242464506-BOC-2014-Taxation-Law-Reviewer.pdf

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TABLE OF CONTENTS

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TABLE OF CONTENTS

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TABLE OF CONTENTS

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PERSONS LIABLE ..................................... 140TAX BASIS ................................................. 141

VAT ...................................................143CONCEPT .................................................. 143CHARACTERISTICS/ELEMENTS OF A VAT-

TAXABLE TRANSACTION ...................... 143IMPACT OF TAX ........................................ 144INCIDENCE OF TAX .................................. 144TAX CREDIT METHOD .............................. 144DESTINATION PRINCIPLE ......................... 171PERSONS LIABLE ..................................... 145VAT ON SALE OF GOODS OR PROPERTIES

............................................................... 146ZERO-RATED SALES OF GOODS OR

PROPERTIES, AND EFFECTIVELY ZERO-RATED SALES OF GOODS OR PROPERTIES............................................................... 148

TRANSACTIONS DEEMED SALE ............... 150CHANGE OR CESSATION OF STATUS AS

VAT-REGISTERED PERSON .................. 150VAT ON IMPORTATION OF GOODS ........... 151VAT ON SALE OF SERVICE AND USE OR

LEASE OF PROPERTIES ......................... 152ZERO-RATED SALE OF SERVICES ............ 154VAT EXEMPT TRANSACTIONS ................. 155INPUT TAX AND OUTPUT TAX, DEFINED 158SOURCES OF INPUT TAX .......................... 158PERSONS WHO CAN AVAIL OF INPUT TAX

CREDIT .................................................. 159

DETERMINATION OF OUTPUT/INPUT TAX;VAT PAYABLE; EXCESS INPUT TAXCREDITS ................................................ 160

SUBSTANTIATION OF INPUT TAX CREDITS............................................................... 162

REFUND OR TAX CREDIT OF EXCESS INPUTTAX ........................................................ 163

INVOICING REQUIREMENTS .................... 164FILING OF RETURN AND PAYMENT......... 166WITHHOLDING OF FINAL VAT ON SALES TO

GOVERNMENT ...................................... 167

Tax Remedies under the NIRC ...... 168TAXPAYER’S REMEDIES........................... 168GOVERNMENT REMEDIES ....................... 184STATUTORY OFFENSES AND PENALTIES

............................................................... 190COMPROMISE AND ABATEMENT OF TAXES

................................................................ 191FLOWCHART: TAXPAYER’S REMEDIES

FROM TAX ASSESSMENT—NIRC .......... 193

FLOWCHART: PROCEDURES FORDISTRAINT AND LEVY—NIRC ................ 194

Organization and Function of the BIR ......................................................... 194

RULE-MAKING AUTHORITY OF THESECRETARY OF FINANCE ...................... 194POWER OF THE COMMISSIONER TO

SUSPEND THE BUSINESS OPERATIONOF A TAXPAYER ...................................... 195LOCAL GOVERNMENT CODE OF 1991, AS

AMENDED ............................................. 196FLOWCHART: PROCEDURE FOR

ASSESSMENT OF LAND VALUE FOR REALPROPERTY TAX PURPOSES—LGC ........ 218

FLOWCHART: TAXPAYER’S REMEDIESINVOLVING COLLECTION OF REALPROPERTY TAX—LGC ........................... 219

FLOWCHART: PROCEDURE FOR LEVY FORPURPOSES OF SATISFYING REALPROPERTY TAXES—LGC ...................... 220

TARIFF AND CUSTOMS CODE OF 1978, ASAMENDED ............................................. 221

FLOWCHART: REMEDIES FROM SEIZUREAND FORFEITURE CASES—TCC ........... 240

TABLE OF SPECIAL DUTIES: WHENIMPOSED ............................................... 241

TABLE OF SPECIAL DUTIES: IMPOSINGAUTHORITY AND AMOUNT .................. 242

JUDICIAL REMEDIES ................................243



UP LAW BOC TAXATION LAW 1 TAXATION LAW

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General Principles ofTaxation

DEFINITION AND CONCEPT OF

TAXATIONTAXATION (4)(a) is a mode by which governments make

exactions for revenue in order to supporttheir existence and carry out their legitimateobjectives.

(b) a mode of raising revenue for publicpurpose; the exercise of sovereign power toraise revenue for the expense of thegovernment;

(c) the process or means by which the sovereign,

through its law-making body, raises incometo defray the necessary expenses ofgovernment; a method of apportioning thecost of government among those who insome measure are privileged to enjoy itsbenefits and must, therefore, bear itsburdens, (see 51 Am. Jur. 341; 1 Cooley 72-93.)

(d) as a power, it refers to the inherent power ofthe state to demand enforced contributionsfor public purpose or purposes.

TAXES(a) are enforced proportional contributions from

persons and property levied by the law-making body of the State by virtue of itssovereignty for the support of thegovernment and all public needs.

(b) The enforced proportional and pecuniarycontributions from persons and propertylevied by the law-making body of the statehaving jurisdiction over the subject of theburden for the support of the governmentand public needs.

UNDERLYING THEORY AND BASIS OF

TAXATIONThe power of taxation proceeds upon the theorythat the existence of government is a necessity;that it cannot continue without means to pay itsexpenses; and that for those means it has theright to compel all citizens and property withinits limits to contribute.

The basis of taxation is found in the reciprocalduties of protection and support between theState and its inhabitants. The State receivestaxes that it may be enabled to carry itsmandates into effect and perform the functionsof government and the citizen pays the portion

of taxes demanded in order that he may, bymeans thereof, be secured in the enjoyment ofthe benefits of an organized society, (see 51 Am. Jur. 42-43.) This is the so-called benefits-received principle.

NATURE OF THE POWER OF TAXATION(1) Inherent in sovereignty - The power to tax is an

attribute of sovereignty. It is a poweremanating from necessity. It is a necessaryburden to preserve the State's sovereigntyand a means to give the citizenry an army toresist an aggression, a navy to defend itsshores from invasion, a corps of civilservants to serve, public improvementdesigned for the enjoyment of the citizenryand those which come within the State'sterritory, and facilities and protection whicha government is supposed to provide (Phil.Guaranty Co., Inc. v. Commissioner , G.R. No.L-22074 April 30, 1965). It isessential to the existence of everygovernment. It exists apart fromconstitutions and without being expresslyconferred by the people (71 Am.Jur.2d 397-

398). Constitutional provisions relating tothe power of taxation do not operate asgrants of the power to the government.They merely constitute limitations upon apower which would otherwise be practicallywithout limit. (1 Cooley 150). While thepower to tax is not expressly provided for inour Constitution, its existence is recognizedby the provisions relating to taxation (infra).

(2) Essentially a legislative function- The powerto tax is peculiarly and exclusivelylegislative and cannot be exercised by the

executive or judicial branch of thegovernment (1 Cooley 160-161). Hence, onlyCongress, our national legislative body, canimpose taxes. The levy of a tax, however,may also be made by a local legislativebody subject to such limitations as may beprovided by law.




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(3) Subject to constitutional and inherentlimitations - These limitations are thoseprovided in the fundamental law or impliedtherefrom, while the rest spring from thenature of the taxing power itself althoughthey may or may not be provided in the

Constitution.

SCOPE OF TAXATIONSubject to constitutional and inherentrestrictions, the power of taxation is regarded assupreme, unlimited and comprehensive. Theprincipal check on its abuse rests only on theresponsibility of the members of the legislatureto their constituents.

EXTENT OF THE LEGISLATIVE POWER TOTAXSubject to constitutional and inherentrestrictions, the legislature has discretion todetermine the incidence of the power to tax.

(1) The subjects or objects to be taxed— refer tothe coverage and the kind or nature of the tax.They may be persons, whether natural or juridical; property, whether real or personal,tangible or intangible; businesses, transactions,rights, or privileges. A state is free to select thesubject of taxation and it has been repeatedlyheld that that inequalities which result from asingling out of one particular class for taxation

or exemption infringe no constitutionallimitation so long as such exemption isreasonable and not arbitrary. [see Lutz vs. Araneta, 98 Phil. 148; Sison, Jr. vs. Ancheta, 130SCRA 654, 1984]

Thus, the power to tax carries with it the powerto grant exemption therefrom.

(2) The purpose or object of the tax so long as it isa public purpose—The legislative body’sdetermination, however, on the question of

what is a public purpose is not conclusive. Thecourts can inquire into whether the purpose isreally public or private.

In the final analysis, therefore, the decision onthe question is not a legislative but a judicialfunction. But once it is settled that the purposeis public, the courts can make no other inquiryinto the objective of the legislature in imposinga tax (see Pascual vs. Sec. of Public Works, 110

Phil. 331 [1961]), or the wisdom, advisability, orexpediency of the tax. [Blunt vs. U.S., 255 Fed. 322.]

Judicial action is limited only to a review whereit involves:

(a) The determination of the validity of thetax in relation to constitutional preceptsor provisions. Thus, a tax may bedeclared invalid because it violates theconstitutional requirement of uniformityand equity in taxation; or

(b) The determination in an appropriatecase of the application of a tax law.(see1 Cooley 165.) Thus, a court maydecide that a tax has been illegallycollected where the taxpayer is entitledto tax exemption or his liability hasalready been extinguished by reason ofprescription.

(3) The amount or rate of the tax.- As a generalrule, the legislature may levy a tax of anyamount or rate it sees fit. If the taxes areoppressive or unjust, the only remedy is the

ballot box and the election of newrepresentatives. [see Cooley 178-181.]

According to Chief Justice John Marshall, "thepower to tax involves the power to destroy."[McCulloch vs. Maryland, 17 U.S. [4 Wheat.] 316-428, 4L. ed. 579.] To say, however, that thepower to tax is the power to destroy is todescribe not the purposes for which the taxingpower may be used but the extent to which itmay be employed in order to raise revenues.[see: Cooley 178.] Thus, even if a tax should

destroy a business, such fact alone could notinvalidate the tax. [84 C.J.S. 46.]




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Incidentally, our Constitution mandates that"the rule of taxation shall be uniform andequitable." In a case, our Supreme Court said:"The power of taxation is sometimes called alsothe power to destroy. Therefore, it should beexercised with caution to minimize injury to the

proprietary rights of the taxpayer. It must beexercised fairly, equally and uniformly, lest thetax collector kills the 'hen that lays the goldeneggs.' And in order to maintain the generalpublic's trust and confidence in the government,this power must be used justly and nottreacherously." (Roxas v. Court of Tax Appeals, 23 SCRA276, App120, 1968; Philex Mining Corp.vs. Comm. of Internal Revenue, 97 SCAD 777,294SCRA 687, Aug. 28, 1998.)

(4) The manner, means, and agencies of

collection of the tax . – These refer to theadministration of the tax or the implementationof tax laws. The legislature possesses the solepower to prescribe the mode or method bywhich the tax shall be collected, and todesignate the officers through whom its willshall be enforced as well as the remedies whichthe State or the taxpayer may avail inconnection therewith.

ESSENTIAL CHARACTERISTICS OF TAX(1) It is an enforced contribution for its imposition

is in no way dependent upon the will or

assent of the person taxed.(2) It is generally payable in the form of money ,

although the law may provide payment inkind (e.g. backpay certificates under Sec. 2,R.A. No. 304, as amended);

(3) It is proportionate in character or islaid bysome rule of apportionment which is usuallybased on ability to pay;

(4) It is levied on persons, property, rights, acts, privileges, or transactions.

(5) It is levied by the State which has jurisdictionor control over the subject to be taxed.

(6) It is levied by the law-making body of theState. The power to tax is a legislativepower but is also granted to localgovernments, subject to such guidelinesand limitations as law may provided [Sec. 5, Art. X, Constitution]; and;

(7) It is levied for public purpose. Revenuesderived from taxes cannot be used forpurely private purposes or for the exclusivebenefit of private persons. [Gaston v.Republic Planters Bank, 158 SCRA 626,March 15, 1988]. The “public purpose or

purposes” of the imposition is implied in thelevy of tax. (see Mendoza v. Municipality, 94Phil. 1047[1954]), A tax levied for a privatepurpose constitutes a taking of propertywithout due process of law.

It is also an important characteristic of mosttaxes that they are commonly required to bepaid at regular periods or intervals (see 1Cooley 64) every year.




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POWER OF TAXATION COMPARED WITH OTHER POWERS

Taxation Police Power Eminent Domain1. As to concept Power to enforce

contribution to raisegovernment funds

Power to make andimplement laws for thegeneral welfare

Power to take privateproperty for public use with just compensation

2. As to scope Plenary, comprehensive andsupreme

Broader in application.General power to make andimplement laws.

Merely a power to takeprivate property for publicuse

3. As to authority Exercised only bygovernment or its politicalsubdivisions

Exercised only bygovernment or its politicalsubdivisions

May be granted to publicservice or public utilitycompanies

4. As to purpose Money is taken to supportthe government

Property is taken ordestroyed to promotegeneral welfare

Private property is taken forpublic use

5. As to necessity ofdelegation

The power to make tax lawscannot be delegated

Can be expressly delegatedto the local governmentunits by the law makingbody

Can be expressly delegatedto the local governmentunits by the law makingbody

6. As to person

affected

Operates on a community or

a class of individual

Operates on a community or

a class of individual

Operates on the particular

private property of anindividual

7. As to benefits Continuous protection andorganized society

Healthy economic standardof society

Market value of the propertyexpropriated

8. As to amount ofimposition

Generally no limit Cost of regulation, licenseand other necessaryexpenses

No imposition

9. As to importance Inseparable for theexistence of a nation – itsupports police power andeminent domain

Protection, safety andwelfare of society

Common necessities andinterest of the communitytranscend individual rightsin property

10. As torelationship to

Constitution

Subject to Constitutionaland Inherent limitations.

Inferior to non-impairmentclause.

Relatively free fromConstitutional limitations.

Superior to non-impairmentclause.

Superior to and mayoverride Constitutional

impairment provisionbecause the welfare of theState is superior to anyprivate contract

11. As to limitation Constraints byConstitutional and Inherentlimitations

Limited by the demand forpublic interest and dueprocess

Bounded by public purposeand just compensation

[Valencia and Roxas, Income Taxation 6 th

Edition (2013-2014), Valencia Educational Supply, pp. 9-10]




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PURPOSE OF TAXATION

Revenue RaisingPrimary purpose of taxation is to provide fundsor property with which to promote the generalwelfare and protection it its citizens.

Fees may be properly regarded as taxes eventhough they also serve as an instrument ofregulation... If the purpose is primarily revenue,or if revenue is, at least, one of the real andsubstantial purposes, then the exaction isproperly called a tax. [PAL v. Edu, G.R. No. L-41383 August 15, 1988]

Non-Revenue/Special or RegulatoryTaxation is often employed as a device forregulation by means of which certain effects or

conditions envisioned by governments may beachieved. These regulatory purposes are alsoknown as Sumptuary. Thus, taxation can:(1) Strengthen anemic enterprises or provide

incentive to greater production through grantof tax exemptions or the creation ofconditions conducive to their growth.

(2) Protect local industries against foreigncompetition by imposing additional taxeson imported goods, or encourage foreigntrade by providing tax incentives onimported goods.

(3) Be a bargaining tool by setting tariff rates

first at a relatively high level before tradenegotiations are entered into with anothercountry.

(4) Halt inflation in periods of prosperity to curbspending power; ward off depression inperiods of slump to expand business.

(5) Reduce inequalities in wealth and incomes, asfor instance, the estate, donor's and incometaxes, their payers being the recipients ofunearned wealth or mostly in the higherincome brackets.

(6) Taxes may be levied to promote science and

invention [see RA. No. 5448] or to financeeducational activities [see RA. No. 5447) orto improve the efficiency of local police forcesin the maintenance of peace and orderthrough grant of subsidy (see RA.No. 6141)].

(7) Be an implement of the police power topromote the general welfare.

In Lutz v. Araneta, 78 Phil 148, it has beenheld that the Sugar Adjustment Act is anact enacted primarily under the policepower and designed to obtain areadjustment of the benefits derived bypeople interested in the sugar industry as

well as to rehabilitate and stabilize theindustry which constitutes one of the greatsources of the country's wealth and,therefore, affects a great portion of thepopulation of the country.

Taxes may be levied with a regulatorypurpose to provide means for rehabilitationand stabilization of a threatened industrywhich is imbued with public interest as to bewithin the police power of the State. [Caltexv. COA, G.R. No. 92585 May 8, 1992]

As long as a tax is for a public purpose, itsvalidity is not affected by collateralpurposes or motives of the legislature inimposing the levy, or by the fact that it has aregulatory effect [51 Am. Jur. 381-382.] or itdiscourages or even definitely deters theactivities taxed. The principle applies eventhough the revenue obtained from the taxappears very negligible or the revenuepurpose is only secondary. [see UnitedStates vs. Sanchez, 340 U.S. 42; Tio vs.Videogram Regulatory Board, 151 SCRA 208,

1987]

PRINCIPLES OF SOUND TAX SYSTEM

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

Administrative feasibility

Tax laws should be capable of convenient, justand effective administration. Each tax should becapable of uniform enforcement by governmentofficials, convenient as to the time, place, andmanner of payment, and not undulyburdensome upon, or discouraging to businessactivity.




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Theoretical justice or equality The tax burden should be in proportion to thetaxpayer’s ability to pay. This is the so-calledability to pay principle. Taxation should beuniform as well as equitable

Note: The non-observance of the aboveprinciples will not necessarily render the taximposed invalid except to the extent thosespecific constitutional limitations are violated.[De Leon]

THEORY AND BASIS OF TAXATION

Lifeblood theoryTaxes are the lifeblood of the government andtheir prompt and certain availability is animperious need. [CIR v. Pineda]

Taxes are the lifeblood of the government andso should be collected without unnecessaryhindrance... It is said that taxes are what we payfor civilized society. Without taxes, thegovernment would be paralyzed for lack of themotive power to activate and operate it [CIR v. Algue, G.R. No. L-28896, February 17, 1988].

Necessity theoryThe power of taxation proceeds upon theorythat the existence of government is a necessity;that is cannot continue without means to pay its

expenses; and that for those means it has theright to compel all citizens and property withinits limits to contribute.

The power to tax, an inherent prerogative, hasto be availed of to assure the performance ofvital state functions. It is the source of the bulkof public funds. [Sison v. Ancheta, G.R. No. L-59431, July 25, 1984]

The obligation to pay taxes rests… upon thenecessity of money for the support of the state.

For this reason, no one is allowed to object to orresist the payment of taxes solely because nopersonal benefit to him can be pointed out[Lorenzo v. Posadas, G.R. No. L-43082, June 18,1937].

Benefits-protection theory (symbioticrelationship)This principle serves as the basis of taxation andis founded on the reciprocal duties of protectionand support between the State and itsinhabitants.

Despite the natural reluctance to surrender partof one's hard earned income to the taxingauthorities, every person who is able to mustcontribute his share in the running of thegovernment. The government for its part isexpected to respond in the form of tangible andintangible benefits intended to improve the livesof the people and enhance their moral andmaterial values. This symbiotic relationship isthe rationale of taxation and should dispel theerroneous notion that it is an arbitrary method

of exaction by those in the seat of power. [CIR v. Algue]

Jurisdiction over subject and objectsThe limited powers of sovereignty are confinedto objects within the respective spheres ofgovernmental control. These objects are theproper subjects or objects of taxation and noneelse.

DOCTRINES IN TAXATION

Prospectivity of tax laws

General rule: Tax laws are prospective inoperation.Rationale: Nature and amount of the tax couldnot be foreseen and understood by the taxpayerat the time the transaction.

Exception: Tax laws may be applied retroactivelyprovided it is expressly declared or clearly thelegislative intent.(e.g increase taxes on incomealready earned) when retroactive applicationwould be so harsh and oppressive [Republic v.Fernandez, G.R. No. L-9141. September 25,

1956].

It is a cardinal rule that laws shall have noretroactive effect, unless the contrary isprovided (citing Art. 4 of the Civil Code).[HydroResources v.CA]




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The language of the statute must clearlydemand or press that it shall have a retroactiveeffect.[Lorenzo v.Posadas]

Exception to the exception:

Collection of interest in tax cases is not penal in

nature; it is but a just compensation to theState. The constitutional prohibition against expost facto laws is not applicable to thecollection of interest on back taxes. [Central Azucarera v.CTA]

Non-retroactivity of rulings (sec. 246)General rule: Any revocation, modification orreversal of rules and regulations promulgated inaccordance with Sections 244 and 245 of theTax Code and rulings or circulars promulgatedby the CIR, that is prejudicial to the taxpayer,

shall NOT be given retroactive effect.

Exceptions: (1) Where the taxpayer deliberately misstates or

omits material facts from his return or anydocument required of him by BIR;

(2) Where the facts subsequently gathered bythe BIR are materially different from thefacts on which the ruling is based; OR

(3) Where the taxpayer acted in bad faith. (Sec. 246 , NIRC)

ImprescriptibilityUnless otherwise provided by the tax itself,taxes are imprescriptible. [CIR v. Ayala SecuritiesCorporation]

The law on prescription, being a remedialmeasure, should be liberally construed in orderto afford such protection. As a corollary, theexceptions to the law on prescription shouldperforce be strictly construed. [Commissioner v.C.A., G.R.No. 104171 (1999)]

Prescriptions found in statutes

(1) National Internal Revenue Code- statute oflimitations [see Section 203 and 222 ] in theassessment and collection of taxes thereinimposed.

(2) Tariff and Customs Code- does not expressany general statute of limitation; it provides,however, that “when articles have beenentered and passed free of duty or finaladjustments of duties made, withsubsequent delivery, such entry and

passage free of duty or settlements ofduties will, after the expiration of one (1) year ,from the date of the final payment of duties,in the absence of fraud or protest orcompliance audit pursuant to the provisionsof this Code, be final and conclusive uponall parties, unless the liquidation of theimport entry was merely tentative.” [Sec.1603]

(3) Local Government Code- prescribesprescriptive periods for the assessment (5years) and collection (5 years) of taxes. [see

Sections 194 and 270, Rep. Act No. 7160].

DOUBLE TAXATONMeans taxing twice the same taxpayer for thesame tax period upon the same thing or activity,when it should be taxed but once, for the samepurpose and with the same kind of character oftax.

Strict sense (Direct Duplicate Taxation)(1) the same property must be taxed twice when

it should be taxed once;(2) both taxes must be imposed on the same

property or subject matter;(3) for the same purpose;(4) by the same State, Government, or taxing

authority;(5) within the same territory, jurisdiction or taxing

district;(6) during the same taxing period; and(7) of the same kind or character of tax .

Broad sense (Indirect Duplicate Taxation)There is double taxation in the broad sense orthere is indirect duplicate taxation if any of the

elements for direct duplicate taxation is absent.

It extends to all cases in which there is a burdenof two or more pecuniary impositions. Forexample, a tax upon the same property imposedby two different states.




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TransformationTRANSFORMATION – method of escape intaxation whereby the manufacturer or producerupon whom the tax has been imposed pays thetax and endeavors to recoup himself byimproving his process of production thereby

turning out his units of products at a lower cost.The taxpayer escapes by a transformation of thetax into a gain through the medium ofproduction.

Tax evasion (Tax Dodging)Tax Evasion - is the use by the taxpayer of illegalor fraudulent means to defeat or lessen thepayment of a tax. It is also known as “taxdodging.” It is punishable by law.

Example: Deliberate failure to report a taxable

income or property; deliberate reduction ofincome that has been received.

Elements of Tax Evasion(a) The end to be achieved. Example: the

payment of less than that known by thetaxpayer to be legally due, or in paying notax when such is due.

(b) An accompanying state of mind described asbeing “evil,” “in bad faith,” “willful” or“deliberate and not accidental.”

(c) A course of action (or failure of action) whichis unlawful.

Since fraud is a state of mind, it need not beproved by direct evidence but may be inferredfrom the circumstances of the case. Thus:(1) The failure of the taxpayer to declare for

taxation purposes his true and actualincome derived from his business for twoconsecutive years has been held as anindication of his fraudulent intent to cheatthe government of its due taxes. [Republic v.Gonzales, 13 SCRA 633, 1965]

(2) The substantial underdeclaration of income

in the income tax returns of the taxpayer forfour (4) consecutive years coupled with hisintentional overstatement of deductions justifies the finding of fraud. [Perez v. CTAand Collector, 103 Phil. 1167, 1958]

EXEMPTION FROM TAXATION

Meaning of exemption from taxationThe grant of immunity to particular persons orcorporations or to person or corporations of aparticular class from a tax which persons and

corporations generally within the same state ortaxing district are obliged to pay. It is animmunity or privilege; it is freedom from afinancial charge or burden to which others aresubjected. It is strictly construed against thetaxpayer.

Taxation is the rule; exemption is the exception.He who claims exemption must be able to justify his claim or right thereto, by a grantexpressed in terms “too plain to be mistakenand too categorical to be misinterpreted.” If not

expressly mentioned in the law, it must at leastbe within its purview by clear legislative intent.

Nature of tax exemption

Mere personal privilege- cannot be assignedor transferred without the consent of theLegislature. The legislative consent to thetransfer may be given either in the originalact granting the exemption or in asubsequent law

General rule: revocable by the government.

Exception: if founded on a contract which is

protected from impairment. But thecontract must contain the essentialelements of other contracts. An exemptionprovided for in a franchise, however, may berepealed or amended pursuant to theConstitution [see Sec. 11, Art. XII]. Alegislative franchise is in the nature of acontract.

Implies a waiver on the part of thegovernment of its right to collect taxes dueto it, and, in this sense, is prejudicial thereto.Hence, it exists only by virtue of an expressgrant and must be strictly construed.

Not necessarily discriminatory, provided ithas reasonable foundation or rational basis.Where, however, no valid distinction exists,the exemption may be challenged asviolative of the equal protection guaranteeor the uniformity rule.




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Principles of Tax Exemption:

(1) They are not presumed [Floro Cement v.Gorospe]

(2) When granted, they are strictly construedagainst the taxpayer [Luzon Stevedoring Co.v. CTA]

(3) They are higHly disfavoured and may almostbe said “to be directly contrary to theintention of tax laws.” [Manila ElectricCompany v. Vera], [Valencia and Roxas]

Kinds of tax exemption(1) Express or Affirmative - either entirely or in

part, may be made by provisions of theConstitution, statutes, treaties, ordinances,franchises, or contracts.

(2) Implied or Exemption by Omission - when atax is levied on certain classes without

mentioning the other classes. Every taxstatute, in a very real sense, makesexemptions since all those not mentionedare deemed exempted. The omission maybe either accidental or intentional.

Exemptions are not presumed, but whenpublic property is involved, exemption is therule, and taxation is the exception.

(3) Contractual - The legislature of a State may,in the absence of special restrictions in itsconstitution, make a valid contract with acorporation in respect to taxation, and that

such contract can be enforced against theState at the instance of the corporation[Casanovas Hord, G.R. No. 3473, March 22,1907]. In the real sense of the term andwhere the non-impairment clause of theConstitution can rightly be invoked, thisincludes those agreed to by the taxingauthority in contracts, such as thosecontained in government bonds ordebentures, lawfully entered into by themunder enabling laws in which thegovernment, acting in its private capacity,

sheds its cloak of authority and waives itsgovernmental immunity.

These contractual tax exemptions, however,are not to be confused with tax exemptionsgranted under franchises. A franchisepartakes the nature of a grant which isbeyond the purview of the non-impairmentclause of the Constitution. [Manila Electric

Company v. Province of Laguna, G.R.No.131359, May 5, 1999]

RATIONALE/GROUNDS FOR EXEMPTION

Rationale of Tax ExemptionSuch exemption will benefit the body of thepeople and not particular individuals or privateinterest and that the public benefit is sufficientto offset the monetary loss entailed in the grantof the exemption.

Grounds for tax exemption(1) It may be based on contract. (2) It may be based on some ground of public

policy. (3) It may be created in a treaty on grounds of

reciprocity or to lessen the rigors ofinternational or multiple taxation.

But equity is NOT a ground for tax exemption.Exemption from tax is allowable only if there isa clear provision. While equity cannot be usedas a basis or justification for tax exemption, alaw may validly authorize the condonation oftaxes on equitable considerations.

REVOCATION OF TAX EXEMPTIONGeneral Rule: revocable by the government.Exception: Contractual tax exemptions may notbe unilaterally so revoked by the taxingauthority without thereby violating the non-impairment clause of the Constitution.

COMPENSATION AND SET-OFFGeneral rule: Internal revenue taxes cannot bethe subject of set-off or compensation [Republic

v. Mambulao Lumber, G.R. No. L-17725,February 28, 1962].




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Reasons:

(1) This would adversely affect the governmentrevenue system (Philex Mining v. CA G.R.No. 125704. August 28, 1998).

(2) Government and the taxpayer are notcreditors and debtors of each other. The

payment of taxes is not a contractualobligation but arises out of a duty to pay.[Republic v. Mambulao Lumber (1962)]

Exception: If the claims against the governmenthave been recognized and an amount hasalready been appropriated for that purpose.Where both claims have already become dueand demandable as well as fully liquidated,compensation takes place by operation of lawunder Art. 1200 in relation to Articles 1279 and1290 of the NCC, and both debts are

extinguished to the concurrent amount.[Domingo v. Garlitos, G.R. No. L-18994, June 29,1963]

Doctrine of Equitable Recoupment- a claim forrefund barred by prescription may be allowed tooffset unsettled tax liabilities. The doctrine finds

no application in this jurisdiction.

COMPROMISE A contract whereby the parties, by making

reciprocal concessions avoid litigation or putan end to one already commenced. (Art.2028, Civil Code). It involves a reduction ofthe taxpayer’s liability.

Requisites of a tax compromise:(a) The taxpayer must have a tax liability.(b) There must be an offer (by the taxpayer

or Commissioner) of an amount to bepaid by the taxpayer.

(c) There must be acceptance (by theCommissioner or the taxpayer, as thecase may be) of the offer in settlementof the original claim.

Generally, compromises are allowed and

enforceable when the subject matter thereofis not prohibited from being compromisedand the person entering into it is dulyauthorized to do so.

(1) In the National Internal Revenue Code, theCommissioner of Internal Revenue isexpressly authorized to enter, under certainconditions, into a compromise of both thecivil and criminal liabilities of the taxpayer[Sec. 204, NIRC].

(2) The power to compromise in respect ofcustoms duties is, at best, limited to caseswhere potestive authority is specificallygranted such as in the remission of dutiesby the Collector of Customs [Sec. 709, Tariffand Customs Code] and cases involvingimposition of fines, surcharges andforfeitures which may be compromised bythe Commissioner subject to the approval ofthe Secretary of Finance [Sec. 2316 , Tariffand Customs Code]

(3) No provisions exist under the Local

Government Code, while the tax (notcriminal) liability is not prohibited frombeing compromised [see Arts. 2034 and 2035, Civil Code]; there is no specificauthority, however, given to any publicofficial to execute the compromise so as torender it effective. [Vitug, p. 48]

TAX AMNESTY A tax amnesty partakes of an absolute

forgiveness or waiver by the Government of itsright to collect what otherwise would be dueit, and in this sense, prejudicial thereto,particularly to give tax evaders, who wish torelent and are willing to reform a chance to doso and become a part of the new society witha clean slate.[Republic v. IAC (1991)]

A tax amnesty, much like a tax exemption, isnever favored nor presumed in law. If granted,the terms of the amnesty, like that of a taxexemption, must be construed strictly againstthe taxpayer and liberally in favor of thetaxing authority. For the right of taxation isinherent in government. The State cannotstrip itself of the most essential power of

taxation by doubtful words. He who claims anexemption (or an amnesty) from the commonburden must justify his claim by the clearestgrant of organic or state law. It cannot beallowed to exist upon a vague implication. If adoubt arises as to the intent of the legislature,that doubt must be resolved in favor of thestate. [CIR v. Marubeni Corp.,372 SCRA 576, 2001]




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Distinguished from tax exemptionTax amnesty is immunity from all criminal andcivil obligations arising from non-payment oftaxes. It is a general pardon given to alltaxpayers. It applies to past tax periods, henceof retroactive application.[People v. Castañeda,

G.R. No. L-46881, September 15, 1988]

Tax exemption is an immunity from all civilliability only. It is an immunity or privilege, afreedom from a charge or burden of whichothers are subjected. [Greenfield v. Meer, 77 Phil. 394 [1946]). It is generally prospective inapplication.(Dimaampao, 2005, p. 111)

CONSTRUCTION AND INTERPRETATION

Tax laws

General Rule:Tax laws are construed strictlyagainst the government and liberally in favor ofthe taxpayer. [Manila Railroad Co. v. Coll. ofCustoms, 52 Phil. 950, 1929]

No person or property is subject to taxationunless within the terms or plain import of ataxing statute. [ See72 Am.Jur. 2d 44].

Taxes, being burdens, they are not to bepresumed beyond what the statute expresslyand clearly declares. [Coll. v. La Tondena, 5SCRA 665, 1962] Thus, a tax payable by“individuals” does not apply to “corporations.”

Tax statutes offering rewards are liberallyconstrued in favor of informers. [Penid v. Virata,121 SCRA 166, 1983]

Exceptions:

(1) The rule of strict construction as against thegovernment is not applicable where thelanguage of the statute is plain and there isno doubt as to the legislative intent. (see 51Am.Jur.368). In such case, the words

employed are to be given their ordinarymeaning. Ex. Word “individual” was changedby the law to “person”. This clearly indicatesthat the tax applies to both natural and juridical persons, unless otherwise expresslyprovided.

(2) The rule does not apply where the taxpayerclaims exemption from the tax.

Tax statutes are to receive a reasonableconstruction or interpretation with a view tocarrying out their purpose and intent . Theyshould not be construed as to permit thetaxpayer easily to evade the payment of tax.[Carbon Steel Co. v. Lewellyn, 251 U.S. 201]. Thus,

the good faith of the taxpayer is not a sufficient justification for exemption from the payment ofsurcharges imposed by the law for failing to paytax within the period required by law.

Tax exemption and exclusionTax exemptions must be shown to exist clearlyand categorically , and supported by clear legalprovisions. [NPC v. Albay, G.R. No. 87479, June4, 1990]

General Rule: In the construction of tax statutes,

exemptions are not favored and are construedstrictissimi juris against the taxpayer. [RepublicFlour Mills v. Comm. & CTA, 31 SCRA 520, 1970].

Tax exemptions must be shown to existclearly and categorically , and supported byclear legal provisions [NPC v. Albay].

Claims for an exemption must be able topoint out some provision of law creating theright, and cannot be allowed to exist upon amere vague implication or inference [FloroCement v. Gorospe].

Refunds are in the nature of exemption, andmust be construed strictly against thegrantee/taxpayer [CIR v. CA]

Taxation is the rule and exemption theexception, and therefore, he who claimsexemption must be able to justify his claimor right thereto, by a grant expressed interms “too plain to be mistaken and toocategorical to be misinterpreted.”[Comm. V.Kiener Co. Ltd. (65 SCRA 142, 1975)]

Exceptions:

(1) When the law itself expressly provides for aliberal construction, that is, in case of doubt,it shall be resolved in favor of exemption;and

(2) When the exemption is in favor of thegovernment itself or its agencies, or ofreligious, charitable, and educationalinstitutions because the general rule is thatthey are exempt from tax.




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(3) When the exemption is granted underspecial circumstances to special classes ofpersons.

(4) If there is an express mention or if thetaxpayer falls within the purview of theexemption by clear legislative intent, the

rule on strict construction does not apply.[Comm. V. Arnoldus Carpentry Shop, Inc.,159 SCRA 19, 1988].

Tax rules and regulationsThe Secretary of Finance, uponrecommendation of the CIR, shall promulgateall needful rules and regulations for theeffective enforcement of the provisions of theNIRC. [Sec. 244].

Requisites for validity and effectivity of

regulations(a) Reasonable(b) Within the authority conferred(c) Not contrary to law and the Constitution ( Art.

7 , Civil Code)(d) Must be published

There are two kinds of administrative issuances:the legislative rules and the interpretative rules.A legislative rule is in the nature of subordinatelegislation, designed to implement a primarylegislation by providing the details thereof. Aninterpretative rule, on the other hand, is designedto provide guidelines to the law, which theadministrative agency is in charge of enforcing.An administrative rule should be published if itsubstantially adds to or increases the burden ofthose governed. When an administrative rule ismerely interpretative in nature, its applicabilityneeds nothing further than its bare issuance forit gives no real consequence more than whatthe law itself has already prescribed. When,upon the other hand, the administrative rulegoes beyond merely providing for the meansthat can facilitate or render least cumbersome

the implementation of the law but substantiallyadds to or increases the burden of thosegoverned, it behooves the agency to accord atleast to those directly affected a chance to beheard, and thereafter to be duly informed,before that new issuance is given the force andeffect of law. [Commissioner v. Court of Appeals,G.R.No. 119761, 1996].

Tax regulations (issued by the CIR/DOFSecretary) whose purpose is to enforce orimplement existing law must (a) be published ina newspaper of general circulation (see Art. 2 ofthe Civil Code), AND (b) filed with UP LawCenter ONAR (per Chapter 2, Book VII of the

Admin Code of 1987 (EO 292) before they canbecome effective.

Such rules once established and found to be inconsonance with the general purposes andobjects of the law have the force and effect oflaw, and so they must be applied and enforced.[De Guzman v. Lontok, 68 Phil. 495, 1939]. Theyare, therefore, just as binding as if theregulations had been written in the law itself.[Rep. of the Philippines v. Pilipinas ShellPetroleum Corporation, G.R. No. 173918, April 8,

2008]NOTE: Administrative rules and regulationsmust always be in harmony with the provisionsof the law. In case of conflict with the law or theConstitution, the administrative rules andregulations are null and void. As a matter ofpolicy, however, courts will declare a regulationor provision thereof invalid only when theconflict with the law is clear and unequivocal.

Administrative interpretations and opinions The power to interpret the provisions of the TaxCode and other tax laws is under the exclusive

and original jurisdiction of the Commissioner ofInternal Revenue subject to review by theSecretary of Finance [Sec. 4, par.1, NIRC].

Revenue regulations are the formalinterpretation of the provisions of the NIRC andother laws by the Secretary of Finance upon therecommendation of the Commissioner ofInternal Revenue.

The Commissioner has the sole authority toissue rulings but he also has the power to

delegate said authority to his subordinates. Hecannot, however, delegate to any of hissubordinate officials the power to issue rulingsof first impression (i.e., question involved is newand important) or to reverse, revoke or modifyany existing ruling of the BIR [Sec. 7[B], NIRC].




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Decisions of the Supreme Court and Court ofTax AppealsDecisions of the Supreme Court applying orinterpreting existing tax laws are binding on allsubordinate courts and have the force andeffect of law. As provided for in Article 8 of the

Civil Code, they “form part of the law of theland”. They constitute evidence of what the lawmeans. [People v. Licera, 65 SCRA 270, 1975].

The same is also true with respect to decisionsof the Court of Tax Appeals. However, by thenature of its jurisdiction, the decisions of thiscourt are still appealable to the Supreme Courtby a petition for review on certiorari.

Penal provisions of tax laws

Penal provisions of tax laws must be strictly

construed. It is not legitimate to stretch thelanguage of a rule, however beneficent itsintention, beyond the fair and ordinary meaningof its language.

A penal statute should be construed strictlyagainst the State and in favor of the accused.The reason for this principle is the tenderness ofthe law for the rights of individuals and theobject is to establish a certain rule by conformityto which mankind would be safe, and thediscretion of the court limited. [People v.Purisima, 86 SCRA 524,1978].

Non-retroactive application of tax laws totaxpayersGeneral rule: Tax laws are prospective inoperation. The reason is that the nature andamount of the tax could not be foreseen andunderstood by the taxpayer at the time thetransaction which the law seeks to tax wascompleted.

Exception: Tax laws may be applied retroactively provided it is expressly declared or clearly the

legislative intent. [Lorenzo v. Posadas, 64 Phil. 353, 1937].

Exception to the exception: a tax law should notbe given retroactive application when it wouldbe so harsh and oppressive for in such case, theconstitutional limitation of due process wouldbe violated [Republic v. Fernandez,1956].

SCOPE AND LIMITATION OFTAXATION

INHERENT LIMITATIONS

PUBLIC PURPOSE

The proceeds of the tax must be used (a) forthe support of the State or (b) for somerecognized objects of government or directlyto promote the welfare of the community.

Test: whether the statute is designed topromote the public interest, as opposed to thefurtherance of the advantage of individuals,although each advantage to individuals mightincidentally serve the public. [Pascual v.Secretary of Public Works (1960)]

The protection and promotion of the sugarindustry is a matter of public concern; the

legislature may determine within reasonablebounds what is necessary for its protectionand expedient for its promotion. [Lutz v Araneta (1955)]

The public purpose of a tax may legally existeven if the motive which impelled thelegislature to impose the tax was to favor oneindustry over another. [Tio v. Videogram(1987)]

Tests in Determining Public Purpose:(1) Duty Test - Whether the thing to be furthered

by the appropriation of public revenue is

something which is the duty of the State asa government to provide.

(2) Promotion of General Welfare Test - Whetherthe proceeds of the tax will directly promotethe welfare of the community in equalmeasure.

(3) Character of the Direct Object of theExpenditure – it is the essential character ofthe direct object of the expenditure whichmust determine its validity as justifying atax and not the magnitude of the intereststo be affected nor the degree to which the

general advantage of the community, andthus the public welfare, may be ultimatelybenefited by their promotion. Incidentaladvantage to the public or to the State,which results from the promotion of privateenterprises or business, does not justify theiraid with public money. [Pascual v. Sec. ofPublic Works, G.R. No. L-10405, December 29, 1960]




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INHERENTLY LEGISLATIVEStated in another way, taxation mayexceptionally be delegated, subject to suchwell-settled limitations as – (1) The delegation shall not contravene any

constitutional provision or the inherent

limitations of taxation;(2) The delegation is effected either by the

Constitution or by validly enacted legislativemeasures or statute; and

(3) The delegated levy power, except when thedelegation is by an express provision of theConstitution itself, should only be in favor ofthe local legislative body of the local ormunicipal government concerned. [Vitug and Acosta]

General Rule: Delegata potestas non potest

delegari. The power to tax is exclusively vested inthe legislative body and it may not be re-delegated.

Judge Cooley enunciates the doctrine in thefollowing oft-quoted language: "One of thesettled maxims in constitutional law is that thepower conferred upon the legislature to makelaws cannot be delegated by that departmentto any other body or authority. Where thesovereign power of the state has located theauthority, there it must remain; and by theconstitutional agency alone the laws must be

made until the Constitution itself is charged.”[People v. Vera, G.R. No. L-45685, November 16,1937]

Legislature has the power to determine the:(1) nature (kind),(2) object (purpose),(3) extent (rate),(4) coverage (subjects) and(5) situs (place) of taxation.

Exceptions

(1) Delegation to local governments - Thisexception is in line with the generalprinciple that the power to create municipalcorporations for purposes of local self-government carries with it, by necessaryimplication, the power to confer the powerto tax on such local governments. [1 Cooley190].

This is logical for after all, municipalcorporations are merely instrumentalities ofthe state for the better administration of thegovernment in respect to matters of localconcern. [Pepsi-Cola Bottling Co. of the Phil.Inc. v. Mun. of Tanauan, 69 SCRA 460,

1976]. Under the new Constitution,however, LGUs are now expressly given thepower to create its own sources of revenueand to levy taxes, fees and charges, subjectto such guidelines and limitations as theCongress may provide which must beconsistent with the basic policy of localautonomy. [Art X, Sec 5, 1987 Constitution]

(2) Delegation to the President

(a) to enter into Executive agreements, and(b) To ratify treaties which grant tax

exemption subject to Senate

concurrence.

The Congress may, by law, authorize thePresident to fix within specified limits,and subject to such limitations andrestrictions as it may impose, tariffrates, import and export quotas,tonnage and wharfage dues, and otherduties or imposts within the frameworkof the national development program ofthe Government. [Art. 6, Sec. 28 (2),1987 Constitution]

(3) Delegation to administrative agencies -

Limited to the administrativeimplementation that calls for some degreeof discretionary powers under sufficientstandards expressed by law or implied fromthe policy and purposes of the Act.(a) There are certain aspects of the taxing

process that are not legislative and theymay, therefore, be vested in anadministrative body. The powers whichare not legislative include: (1) the powerto value property for purposes oftaxation pursuant to fixed rules; (2) the

power to assess and collect the taxes;and (3) the power to perform any of theinnumerable details of computation,appraisement, and adjustment, and thedelegation of such details.

(b) The exercise of the above powers isreally not an exception to the rule as nodelegation of the strictly legislativepower to tax is involved.




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(c) The powers which cannot be delegatedinclude the determination of thesubjects to be taxed, the purpose of thetax, the amount or rate of the tax, themanner, means, and agencies ofcollection, and the prescribing of the

necessary rules with respect thereto.

TERRITORIALRule: A state may not tax property lying outsideits borders or lay an excise or privilege tax uponthe exercise or enjoyment of a right or privilegederived from the laws of another state andtherein exercise and enjoyed. (51 Am.Jur. 87-88).

Reasons:

(1) Tax laws (and this is true of all laws) do notoperate beyond a country’s territorial limits.

(2)

Property which is wholly and exclusivelywithin the jurisdiction of another statereceives none of the protection for which atax is supposed to be a compensation.

Note: Where privity of relationship exists. - Itdoes not mean, however, that a person outsideof state is no longer subject to its taxing powers.The fundamental basis of the right to tax is thecapacity of the government to provide benefitsand protection to the object of the tax. A personmay be taxed where there is between him andthe taxing state, a privity of the relationship

justifying the levy. Thus, the citizen’s incomemay be taxed even if he resides abroad as the

personal (as distinguished from territorial) jurisdiction of his government over him remains.In this case, the basis of the power to tax is notdependent on the source of the income norupon the location of the property nor upon theresidence of the taxpayer but upon his relation

as a citizen to the state. As such citizen, he isentitled, wherever he may be, inside or outsideof his country, to the protection of hisgovernment.

SITUS OF TAXATIONSitus of taxation literally means the place oftaxation. The basic rule is that the state wherethe subject to be taxed has a situs may rightfullylevy and collect the tax; and the situs isnecessarily in the state which has jurisdiction orwhich exercises dominion over the subject in

question. Within the territorial jurisdiction, thetaxing authority may determine the situs.

Factors that Determine Situs:(1) Nature of the tax;(2) Subject matter of the tax (person, property,

act or activity);(3) Possible protection and benefit that may

accrue both to the government and thetaxpayer;

(4) Citizenship of the taxpayer;(5) Residence of the taxpayer;(6) Source of income.

INCOME TAX

Who is being taxed Source or Location

Citizenship Residency Within the PH Outside thePH

Partly Within andPartly Outside

Filipino Resident Taxable Taxable Taxable

Filipino Nonresident Taxable NotTaxable

Only income fromwithin is Taxable

Alien Resident Taxable NotTaxable

Only incomefrom within isTaxable

Alien Nonresident Not Taxable NotTaxable

Only incomefrom within isTaxable




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PROPERTY TAXKind of Property SitusReal property Where it is located (lex

rei sitae)Tangible Personal

property

Where property is

physically locatedalthough the ownerresides in another jurisdiction.

Intangible personalproperty (e.g., credits,bills receivables, bankdeposits, bonds,promissory notes,mortgage loans, judgments andcorporate stocks)

Gen Rule: Domicile ofthe owner. Mobiliasequuntur personam (movables follow theperson)

Exceptions:(1) When property has

acquired abusiness situs inanother jurisdiction; or

(2) When the lawprovides for thesitus of the subjectof tax (e.g., Sec 104,NIRC)

EXCISE TAX

Kind of Excise Tax Situs

Income Source of the income,nationality orresidence of taxpayer(Sec. 23, NIRC)

Donor’s Tax Location of property;nationality orresidence of taxpayer

Estate Location of property;nationality orresidence of taxpayer

BUSINESS TAXKind of Business Tax SitusVAT Where transaction is

madeSale of Real Property Where the real

property is located

Sale of Personal

Property

Where the personal

property was sold

International ComityComity - respect accorded by nations to eachother because they are sovereign equals. Thus,the property or income of a foreign state orgovernment may not be the subject of taxation

by another state.

Reasons:

(1) In par in parem non habet imperium. Asbetween equals there is no sovereign(Doctrine of Sovereign Equality amongstates under international law). One statecannot exercise its sovereign powers overanother.)

(2) In international law, a foreign governmentmay not be sued without its consent→ useless to impose a tax which could not be

collected.(3) Usage among states that when a foreign

sovereign enters the territorial jurisdiction ofanother, there is an implied understandingthat the former does not intend to degradeits dignity by placing itself under the jurisdiction of the other.

(4) Rule in international law that a foreigngovernment may not be sued without itsconsent so that it is useless to assess thetax anyway since it cannot be collected.

Exemption of Government Entities, Agencies,and Instrumentalities

If the taxing authority is the National

Government:

General Rule: Agencies and instrumentalities ofthe government are exempt from tax.

Note: Unless otherwise provided by law, theexemption applies only to government entitiesthrough which the government immediatelyand directly exercises its sovereign powers. Withrespect to government-owned or controlledcorporations performing proprietary (notgovernmental) functions, they are generallysubject to tax in the absence of tax exemptionprovisions in their charters or the law creatingthem.




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Reasons for the exemption: (1) To levy a tax uponpublic property would render necessary newtaxes on other public property for the paymentof the tax so laid and thus, the governmentwould be taxing itself to raise money to pay overfor itself. (2) This immunity also rests upon

fundamental principles of government, beingnecessary in order that the functions ofgovernment shall not be unduly impeded. (1Cooley 263). (3) The practical effect of anexemption running to the benefit of thegovernment is merely to reduce the amount ofmoney that has to be handled by thegovernment in the course of its operations: Forthese reasons, provisions granting exemptionsto government agencies may be construedliberally in favor of non-tax liability of suchagencies. [Maceda v. Macaraig, Jr., 197 SCRA 771,

1991].

Exception: When it chooses to tax itself. Nothingcan prevent Congress from decreeing that eveninstrumentalities or agencies of the governmentperforming governmental functions may besubject to tax. [Mactan Cebu Airport v Marcos,G.R. No. 120082 September 11, 1996] There is noconstitutional prohibition against thegovernment taxing itself. [Coll. v. Bisaya LandTransportation, 105 Phil. 338, 1959].

If the taxing authority is the local government

unit: RA 7160 expressly prohibits LGUs fromlevying tax on the National Government, itsagencies and instrumentalities and other LGUs.[Local Government Code, Sec. 133 (o)]

CONSTITUTIONAL LIMITATIONS

PROVISIONS DIRECTLY AFFECTINGTAXATION

Prohibition against imprisonment for non-payment of poll tax

Art III, Sec 20, 1987 Constitution- No personshall be imprisoned for debt or non-payment ofa poll tax.

Uniformity and equality of taxation Art VI, Sec 28(1), 1987 Constitution- The rule

of taxation shall be uniform and equitable.Congress shall evolve a progressive systemof taxation.

Uniformity- All taxable articles or propertiesof the same class shall be taxed at the samerate. [City of Baguio v. de Leon, 25 SCRA938]. (1) Uniformity of operation throughouttax unit - The rule requires the uniformapplication and operation, without

discrimination, of the tax in every placewhere the subject of it is found. This means,for example, that a tax for a nationalpurpose must be uniform and equalthroughout the country and a tax for aprovince, city, municipality, or barangaymust be uniform and equal throughout theprovince, city, municipality or barangay. (2)Equality in burden – Uniformity impliesequality in burden, not equality in amountor equality in its strict and literal meaning.The reason is simple enough. If legislation

imposes a single tax upon all persons,properties, or transactions, an inequalitywould obviously result considering that notall persons, properties, and transactions areidentical or similarly situated. Neither doesuniformity demand that taxes shall beproportional to the relative value or amountof the subject thereof. Taxes may beprogressive.

Equity – 1) Uniformity in taxation is effectedthrough the apportionment of the taxburden among the taxpayers which underthe Constitution must be equitable.“Equitable” means fair, just, reasonable andproportionate to the taxpayer’s ability topay. Taxation may be uniform butinequitable where the amount of the taximposed is excessive or unreasonable. (2)The constitutional requirement of equity intaxation also implies an approach whichemployees a reasonable classification of theentities or individuals who are to be affectedby a tax. Where the “tax differentiation isnot based on material or substantialdifferences,” the guarantee of equal

protection of the laws and the uniformityrule will likewise be infringed.

Taxation does not require identity or equalityunder all circumstances, or negate theauthority to classify the objects of taxation. –Classification to be valid, must, bereasonable and this requirement is notdeemed satisfied unless:




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(a) it is based upon substantial distinctionswhich make real differences;

(b) these are germane to the purpose of thelegislation or ordinance;

(c) the classification applies, not only topresent conditions, but, also, to future

conditions substantially identical tothose of the present; and

(d) the classification applies equally to allthose who belong to the same class.[Pepsi-Cola v. Butuan City, 24 SCRA 789]

The progressive system of taxation wouldplace stress on direct rather than indirecttaxes, on non-essentiality rather thanessentiality to the taxpayer of the object oftaxation, or on the taxpayer’s ability to pay.Example is that individual income taxsystem that imposes rates progressing

upwards as the tax base (taxpayer’s taxableincome) increases. A progressive tax,however, must not be confused with aprogressive system of taxation.

While equal protection refers more to liketreatment of persons in like circumstances,uniformity and equity refer to the proper relativetreatment for tax purposes of persons in unlikecircumstances.

Grant by Congress of authority to thePresident to impose tariff ratesDelegation of Tariff powers to the Presidentunder the flexible tariff clause [Art VI, Sec 28(2)],1987 Constitution], which authorizes thePresident to modify import duties. [Sec. 401,Tariff and Customs Code]

Prohibition against taxation of religious,charitable entities, and educational entities Art VI, Sec 28(3), 1987 Constitution:(a) Charitable institutions, churches and

personages or convents appurtenantthereto, mosques, non-profit cemeteries,

and all lands, buildings, and improvements,(b) actually, directly, and exclusively used for

religious, charitable, or educationalpurposes shall be exempt from taxation.

(c) The tax exemption under this constitutionalprovision covers property taxes only and notother taxes [Lladoc v. Commissioner, 14SCRA 292, 1965].

In general, special assessments are not coveredby the exemption because by nature they arenot classified as taxes. [ Apostolic Prefect v. CityTreasurer of Baguio]

To be entitled to the exemption, the petitioner

must prove that:(1) it is a charitable institution(2) its real properties are actually , directly and

exclusively used for charitable purposes.

Revenue or income from trade, business orother activity, the conduct of which is notrelated to the exercise or performance ofreligious, educational and charitable purposesor functions shall be subject to internal revenuetaxes when the same is not actually, directly orexclusively used for the intended purposes. [BIR

Ruling 046-2000]

Test ofExemption

Use of the property, and notthe ownership

Nature of UseActual, direct and exclusiveuse for religious, charitable oreducational purposes.

Scope ofExemption

Real property taxes on facilitieswhich are(1) actual,(2) incidental to, or(3) reasonably necessary for

the accomplishment of saidpurposes such as in thecase of hospitals, a schoolfor training nurses, anurses’ home, property toprovide housing facilities forinterns, resident doctorsand other members of thehospital staff, andrecreational facilities forstudent nurses, interns andresidents, such as athleticfields. [ Abra Valley College v.

Aquino]

Test: whether an enterprise is charitable or not:whether it exists to carry out a purposerecognized in law as charitable or whether it ismaintained for gain, profit, or privateadvantage.




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A charitable institution does not lose itscharacter as such and its exemption from taxessimply because it derives income from payingpatients, whether out-patient, or confined in thehospital, or receives subsidies from thegovernment, so long as the money received is

devoted or used altogether to the charitableobject which it is intended to achieve; and nomoney inures to the private benefit of thepersons managing or operating the institution.

“Exclusive - possessed and enjoyed to theexclusion of others; debarred from participationor enjoyment; "Exclusively" - "in a manner toexclude; as enjoying a privilege exclusively.”

If real property is used for one or morecommercial purposes, it is not exclusively used

for the exempted purposes but is subject totaxation. The words "dominant use" or"principal use" cannot be substituted for thewords "used exclusively" without doing violenceto the Constitutions and the law. Solely issynonymous with exclusively. [Lung Center ofthe Philippines v. Quezon City (2004)]

Note: Lung Center did not necessarily overturnthe case of Abra Valley College v. Aquino (1988).Lung Center just provided a stricterinterpretation. In Abra Valley, the court held: Theprimary use of the school lot and building is the

basic and controlling guide, norm and standardto determine tax exemption, and not the mereincidental use thereof. Under the 1935Constitution, the trial court correctly held thatthe school building as well as the lot where it isbuilt, should be taxed, not because the secondfloor of the same is being used by the Directorand his family for residential purposes(incidental to its educational purpose), butbecause the first floor thereof is being used forcommercial purposes. However, since only aportion is used for purposes of commerce, it is

only fair that half of the assessed tax bereturned to the school involved.

Prohibition against taxation of non-stock,non-profit educational institutions

Art. XIV, Sec. 4, 1987 Constitutionxxx(3) All revenues and assets of non-stock, non-

profit educational institutions used actually,directly, and exclusively for educationalpurposes shall be exempt from taxes andduties.Proprietary educational institutions,including those cooperatively owned, maylikewise be entitled to such exemptionssubject to the limitations provided by law,including restrictions on dividends andprovisions for reinvestment.

(4) Subject to conditions prescribed by law, allgrants, endowments, donations, or

contributions used actually, directly, andexclusively for educational purposes shall beexempt from tax.

This provision covers only non-stock, non-profiteducational institutions

The exemption covers income, property, anddonor’s taxes, custom duties, and other taxesimposed by either or both the nationalgovernment or political subdivisions on allrevenues, assets, property or donations, usedactually, directly and exclusively for educationalpurposes. (In the case of religious andcharitable entities and non-profit cemeteries,the exemption is limited to property tax.)

The exemption does not cover revenues derivedfrom, or assets used in, unrelated activities orenterprise.

Similar tax exemptions may be extended toproprietary (for profit) educational institutionsby law subject to such limitations as it mayprovide, including restrictions on dividends andprovisions for reinvestment. The restrictions are

designed to insure that the tax-exemptionbenefits are used for educational purposes.

Lands, buildings, and improvements actually,directly and exclusively used for educationalpurposes are exempt from property tax [Sec. 28[3], Art. VI, 1987 Constitution], whether theeducational institution is proprietary or non-profit.




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Even the legislative body cannot deprive the SCof its appellate jurisdiction over all casescoming from inferior courts where theconstitutionality or validity of an ordinance orthe legality of any tax, impost, assessment, ortoll is in question. [San Miguel Corp v. Avelino

(G.R. No. L-39699 March 14, 1979]

Art VI, Sec 30, 1987 Constitution – No law shallbe passed increasing the appellate jurisdictionof the Supreme Court without its advice andconcurrence.

Scope of Judicial Review in taxation: limited onlyto the interpretation and application of tax laws.Its power does not include inquiry into the policyof legislation. Neither can it legitimatelyquestion or refuse to sanction the provisions of

any law consistent with the Constitution. [BisayaLand Transportation Co v. Collector, May 29,1959]

Grant of power to the local government unitsto create its own sources of revenueLGUs have power to create its own sources ofrevenue and to levy taxes, fees and charges,subject to such guidelines and limitations as theCongress may provide which must be consistentwith the basic policy of local autonomy. [ Art X,Sec 5, 1987 Constitution]

Flexible tariff clauseDelegation of Tariff powers to the Presidentunder the flexible tariff clause [ Art VI, Sec 28(2),1987 Constitution]

Flexible tariff clause: the authority given to thePresident, upon the recommendation of NEDA,to adjust the tariff rates under Sec. 401 of theCode in the interest of national economy,general welfare and/or national security.

Exemption from real property taxes

Art VI, Sec 28(3), 1987 Constitution – Charitableinstitutions, churches and personages orconvents appurtenant thereto, mosques, non-profit cemeteries, and all lands, buildings, andimprovements, actually, directly, and exclusivelyused for religious, charitable, or educationalpurposes shall be exempt from taxation.

No appropriation or use of public money for

religious purposes

Art VI, Sec 29, 1987 Constitution(1) No money shall be paid out of the Treasury

except in pursuance of an appropriationmade by law.

(2)

No public money or property shall beappropriated, applied, paid, or employed,directly or indirectly, for the use, benefit, orsupport of any sect, church, denomination,sectarian institution, or system of religion, orof any priest, preacher, minister, otherreligious teacher, or dignitary as such, exceptwhen such priest, preacher, minister, ordignitary is assigned to the armed forces, orto any penal institution, or governmentorphanage or leprosarium.

(3) All money collected on any tax levied for a

special purpose shall be treated as a specialfund and paid out for such purpose only. Ifthe purpose for which a special fund wascreated has been fulfilled or abandoned, thebalance, if any, shall be transferred to thegeneral funds of the Government.

Provisions Indirectly Affecting Taxation

Due process

Art III, Sec 1, 1987 Constitution – No person shall

be deprived of life, liberty, or property without due

process of law, nor shall any person be deniedthe equal protection of the laws.

(1) Substantive Due Process – An act is doneunder the authority of a valid law or theConstitution itself.

(2) Procedural Due Process – An act is done aftercompliance with fair and reasonablemethods or procedure prescribed by law.

Due Process in Taxation requirements:(1) public purpose(2) imposed within taxing authority’s territorial

jurisdiction(3) assessment or collection is not arbitrary or

oppressive




PAGE 23

The due process clause may be invoked where ataxing statute is so arbitrary that it finds nosupport in the Constitution, as where it can beshown to amount to the confiscation ofproperty. [Sison v. Ancheta, 130 SCRA 654,1984]

Instances of violations of the due process clause:

(1) If the tax amounts to confiscation of property;(2) If the subject of confiscation is outside the

jurisdiction of the taxing authority;(3) If the tax is imposed for a purpose other than

a public purpose;(4) If the law which is applied retroactively

imposes just and oppressive taxes.(5) If the law violates the inherent limitations on

taxation.

Equal protection

Art III, Sec 1, 1987 Constitution - No person shallbe deprived of life, liberty, or property withoutdue process of law, nor shall any person bedenied the equal protection of the laws.

All persons subject to legislation shall betreated alike under similar circumstances andconditions both in the privileges conferred andliabilities imposed. [1 Cooley 824-825; See Sisonv. Ancheta,1984]

The doctrine does not require that persons or

properties different in fact be treated in laws asthough they were the same. Indeed, to treatthem the same or alike may offend theConstitution. What the Constitution prohibits isclass legislation which discriminates againstsome and favors others. As long as there arerational or reasonable grounds for so doing,Congress may, therefore, group the persons orproperties to be taxed and it is sufficient “if all ofthe same class are subject to the same rate andthe tax is administered impartially upon them.”[1 Cooley 608].

The equal protection clause is subject toreasonable classification. Classification is validas long as:(1) classification rests on substantial distinctions

which make real differences,(2) classification is germane to achieve the

legislative purpose,(3) the law applies, all things being equal, to

both present and future conditions, and

(4) the classification applies equally well to allthose belonging to the same class.

Religious freedom

Art III, Sec 5, 1987 Constitution – No law shall bemade respecting an establishment of religion,

or prohibiting the free exercise thereof. (non-establishment clause)

The free exercise and enjoyment of religiousprofession and worship, without discriminationor preference, shall forever be allowed. (freeexercise clause)

No religious test shall be required for theexercise of civil or political rights.

The free exercise clause is the basis of tax

exemptions.

The imposition of license fees on thedistribution and sale of bibles and otherreligious literature by a non-stock, non-profitmissionary organization not for purposes ofprofit amounts to a condition or permit for theexercise of their right, thus violating theconstitutional guarantee of the free exercise andenjoyment of religious profession and worshipwhich carries with it the right to disseminatereligious beliefs and information. [AmericanBible Society v. City of Manila, L-9637 April 30,1957]It is actually in the nature of a condition orpermit for the exercise of the right. This isdifferent from a tax in the income of one whoengages in religious activities or a tax onproperty used or employed in connection withthose activities. It is one thing to impose a taxon the income or property of a preacher. It isquite another thing to exact a tax for theprivilege of delivering a sermon. [American BibleSociety v. City of Manila]

The Constitution, however, does not prohibit

imposing a generally applicable tax on the saleof religious materials by a religiousorganization. [Tolentino v. Secretary of Finance, 235 SCRA 630,1994].




PAGE 26

Special AssessmentTaxes Special Assessment

Levied not only onland.

Levied only on land.

Imposed regardless ofpublic improvements

Imposed because ofan increase in value of

land benefited bypublic improvement.

Contribution of ataxpayer for thesupport of thegovernment.

Contribution of aperson for theconstruction of apublic improvement

It has generalapplication both as totime and place.

Exceptional both as totime and locality.

A special assessment is not a personal liabilityof the person assessed, i.e., his liability is limited

only to the land involved. It is based wholly onbenefits (not necessity).

A charge imposed only on property ownersbenefited is a special assessment rather than atax notwithstanding that the statute calls it atax. The rule is that an exemption from taxationdoes not include exemption from specialassessment. But the power to tax carries with itthe power to levy a special assessment.

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

DebtTaxes Debt

Based on laws Generally based oncontract, express orimplied.

Generally cannot be

assigned

Assignable

Generally paid inmoney

May be paid in kind.

Cannot be a subject ofset off orcompensation

Can be a subject ofset off orcompensation (seeArt. 1279, Civil Code)

Taxes DebtA person cannot beimprisoned for non-payment of debt(except when it arisesfrom a crime),

Imprisonment is asanction for non-payment of tax,except poll tax.

Governed by thespecial prescriptiveperiods provided for inthe NIRC.

Governed by theordinary periods ofprescription.

Does not drawinterest except onlywhen delinquent

Draws interest when itis so stipulated orwhere there is default.

Imposed only bypublic authority

Can be imposed byprivate individual

A tax is not a debt in the ordinary sense of theword.

PenaltyTaxes Penalty

Violation of tax lawsmay give rise toimposition of penalty.

Any sanction imposedas a punishment forviolation of law or actsdeemed injurious

Generally intended toraise revenue

Designed to regulateconduct

May be imposed onlyby the government

May be imposed bythe government orprivate individuals or

entitiesCannot be a subject ofset off orcompensation

Can be a subject ofset off orcompensation (seeArt. 1279, Civil Code)

KINDS OF TAXES

AS TO OBJECT(1) Personal, Poll or Capitation Tax – tax of a

fixed amount imposed on persons residingwithin a specified territory, whether citizens

or not, without regard to their property orthe occupation or business in which theymay be engaged (e.g. community (formerlyresidence) tax). Taxes of a specified amountimposed upon each person performing acertain act or engaging in a certain businessor profession are not, however, poll taxes.[71 Am.Jur.2d 357].




PAGE 27

(2) Property Tax – tax imposed on property, realor personal, in proportion to its value or inaccordance with some other reasonablemethod of apportionment (e.g., real estatetax). The obligation to pay the tax isabsolute and unavoidable and is not based

upon the voluntary action of the personassessed.

(3) Privilege/Excise Tax – any tax which doesnot fall within the classification of a poll taxor a property tax. Thus, it is said that anexcise tax is a charge imposed upon theperformance of an act, the enjoyment of aprivilege, or the engaging in an occupation,profession, or business. The obligation topay the tax is based on the voluntary actionof the person taxed in performing the act orengaging in the activity which is subject to

the excise. The term “excise tax” issynonymous with “privilege tax” and thetwo are often used interchangeably (e.g.,income tax, value added tax, estate tax,donor’s tax).

AS TO BURDEN OR INCIDENCE(1) Direct Taxes – taxes which are demanded

from persons who also shoulder them; taxesfor which the taxpayer is directly or primarilyliable, or which he cannot shift to another(eg. Income tax, estate tax, donor’s tax,community tax)

(2) Indirect Taxes – taxes which are demandedfrom one person in the expectation andintention that he shall indemnify himself atthe expense of another, falling finally uponthe ultimate purchaser or consumer; taxeslevied upon transactions or activities beforethe articles subject matter thereof, reachthe consumers who ultimately pay for themnot as taxes but as part of the purchaseprice. Thus, the person who absorbs orbears the burden of the tax is other than theone on whom it is imposed and required by

law to pay the tax. Practically all businesstaxes are indirect (e.g., VAT, percentage tax;excise taxes on specified goods; customsduties).

AS TO TAX RATES(1) Specific Tax – a tax of a fixed amount

imposed by the head or number or by someother standard of weight or measurement.It requires no assessment (valuation) otherthan the listing or classification of the

objects to be taxed (e.g., taxes on distilledspirits, wines, and fermented liquors; cigarsand cigarettes)

(2) Ad Valorem Tax – a tax of a fixed proportionof the value of the property with respect towhich the tax is assessed. It requires theintervention of assessors or appraisers toestimate the value of such property beforethe amount due from each taxpayer can bedetermined. The phrase “ad valorem”means literally, “according to value.” (e.g.real estate tax, excise tax on automobiles,

non-essential goods such as jewelry andperfumes, customs duties (except oncinematographic films)).

(3) Mixed

AS TO PURPOSES(1) General or Fiscal Tax –levied for the general

or ordinary purposes of the Government,i.e., to raise revenue for governmental needs(e.g. income tax, value added tax, andalmost all taxes).

(2) Special/Regulatory/ Sumptuary Tax –leviedfor special purposes i.e., to achieve some

social or economic ends irrespective ofwhether revenue is actually raised or not(e.g. protective tariffs or customs duties onimported goods to enable similar productsmanufactured locally to compete with suchimports in the domestic market).

Tariff duties intended mainly as a source ofrevenue are relatively low so as not todiscourage imports.

AS TO SCOPE (OR AUTHORITY IMPOSING

THE TAX) (1) National – taxes imposed by the national

government (e.g. national internal revenuetaxes, customs duties, and national taxesimposed by laws).

(2) Municipal or Local – taxes imposed by localgovernments (e.g. business taxes that maybe imposed under the Local GovernmentCode; professional tax).




PAGE 28

AS TO GRADUATION(1) Proportionate – The rate of tax is based on a

fixed percentage of the amount of theproperty, receipts or other basis to be taxed.Example: real estate tax, value added tax,and other percentage taxes.

(2) Progressive – The rate of tax increases as thetax base or bracket increases. Example:income tax, estate tax, donor’s tax.

(3) Digressive – A fixed rate is imposed on acertain amount and diminishes gradually onsums below it. The tax rate in this case isarbitrary because the increase in tax rate isnot proportionate to the increase of taxbase.

(4) Regressive – The rate of tax decreases as thetax base or bracket increases. There is noregressive tax in the Philippines.

Regressive/progressive system of taxation - Aregressive tax must not be confused with theregressive system of taxation.(a) In a society where the majority of the people

have low incomes, regressive taxation system exists when there are more indirect taxesimposed than direct taxes. Since the low-income sector of the population as a wholebuys more consumption goods on which theindirect taxes are collected, the burden ofindirect taxes rests more on them than onthe more affluent groups. There should be

no objection if indirect taxes are raised onluxury items consumed mainly by the higherincome groups and reduced on basiccommodities consumed by the lowerincome segments of society.

(b) Studies reveal that the progressive elementsof the income and other direct taxes havenot sufficiently offset the regressive effectsof the indirect taxes as a whole.

A progressive tax is, therefore, also differentfrom a progressive system of taxation.

National Internal RevenueCode of 1997 as amended(NIRC)

INCOME TAXATION

Income Tax is defined as a tax on all yearlyprofits arising from property, professions,trades, or offices, or as a tax on the person’sincome, emoluments, profits and the like [Fisherv. Trinidad, 43 Phil. 981].

It may be succinctly defined as a tax on income,whether gross or net, realized in one taxableyear.

Income tax is generally classified as an excisetax. It is not levied upon persons, property, fundsor profits but upon the right of a person toreceive income or profits.

In the Philippines, income tax is imposed on thenet income of citizens, resident aliens, domesticcorporations, and nonresident aliens andforeign corporations engaged in trade orbusiness within the Philippines [Sec. 24 (A), Sec. 25 (A), Sec. 27 (A), Sec. 28 (A), NIRC ]. It is alsoimposed on the gross income of nonresident

aliens and foreign corporations-not doingbusiness in the Philippines [Sec. 25 (B), (C), (D),Sec. 28 (B), NIRC]. It is further imposed as a finaltax on certain passive income (interests,royalties, prizes, and other winnings), cash andproperty dividends, capital gains from the saleof domestic shares of stock and real propertyclassified as capital assets located in thePhilippines [Sec. 24 (B), Sec. 25 (A) (2), (3), Sec. 27 (D), Sec. 28 (A), NIRC ].

Income Tax Law aims to mitigate the evils

arising from the inequalities of wealth by aprogressive scheme of taxation which places theburden of on those best able to pay [Madrigal v.Rafferty & Concepcion, G.R. No. L-12287, August7, 1918 ].




PAGE 29

INCOME TAX SYSTEMS

GLOBAL TAX SYSTEMUnder a global tax system, it did not matterwhether the income received by the taxpayer isclassified as compensation income, business or

professional income, passive investmentincome, capital gain, or other income. All itemsof gross income, deductions, and personal andadditional exemptions, if any, are reported inone income tax return, and one set of tax ratesare applied on the tax base.

SCHEDULAR TAX SYSTEMDifferent types of incomes are subject todifferent sets of graduated or flat income taxrates. The applicable tax rate(s) will depend onthe classification of the taxable income and the

basis could be gross income or net income.Separate income tax returns (or other types ofreturn applicable) are filed by the recipient ofincome for the particular types of incomereceived.

SEMI-SCHEDULAR OR SEMI-GLOBAL TAXSYSTEMAll compensation income, business orprofessional income, capital gain and passiveincome not subject to final tax, and otherincome are added together to arrive at the grossincome, and after deducting the sum ofallowable deductions, the taxable income issubjected to one set of graduated tax rates ornormal corporate income tax. With respect tosuch income the computation is global.For those other income not mentioned above,they remain subject to different sets of tax ratesand covered by different returns.

Note: The Philippines, under EO 37 (1986) andRA 8424 (1998), follows a semi-schedular andsemi-global tax system.

FEATURES OF THE PHILIPPINE INCOME TAX LAWDIRECT TAXThe tax burden is borne by the income recipientupon whom the tax is imposed.

PROGRESSIVE

The tax rate increases as the tax base increases.It is founded on the ability to pay principle and isconsistent with Sec. 28, Art. VI, 1987Constitution.

COMPREHENSIVEThe Philippines has adopted the mostcomprehensive system of imposing income taxby adopting the citizenship principle, theresidence principle, and the source principle.Any of the three principles is enough to justifythe imposition of income tax on the income of aresident citizen and a domestic corporation thatare taxed on a worldwide income.

SEMI-SCHEDULAR OR SEMI-GLOBAL TAXSYSTEM

The Philippines follows the semi-schedular orsemi-global system of income taxation,although certain passive investment incomesand capital gains from sale of capital assets(namely: (a) shares of stock of domesticcorporations, and (b) real property) are subjectto final taxes at preferential tax rates.

NATIONAL TAXIt is imposed and collected by the NationalGovernment throughout the country.

EXCISE TAXIt is imposed on the right or privilege of a personto receive or earn income. It is not a personal taxor a property tax.

CRITERIA IN IMPOSING PHILIPPINE

INCOME TAX

Citizenship or Nationality PrincipleA citizen of the Philippines is subject toPhilippine income tax(a) on his worldwide income, if he resides in the

Philippines; or

(b)

only on his income from sources within thePhilippines, if he qualifies as a nonresidentcitizen.

Residence PrincipleA resident alien is liable to pay Philippineincome tax on his income from sources withinthe Philippines but is exempt from tax on hisincome from sources outside the Philippines.




PAGE 31

PrimaryClassification

Sub-Classification(s)

Individuals

Citizens of

the

Philippines

Residents citizens

Non-resident citizens

Aliens

Residents

Non-residents

Engaged inTrade orBusiness inthePhilippinesNotEngaged inTrade orBusiness inthePhilippines

Special

Classes of

Individuals

Minimum Wage Earner

Corporations

Domestic Corporations

Foreign Corporations

ResidentCorporationsNon-residentCorporations

Estates andTrusts

PartnershipsGeneral Business Partnership

General Professional Partnership

Co-ownerships

INDIVIDUAL TAXPAYERS

Citizens(1) Resident Citizens (RC)(2) Non-resident Citizens (NRC)

(a) Citizen of the Philippines whoestablishes to the satisfaction of the

Commissioner the fact of his physicalpresence abroad with a definite intentionto reside therein.

(b) Citizen who leaves the Philippines duringthe taxable year to reside abroad, eitheras an immigrant or for employment on apermanent basis.

(c) Citizen of the Philippines who works andderives income from abroad and whoseemployment thereat requires him to bephysically present abroad most of thetime during the taxable year.

(d) Citizen previously considered as non-

resident citizen and who arrives in thePhilippines at any time during thetaxable year to reside permanently in thePhilippines Treated as NRC withrespect to his income derived fromsources abroad until the date of hisarrival in the Philippines

Aliens(1) Resident Alien

An alien actually present in the Philippines who

is not a mere transient or sojourner is a residentfor income tax purposes.

No/Indefinite Intention = RESIDENT: If he lives inthe Philippines and has no definite intention asto his stay, he is a resident. A mere floatingintention indefinite as to time, to return toanother country is not sufficient to constitutehim a transient.

Definite Intention = TRANSIENT: One who comesto the Philippines for a definite purpose, whichin its nature may be promptly accomplished, is a

transient.

Exception: Definite Intention but such cannot be promptly accomplished; If his purpose is of suchnature that an extended stay may be necessaryfor its accomplishment, and thus the alienmakes his home temporarily in the Philippines,then he becomes a resident.

(2) Non-resident Alien

Engaged in trade or business within the

Philippines - If the aggregate period of his stayin the Philippines is more than 180 days duringany calendar year.

Not engaged in trade or business within thePhilippines - If the aggregate period of his stayin the Philippines does not exceed 180 days.




PAGE 32

Special class of individual employees

Minimum Wage Earner(a) A worker in the private sector paid thestatutory minimum wage;(b) An employee in the public sector withcompensation income of not more than the

statutory minimum wage in the non-agriculturalsector where he/she is assigned.

Corporations

Includes all types of corporations,partnerships (no matter how created ororganized), joint stock companies, jointaccounts, associations, or insurancecompanies, whether or not registered withthe SEC.

Excludes general professional partnerships(GPP), joint venture or consortium formed

for the purpose of undertaking constructionprojects, joint venture or consortiumengaging in petroleum, coal, geothermaland other energy operations pursuant to anoperating or consortium agreement under aservice contract with the government.

(1) Domestic corporations – A corporationcreated and organized under its laws (thelaw of incorporation test).

(2 )Foreign corporations – A corporation whichis not domestic.(a) Resident foreign corporations – Foreign

corporation engaged in trade orbusiness within the Philippines.

Doing business – The term implies acontinuity of commercial dealings andarrangements, and contemplates, to thatextent, the performance of acts or worksor the exercise of some of the functionsnormally incident to, and in progressive prosecution of commercial gain or for the purpose and object of the businessorganization. [RA 7042, Foreign

Investments Act] In order that a foreign corporation maybe regarded as doing business within aState, there must be continuity ofconduct and intention to establish acontinuous business, such as theappointment of a local agent, and notone of a temporary character [CIR v.BOAC]

(b) Non-resident foreign corporations – Foreign corporation not engaged intrade or business within the Philippines

(3) Joint venture and consortium – Essential

factors of a joint venture or consortium:(a) Each party must make a contribution,

not necessarily of capital but by way ofservices, skill, knowledge, material ormoney;

(b) Profits must be shared among theparties;

(c) There must be a joint proprietary interestand right of mutual control over thesubject matter of the enterprise;

(d) There is a single business transaction.

Partnership The Tax Code mandates that every other type ofbusiness partnership is subject to income tax inthe same manner and at the same rate as anordinary corporation.

General Professional Partnerships (GPP)A general professional partnership is apartnership formed by persons for the solepurpose of exercising their common profession,no part of the income of which is derived fromengaging in any trade or business.

Not considered as a taxable entity for incometax purposes. The partners themselves areliable, not the partnership, are liable for thepayment of income tax in their individualcapacities.

Estates and TrustsTaxable estates and trusts are taxed in thesame manner and on the same basis as anindividual.

Co-ownership

For income tax purposes, the co-owners in a co-ownership report their share of the income fromthe property owned in common by them in theirindividual tax returns for the year and the co-ownership is not considered as a separatetaxable entity or a corporation.




PAGE 33

INCOME TAXATION

DEFINITIONIncome Tax is defined as a tax on all yearlyprofits arising from property, professions,trades, or offices, or as a tax on the person’s

income, emoluments, profits and the like [Fisherv. Trinidad].

NATURE

Income tax is generally classified as an excisetax. It is not levied upon persons, property, fundsor profits but upon the right of a person toreceive income or profits.

GENERAL PRINCIPLES A resident citizen of the Philippines is

taxable on all income derived from sources

within and without the Philippines; A nonresident citizen is taxable only on

income derived from sources within thePhilippines;

An individual citizen of the Philippines whois working and deriving income from abroadas an overseas contract worker is taxableonly on income derived from sources withinthe Philippines:Provided, That a seaman shall be treated asan overseas contract worker if he is(a) citizen of the Philippines; and

(b) receives compensation for servicesrendered abroad as a member of thecomplement of a vessel engagedexclusively in international trade

An alien individual, whether a resident ornot of the Philippines, is taxable only onincome derived from sources within thePhilippines;

A domestic corporation is taxable on allincome derived from sources within andwithout the Philippines; and

A foreign corporation, whether engaged or

not in trade or business in the Philippines, istaxable only on income derived fromsources within the Philippines. [Sec. 23]

Taxpayer Within WithoutResident Citizen

Non-resident Citizen andOCW

X

Resident and Non-resident

Alien

X

Domestic Corporation

Foreign Corporation X

INCOMEDEFINITION(a) income means all wealth which flows to the

taxpayer other than a mere return ofcapital. It includes gain derived from thesale or other disposition of capital assets.Income is a gain derived from labor orcapital, or both labor and capital; and

includes the gain derived from the sale orexchange of capital assets.

(b) It is an amount of money coming to a personwithin a specified time, whether as paymentfor services, interest or profit frominvestment. Unless otherwise specified. Itmeans cash or its equivalent. Income canalso be thought of as a flow of the fruits ofone's labor. [Conwi v. CTA, G.R. No. 48532 August 31, 1992]

(c) Income may be received in the form of cash,property, service, or a combination of thethree.

NATUREIncome includes earnings, lawfully or unlawfullyacquired, without consensual recognition, expressor implied, of an obligation to repay and withoutrestriction as their disposition. [ James v. US, 366US 213]

WHEN INCOME IS TAXABLE

Existence of taxable income(a) There is INCOME, gain or profit(b) RECEIVED or REALIZED during the taxable

year(c) NOT EXEMPT from income tax

(i) "The fact is that property is a tree, incomeis the fruit; labor is a tree, income thefruit; capital is a tree, income the fruit."A tax on income is not a tax on property."Income," as here used, can be definedas "profits or gains." [Madrigal vs.Rafferty (1918)]




PAGE 34

(ii) A mere increase in the value of property isnot income, but merely unrealizedincrease in capital. [1 Mertens, Sec.5.06]The increase in the value ofproperty is also known as appraisalsurplus or revaluation increment.

WHEN IS THERE INCOME?When there is a FLOW of wealth other thanmere return of capital during the taxable period.

Income v. Capital [Madrigal v. Rafferty]Income Capital

Denotes a flow ofwealth during adefinite period oftime.

Fund or propertyexisting at one distinctpoint in time.

Service of wealth Wealth itself

Subject to tax Return of capital isnot subject to taxFruit Tree

REALIZATION OF INCOME

Tests of RealizationActual vis-à-vis Constructive receipt

(1) Actual receipt – Income is actually reduced topossession. The realization of gain may takethe form of actual receipt of cash.

(2) Constructive receipt – An income is consideredconstructively received when it is credited tothe account of, or segregated in favour of aperson. The person may withdraw the saidaccount credited in his favor anytime withoutany substantial limitations or conditions uponwhich payment or enjoyment is to be made orexercised. Examples of constructive receiptof income are:(1) Interest credited on savings bank deposit(2) Matured interest coupons not yet

collected by the taxpayer(3) Dividends applied by the corporation

against the indebtedness of a

stockholder(4) Share in the profit of a partner in a

general professional partnership,although not yet distributed, isregarded as constructively received; or

(5) Intended payment deposited in court(consignation).

The doctrine of constructive receipt is designedto prevent the taxpayer using the cash basisfrom deferring or postponing the actual receiptof taxable income. Without the rule, thetaxpayer can conveniently select the year inwhich he will report the income. [Dimaampao]

For a taxpayer using the accrual method, thedeterminative question is, when do the factspresent themselves in such a manner that thetaxpayer must recognize income or expense?The accrual of income and expense is permittedwhen the all-events test has been met. This testrequires: (1) fixing of a right to income or liabilityto pay; and (2) the availability of the reasonableaccurate determination of such income orliability [CIR v. Isabela Cultural Corporation].

The “As If” Theory of Constructive Income isdesigned to prevent a cash basis taxpayer todelay reporting of income. It also resumes theexistence of income on transactions supposedlynot subject to tax. [Valencia and Roxas]

RECOGNITION OF INCOME

Methods of accounting in reporting incomeand expenses

Cash method vis-à-vis Accrual method–Cashmethod generally reports income upon cash

collection and reports expenses upon payment.If earned from rendering of services, income isto be reported in the year when collected,whether earned or unearned. [Sec. 108, NIRC].

Accrual method generally reports income whenearned and reports expense when incurred. Ifearned from sale of goods, income is to bereported in the year of sale, irrespective ofcollection. [Sec. 106, NIRC].

Income realized pertains to the accrual basis of

accounting, when recognition of income in thebooks is when it is realized and expenses arerecognized when incurred. It is the right toreceive and not the actual receipt thatdetermines the inclusion of the amount in grossincome




PAGE 35

Examples:(1) interest or rent income earned but not yet

received(2) rent expense accrued but not yet paid(3) wages due to workers but remaining unpaid

Generally, trade and manufacturing businessesuse accrual method while servicing businessesuse cash method. If the service business optedto report on accrual basis, such method canonly be applied when it comes to reporting ofexpense. To prevent tax evasion, individualtaxpayers whose business consists of the sale ofinventories cannot use cash method. [Valenciaand Roxas]

Installment method vis-à-vis Deferred method

vis-à-vis Percentage of completion method (in

long- term contracts)

Installment Method is a special method ofaccounting whereby income on installmentsales of property during the year is allowed to bereported in installments in proportion to theinstallment payments actually received in thatyear, which the gross profit realized or to berealized when payment is completed, bears tothe total contract price [Sec. 49, NIRC].

Income may be reported on the installmentbasis in the following cases:

Sales of personal property by a dealer – A dealerwho regularly sells or otherwise disposes ofpersonal property on the installment plan

Sales of real property (inventory) and casual

sales of personalty

(1) casual sale or other casual disposition ofpersonal property (not of a kind whichwould be includible in the inventory of thetaxpayer if on hand at the close of thetaxable year) where the selling price >

P1,000 and the initial payments do notexceed 25% of the selling price, or

(2) sale or other disposition of real property(inventory), if the initial payments do notexceed 25% of the selling price. Note: Thissale is subject to creditable withholding taxand normal tax which is 30% for corporatetaxpayer or 5% to 32% for individualtaxpayer.

Sales of real property considered as capital

asset by individuals

An Individual who sells or disposes of realproperty, considered as capital asset, if initialpayments do not exceed 25% of the sellingprice, may pay the capital gains tax in

installments [Sec. 49(C), NIRC]. Note: This saleis subject to a capital gains tax of 6% based onthe selling price or zonal value, whichever ishigher.

Note: Initial payments are the total paymentsreceived in cash or property (other thanevidences of indebtedness such as promissorynotes, mortgages given) by the seller upon orbefore the execution of the instrument of saleduring the taxable year of the disposition of thereal property. Considered as initial payments

are the downpayment and all other paymentsreceived by the seller during the year of sale,including excess mortgage assumed by thebuyer over the basis or cost of the property sold.It contemplates at least one other payment inaddition to the initial payment. If the entirepurchase price is to be paid in a lump sum in alater year, there being no payment during thefirst year, the income may not be returned onthe installment basis.

Selling Price - is the total amount or price of thesale including the cash or property received and

all notes of the buyer or mortgages assumed byhim.

Contract Price is the amount which thepurchaser contracts to pay the seller in cash. Itincludes the excess of the mortgages assumedover the cost or other basis of the property sold

Change from accrual to installment basis

A taxpayer entitled to the benefits of a dealer inpersonal property may elect for any taxable yearto report his taxable income on the installment

basis. In computing his income for the year ofchange or any subsequent year, amountsactually received during any such year onaccount of sales or other dispositions ofproperty made in any prior year shall not beexcluded. [see Sec. 49(D), NIRC].




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Deferred Payment

(a) If the initial payments exceed 25% of theselling price, the gain realized may bereported on a deferred payment method.

(b) The taxable gain or income returnableduring the year of sale is the difference

between the selling or contract price andthe cost of the property, even though theentire purchase price has not been actuallyreceived in the year of sale.

(c) The obligations of the purchaser received bythe vendor are to be considered asequivalent of cash.

Personal Property Real PropertyDealer

Dealer in personalproperty whoregularly sells in

installment plan:Installment method

*held as ordinaryasset regardless ofamount of percentageof initial payments

Installment method;Provided, initialpayments do not

exceed 25% of sellingprice

If exceeds 25%--Deferred paymentmethod

*held as inventory Casual Sale

Installment method;Provided:

(1) Selling price

exceeds php1,000(2) Initial

payments do not exceed 25% ofselling price

If either of 2 or bothconditions not met—Deferred paymentmethod

*personal propertynot considered

inventory Sale by Individuals

Installment method;Provided, initialpayments do not exceed 25% of sellingprice

*held as capital asset

Percentage of completion (in long-term

contracts)

Income from long-term construction contractsrefers to the earnings derived from constructionof a building, installation or other constructioncontract usually covering a period in excess of

one year. When income is derived from long-term construction contracts, it is generallyreported on the basis of percentage ofcompletion made every year that will beevidence by the certificates of engineers orarchitects. The reportable income is calculatedby deducting from the contract price the actualcost of construction.

In recognizing realized revenue for long-termconstruction contracts, accountants usuallyfollow two methods:

(a) Completed contract method – requiresrecognition of revenue only when thecontract is finally completed; and

(b) Percentage of completion method – requiresrecognition of income based on theprogress of work.

Long-term contracts are no longer allowedto be reported based on the completedcontract method basis beginning January 1,1998 pursuant to RA 8424; hence, all long-term contracts must be reported using the

percentage of completion method.

Tests in determining whether income isearned for tax purposes(1) Realization test – no taxable income until

there is a separation from capital ofsomething of exchangeable value, therebysupplying the realization or transmutationwhich would result in the receipt of income(Eisner v Macomber ). Thus, stock dividendsare not income subject to income tax on thepart of the stockholder when he merely

holds more shares representing the sameequity interest in the corporation thatdeclared stock dividends (Fisher v Trinidad).




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(2) Claim of right doctrine (or Doctrine ofOwnership, command, or control) – ataxable gain is conditioned upon thepresence of a claim of right to the allegedgain and the absence of a definiteunconditional obligation to return or repay

that which would otherwise constitute again. To collect a tax would give thegovernment an unjustified preference as tothe part of the money that rightfully andcompletely belongs to the victim. Theembezzler’s title is void.

(3) Economic benefit test, Doctrine of ProprietaryInterest – any economic benefit to theemployee that increases his net worth,whatever may have been the mode by whichit is effected, is taxable. Thus, in stockoptions, the difference between the fair

market value of the shares at the time theoption is exercised and the option priceconstitutes additional compensationincome to the employee at the time ofexercise (not upon the grant or vesting ofthe right).

(4) Severance Test - Under the doctrine ofseverance test of income, in order thatincome may exist, is necessary that there bea separation from capital of something ofexchangeable value. The income required arealization of gain.

(5) All Events Test – Under the accrual method

of accounting, expenses are deductible inthe taxable year in which: (1) all events haveoccurred which determine the liability; and(2) the amount of liability can bedetermined with reasonable accuracy.

“All events test” requires:(a) Fixing a right to income or liability to

pay; and(b) The availability of reasonably accurate

determination of such income orliability.

All of the above tests are followed in thePhilippines for purposes of determining whetherincome is received by the taxpayer or not duringthe year [Mamalateo].

GROSS INCOME

DEFINITIONGross Income means the pertinent items ofincome referred to in Section 32(A) of the TaxCode. It includes all income derived from

whatever source (unless exempt from tax bylaw), including, but not limited to, the followingitems:(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) P artner’s distributive share from the net

income of the general professionalpartnership (GPP) [Sec 32A, NIRC]

The list here is NOT exclusive

The term “gross income” whenever used

without qualification, is comprehensive, asdefined above, and is different from thelimited meaning of gross income forpurposes of minimum corporate income taxor the gross income tax of corporations.Gross income includes gross profit fromordinary business and other income notsubject to passive income tax or finalwithholding tax.

Gross income means income, gain, or profitsubject to income tax.

It includes the compensation for personalservices, business income, profits, andincome derived from any source whatever(whether legal or illegal)

It excludes unless it is exempt from incometax under the Constitution, tax treaty, orstatute or it is subject to final withholdingincome tax in accordance with the semi-global or semi-schedular tax systemadopted by the Philippines.




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It is the difference between grosssales/revenue and the cost of goodssold/services. The definition of grossincome is broad and comprehensive toinclude proceeds from sales of transportdocuments. [Mamalateo]

CONCEPT OF INCOME FROM WHATEVERSOURCE DERIVED“Income derived from whatever source” meansinclusion of all income not expressly exemptedwithin the class of taxable income under thelaws irrespective of the voluntary or involuntaryaction of the taxpayer in producing the gains,and whether derived from legal or illegalsources (i.e. gambling, extortion, smuggling,etc.)

GROSS INCOME VIS-À-VIS NET INCOME VIS-À-VIS TAXABLE INCOME(a) Gross income - means income, gain or profit

subject to tax. (b) Net income– means gross income less

statutory deductions and/or exemptions[Sec. 31, NIRC ]

(c) Taxable income

–

means the pertinent itemsof gross income specified in the Tax Code,less the deductions and/or personal andadditional exemptions, if any, authorized forsuch types of income by the Tax Code orother special laws [Sec. 31, NIRC]. It issynonymous to the term “net income”[Valencia and Roxas]

CLASSIFICATION OF INCOME AS TOSOURCE

Source is ascribed to the place wherein theincome is earned. It is governed by the situs oftaxation. This classification of income isnecessary to determine whether such income issubject to tax or not. Income may be:(1) Derived entirely from sources within thePhilippines [Se. 42A, NIRC]. Examples:

compensation for labor or service derived fromPhilippine sources; interest on bonds, notes,deposits and the like earned in the Philippines;dividends declared by domestic corporations;rentals and royalties from property locatedwithin the Philippines; and gains, profits andincome from sale of real property as well asfrom personal property in the Philippines. As a

rule, incomes earned within the Philippines aretaxable.(2) Derived entirely from sources without thePhilippines [Sec. 42C, NIRC]. Examples:compensation for labor or service rendered byoverseas contract workers; interest on bonds,

notes, deposits and the like earned abroad;dividends declared by nonresident foreigncorporation; rental and royalties from propertylocated outside the Philippines; and gains,profits and income from sale of real property aswell as from personal property located outsidethe Philippines. As a rule, incomes earned withthe Philippines are taxable.(3) Derived from sources partly within or partlywithout the Philippines. Examples: gains, profitsand income from transportation or otherservices rendered partly within and partly

outside, and dividend received by a residentcitizen from a resident foreign corporation. (Sec.43(E), NIRC). In general, when an income isearned partly from within and partly fromwithout, only income within is taxable in thePhilippines, except if the taxpayer is a residentcitizen or a domestic corporation. A Filipinocitizen or a domestic corporation whose incomeis derived from within and without thePhilippines is generally subject to tax.

SOURCES OF INCOME SUBJECT TO TAX

Compensation Income

Income arising from an employer-employee(ER-EE) relationship. It means all remunerationfor services performed by an EE for his ER,including the cash value of all remunerationpaid in any medium other than cash [Sec. 78(A)],unless specifically excluded by the Tax Code.

It includes, but is not limited to, salaries andwages, honoraria and emoluments, allowances(e.g., transportation, representation,entertainment), commissions, fees (including

directors’ fees, if the director is, at the sametime, an employee of the payor-corporation),tips, taxable bonuses, fringe benefits exceptthose subject to Fringe Benefit Tax (FBT) underSection 33 of the Tax Code, and taxablepensions and retirement pay (e.g. retirementbenefits earned without meeting the conditionsfor exemption thereof, such as retirement of lessthan 50 years of age.)




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General Rule: every form of compensationincome is taxable regardless of how it is earned,by whom it is paid, the label by which it isdesignated, the basis upon which it isdetermined, or the form in which it is received.

The basis upon which remuneration is paid isimmaterial. It may be paid on the basis of pieceof work, percentage of profits, hourly, weekly,monthly, or annually.

Exception: The term wages does NOT includeremuneration 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 thePhilippines for a foreign government or anint’l organization. [Sec. 78(A)]

Note: The term “agricultural labor” does notinclude services performed in connection withforestry, lumbering or landscaping.

The term “remuneration for domestic services”refers to remuneration paid for services of ahousehold nature performed by an employee inor about the private home of the person whomhe is employed. The services of household

personnel furnished to an employee (exceptrank and file employees) by an employer shallbe subject to the fringe benefits tax pursuant toSec. 33 of the Tax Code. A private home is thefixed place of abode of an individual or family. Ifthe home is utilized primarily for the purpose ofsupplying board or lodging to the public as abusiness enterprise, it ceases to be a privatehome and remuneration paid for servicesperformed therein is not exempted. Services ofthe household nature in or about a privatehome include services rendered by cooks,

maids, butlers, valets, laundresses, gardeners,chauffeurs of automobiles for family use. Theremuneration paid for the services which areperformed in or about rooming or lodginghouses, boarding houses, clubs, hotels,hospitals or commercial officer orestablishments is considered as compensation.Remuneration paid for services performed as aprivate secretary, even if they are performed in

the employer’s home is considered ascompensation.

The term “casual labor” includes labor which isoccasional, incidental or regular. “Not in thecourse of the employer’s trade or business”

includes labor that does not promote oradvance the trade or business of the employer.

The term “remuneration paid for servicesperformed as an employee of a foreigngovernment or an international organization”includes not only remuneration paid for servicesperformed by ambassadors, ministers and otherdiplomatic officers and employees but alsoremuneration paid for services performed asconsular or other officer or employee of aforeign government or as a non-diplomatic

representative of such government.

Compensation income including overtime pay,holiday pay, night shift differential pay, andhazard pay, earned by MINIMUM WAGE

EARNERS (MWE) who has no other returnableincome are NOT taxable and not subject towithholding tax on wages [RA 9504]Provided,however, that an employee shall not enjoy theprivilege of being a MWE and, therefore, his/herentire earning are not exempt from income taxand, consequently, from withholding tax if hereceives/earns additional compensation such as

commissions, honoraria, fringe benefits,benefits in excess of the allowable statutoryamount of P30,000, taxable allowance, andother taxable income other than the statutoryminimum wage (SMW), holiday pay, overtimepay, hazard pay and night shift differential pay.

MWEs receiving other income, such as incomefrom the conduct of trade, business, or practiceof profession, except income subject to final tax,in addition to compensation income are notexempted from income tax on their income

earned during the taxable year.

This rule, notwithstanding, the SMW, HolidayPay, overtime pay, night differential pay andhazard pay shall still exempt from withholdingtax.




PAGE 40

Forms of compensation and how they are

assessed

(a) Cash – If compensation is paid in cash, thefull amount received is the measure of theincome subject to tax.

(b) Medium other than money – If services are

paid for in a medium other than money (e.g.shares of stock, bonds, and other forms ofproperty), the fair market value (FMV) of thething taken in payment is the amount to beincluded as compensation subject to tax. Ifthe services are rendered at a stipulatedprice, in the absence of evidence to thecontrary, such price will be presumed to bethe FMV of the remuneration received.

(c) Living quarters or meals - General Rule: Thevalue to the employee of the living quartersand meals given by the employer shall be

added to his compensation subject towithholding.Exception: If living quarters/meals are furnished

to an employee for the convenience of theemployer the value needed NOT beincluded as part of compensation income.

(d) Facilities and privileges of a relatively smallvalue - Facilities and privileges (such anentertainment, medical services, or socalled “courtesy” discounts on purchases),otherwise known as “de minimis benefits”furnished or offered by an employer to hisemployees generally, are NOT considered

as compensation subject to income tax andtherefore withholding tax if such facilitiesare offered or furnished by the employermerely as means of promoting the health,goodwill, contentment, or efficiency of hisemployees.

Convenience of the Employer Rule

Allowances in kind furnished to the employeefor and as necessary incident to theperformance of his duties are not taxable[Valencia and Roxas].

If meals, living quarters, and other facilities andprivileges are furnished to an employee for theconvenience of the employer, and incidental tothe requirement of the employee’s work orposition, the value of that privilege need not beincluded as compensation [Henderson v.Collector ]

The amount of “de minimis” benefits confirmingto the ceiling prescribed shall not be consideredin determining the P30,000 ceiling of “otherbenefits” excluded from gross income underSection 32 (b)(7)(e) of the Tax Code, Provided,that the excess of the ‘de minimis’ benefits over

their respective ceilings prescribed by theseregulations shall be considered as part of “otherbenefits” and the employee receiving it will besubject to tax only on the excess over theP30,000 ceiling, Provided, further, that MWEsreceiving, ‘other benefits’ exceeding theP30,000 limit shall be taxable on the excessbenefits, as well as on his salaries, wages, andallowances, just like an employee receivingcompensation income beyond the SMW. Anyamount given by the employer as benefits to itsemployees, whether classified as “de minimis”

benefits or fringe benefits, shall constitute asdeductible expense upon such employer. Wherecompensation is paid in property other thanmoney, the employer shall make necessaryarrangements to ensure that the amount of thetax required to be withheld is available forpayment to the BIR.

Classification of Gross Compensation Income

Basic salary or wage(1) Salary – earnings received periodically for a

regular work other than manual labor.Example: monthly salary of an employee

(2) Wages – earnings received usually accordingto specified intervals of work, as by the hour,day, or week. Example: a carpenter’s wage.

Backwages are subject to income tax andwithholding tax on wages [BIR Ruling No. DA-073-2008]

Honoraria – payments given in recognition forservices performed for which the establishedpractice discourages charging a fixed fee.Example: honorarium of a guest lecturer

Fixed or variable allowances i.e. Transportation,Representation, and other allowances such asCost of Living Allowances (COLA)




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General Rule: Fixed or variable transportation,representation or other allowances that arereceived by a public officer or employee of aprivate entity, in addition to the regularcompensation fixed for his position or office isCOMPENSATION subject to withholding tax.

[Rev. Regs. 2-98]

Exception: Any amount paid specifically, eitheras advances or reimbursements for travelling,representation and other bona fide ordinary andnecessary expenses incurred or reasonablyexpected to be incurred by the employee in theperformance of his duties are not compensation subject to withholding tax, provided thefollowing conditions are satisfied:(a) It is for ordinary and necessary traveling and

representation or entertainment expenses

paid or incurred by the employee in thepursuit of the employer’s trade, business orprofession; and

(b) The employee is required to account orliquidate for the foregoing expenses.

The excess of actual expenses overadvances made shall constitute taxableincome if such amount is not returned tothe employer. The employee is required toaccount/liquidate for the expenses inaccordance with the specific requirementsof substantiation for each category of

expenses pursuant to Section 34 of the TaxCode.

Note: Reasonable amounts ofreimbursements/advances for traveling andentertainment expenses which are pre-computed on a daily basis and are paid to anemployee while he is on an assignment or dutyare NOT subject to withholding tax on wagesand substantiation requirements.

Commission – usually a percentage of totalsales or on certain quota of sales volume

attained as part of incentive such as salescommission.

Fees – received by an employee for the servicesrendered to the employer including a director’sfee of the company, fees paid to the publicofficials such as clerks of court or sheriffs forservices rendered in the performance of theirofficial duty over and above their regularsalaries.

Tips and Gratuities – those paid directly to theemployee (usually by a customer of theemployer) which are not accounted for by theemployee to the employer. (taxable income butnot subject to withholding tax) [RR NO. 2-98,Sec. 2.78.1]

Hazard or Emergency Pay – additional paymentreceived due to the workers’ exposure to dangeror harm while working. It is normally added tothe basic salary together with the overtime payand night differential to arrive at gross salary.

Retirement Pay – a lump sum payment receivedby an employee who has served a company for aconsiderable period of time and has decided towithdraw from work into privacy. [RR 6-82, Sec. 2b]

In general, retirement pay is taxable except inthe following instances:(1) SSS or GSIS retirement pays.(2) Retirement pay (R.A. 7641) due to old ageprovided the following requirements are met:

(a) The retirement program is approved bythe BIR Commissioner;

(b) It must be a reasonable benefit plan. (Itsimplementation must be fair andequitable for the benefit of allemployees)

(c) The retiree should have been employed

for 10 years in the said company;(d) The retiree should have been 50 years

old or above at the time of retirement;and

(e) It should have been availed of for thefirst time.

Separation pay – taxable if voluntarily availed of.It shall not be taxable if involuntary i.e. death,sickness, disability, reorganization/merger ofcompany and company at the brink ofbankruptcy or for any cause beyond the control

of the said official or employee.

“For any cause beyond the control.” –

(1) Connotes involuntariness on the part of theofficial or employee

(2) The separation from the service of the officialor employee must not be asked for orinitiated by him.

(3) The separation was not of his own making.




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(4) Such fact shall be duly established by theemployer by competent evidence whichshould be attached to the monthly returnfor the period in which the amount paid dueto the involuntary separation was made.

(6) Amounts received by reason of involuntary

separation remain EXEMPT from incometax even if the official or the employee, atthe time of separation, had rendered lessthan ten (10) years of service and/or isbelow fifty (50) years of age.

(7)Any payment made by an employer to anemployer to an employee on account ofdismissal, constitutes compensationregardless of whether the employer islegally bound by contract, statute, orotherwise, to make such payment.

Pension – a stated allowance paid regularly to aperson on his retirement or to his dependentson his death, in consideration of past services,meritorious work, age, loss, or injury. Pension istaxable unless the law states otherwise, ORunless the BIR approves the pension plan of aprivate company.

Vacation and sick leave- rules in determiningwhether money received for vacation and sickleave is taxable or not: (a) If paid or availed of as salary of an employee

who is on vacation or on sick leave

notwithstanding his absence from work, itconstitutes TAXABLE compensation income.[RR 6-82, 2d]

(b) Monetized value of unutilized VACATIONleave credits of ten (10) days or less whichwere paid to private employees during theyear, and the monetized value of vacationand sick leave credits paid to governmentofficials and employees are NOT subject toincome tax and to the withholding tax. Theseare ‘de minimis’ benefits.’ [RR no. 5-2011, Sec 2.78.1(A)(7)] Note: monetization of sick leave

credits of private employees even if notexceeding 10 days is not exempt fromincome tax and withholding tax on wages.

(c) Terminal leave or money value ofaccumulated vacation and sick leave benefitsreceived by heir upon death of employee isnot taxable.

Thirteenth month pay and other benefits - Nottaxable if the total amount received is P30,000or less. Any amount exceeding P30,000 istaxable. [Sec. 32 (7)e, NIRC]

Fringe Benefits and De Minimis

Fringe Benefits – any good, service, or otherbenefit furnished or granted by anemployer, in cash or in kind, in addition tobasic salaries of an individual employee[Sec. 33, NIRC ]

De Minimis – privileges of relatively smallvalue as given by the employer to hisemployees.

Fringe Benefits and De Minimis are notconsidered compensation subject to incometax and withholding tax.

Overtime Pay – premium payment received forworking beyond regular hours of work which isincluded in the computation of gross salary ofemployee. It constitutes compensation.

Profit Sharing – the proportionate share in theprofits of the business received by the employeein addition to his wages.

Awards for special services – awards for pastservices or suggestions to employers resultingin the prevention of theft or robbery, etc. are

also compensations.

Beneficial Payments – such as where employerpays the income tax owed by an employee areadditional compensation income.

Other forms of compensation – other formsreceived due to services rendered arecompensation paid in kind, e.g., insurancepremium paid by the employer for insurancecoverage where the heirs of the employee arethe beneficiaries is the employee’s income.

Note: Any amount which is required by law to bededucted by the employer from thecompensation of an employee including thewithheld tax is considered as part of theemployee’s compensation and is deemed to bepaid to the employee as compensation at thetime the deduction is made. (This also applies todeductions not required by law.)




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Withholding Tax on Compensation Income

The income recipient (i.e., EE) is the personliable to pay the tax on income, yet to improvethe collection of compensation income of EEs,the State requires the ER to withhold the taxupon payment of the compensation income.

FRINGE BENEFITS

Special treatment of fringe benefitsPersons liable: The Employer (as a withholdingagent), whether individual, professionalpartnership or a corporation, regardless ofwhether the corporation is taxable or not, or thegovernment and its instrumentalities, is liable toremit the fringe benefit tax to the BIR once fringebenefit is given to a managerial or supervisoryemployee.

The fringe benefit tax (FBT) is a final tax on theemployee’s income to be withheld by theemployer. The withholding and remittance ofFBT shall be made on a calendar quarterlybasis.

Managerial employee: one who is vested withthe powers or prerogatives to lay down andexecute management policies and/or to hire,transfer, suspend, lay-off, recall, discharge,assign or discipline employees.

Supervisory employees: those who, in theinterest of the employer, effectively recommendsuch managerial actions if the exercise of suchauthority is not merely routinary or clerical innature but requires the use of independent judgment.

All employees not falling within any of theabove definitions are considered rank-and-fileemployees.

Fringe benefit tax is imposed on fringe benefits

received by supervisory and managerialemployees. The fringe benefits of rank and fileemployees are treated as part of compensationincome subject to income tax and withholdingtax on compensation.

DefinitionFringe benefit means any good, service, or otherbenefit furnished or granted by an employer, incash or in kind, in addition to basic salaries, toan individual employee (except rank and fileemployees) such as, but not limited to the

following:(1) Housing(2) Expense Account(3) Vehicle of any kind(4) Household personnel, such as maid, driver

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

the extent of the difference between themarket rate and actual rate granted.

(6) Membership fees, dues and other expensesborne by the employer for the employee insocial and athletic clubs and similar

organizations(7) Expenses for foreign travel(8) Holiday and vacation expenses(9) Educational assistance to the employee or

his dependents; and(10) Life or health insurance and other non-life

insurance premiums or similar amounts onexcess of what the law allows.[Sec. 33(B)]

Tax Rate and Tax Base(1) Tax base is based on the grossed-up

monetary value (GMV) of fringe benefits.(2) Rate is generally 32%

(3) GMV represents: (a) the whole amount ofincome realized by the employee whichincludes the net amount of money or netmonetary value of property that has beenreceived; and (b) the amount of fringebenefit tax due from the employee whichhas been withheld and paid by the employerfor and in behalf of his employee.

How GMV is determinedGMV is determined by dividing the actualmonetary value of the fringe benefit by 68%

[100% - tax rate of 32%]. For example, theactual monetary value of the fringe benefit isP1,000. The GMV is equal to P1,470.59 [P1,000/ 0.68]. The fringe benefit tax, therefore, isP470.59 [P1470.59 x 32%].




PAGE 44

Special Cases:(1) For fringe benefits received by non-resident

alien not engaged in trade of business inthe Philippines (NRANETB), the tax rate is25% of the GMV. The GMV is determined bydividing the actual monetary value of the

fringe benefit by 75% [100% - 25%].(2) For fringe benefits received by alien

individuals and Filipino citizens employedby regional or area headquarters, regionaloperating headquarters, offshore bankingunits (OBUs), or foreign service contractor orby a foreign subcontractor engaged inpetroleum operations in the Philippines, orby any of their Filipino individual employeeswho are employed and occupying the samepositions as those occupied by the alienemployees, the tax rate is 15% of the GMV.

The GMV is determined by dividing theactual monetary value of the fringe benefitby 85% [100% - 15%].

(3) What is the tax implication if the employergives ‘fringe benefits’ to rank-and-fileemployees? Fringe benefits given to a rank-and-file employee are treated as part of hiscompensation income subject to normal taxrate and withholding tax on compensationincome, except de minimis benefits andbenefits provided for the convenience of theemployer .

Payor of Fringe Benefit Tax (FBT): The employerwithholds and pays the FBT but the lawallows him to deduct such tax from his grossincome.

Taxable and non-taxable fringe benefitsFringe Benefits NOT subject to Tax

(1) Fringe benefits not considered as grossincome –

(a) if it is required or necessary to thebusiness of employer

(b) if it is for the convenience or advantage of

employer(2) Fringe Benefit that is not taxable under Sec.

32 (B) – Exclusions from Gross Income(3) Fringe benefits not subject to Fringe Benefit

Tax:(a) Fringe Benefits which are authorized and

exempted from income tax under theCode or under special laws;

(b) Contributions of the employer for thebenefit of the employee for retirement,insurance and hospitalization benefitplans;

(c) Benefits given to the rank-and-fileemployees, whether granted under a

collective bargaining agreement or not;and

(d) Fringe benefits granted for theconvenience of the employer;

(e) De minimis benefits

The exemption of any FB from the FBT shall notbe interpreted to mean exemption from anyother income tax imposed under the Tax Codeexcept if the same is likewise expressly exemptfrom any other income tax imposed under theTax Code or under any other existing law. Thus,

if the FB is exempted from the FBT, the samemay, however, still form of the employee’s grosscompensation income which is subject toincome tax; hence, likewise subject towithholding tax on compensation incomepayment.

De minimis benefits (exempt from income tax as

well as withholding tax on compensation income

of both managerial and rank and file EEs) (a) Monetized unused vacation leave credits of

private employees not exceeding ten (10)days during the year;

(b) Monetized value of vacation and sick leavecredits paid to government officials andemployees;

(c) Medical cash allowance to dependents ofemployees, not exceeding P750 peremployee per semester or P125 per month;

(d) Rice subsidy of P1,500 or one (1) sack of 50kg. rice per month amounting to not morethan P1,500;

(e) Uniform and Clothing allowance notexceeding P5,000 per annum (RR 8-2012)

(f) Actual medical assistance, e.g. medical

allowance to cover medical and healthcareneeds, annual medical/executive check-up,maternity assistance, and routineconsultations, not exceeding P10,000.00per annum;

(g) Laundry allowance not exceeding P300 permonth;




PAGE 45

(h) Employees achievement awards, e.g., forlength of service or safety achievement,which must be in the form of a tangiblepersonal property other than cash or giftcertificate, with an annual monetary valuenot exceeding P10,000 received by the

employee under an established written planwhich does not discriminate in favor ofhighly paid employees;

(i) Gifts given during Christmas and majoranniversary celebrations not exceedingP5,000 per employee per annum; and

(j) Daily meal allowance for overtime work andnight/graveyard shift not exceeding twenty-five percent (25%) of the basic minimumwage on a per region basis; [RevenueRegulation No. 5-2011]

All other benefits given by employers which are

not included in the above enumeration shall NOTbe considered as "de minimis" benefits andhence, shall be subject to withholding tax oncompensation (rank and file employees) andFBT (managerial/supervisory employees).

Housing

Housing PrivilegeFringe Benefit Tax Base

(Monetary Value)

(1) LEASE of residentialproperty for theresidential use ofemployees

MV= 50% of leasepayments

where MV = monetary

value of the FB(2) Assignment of

residential propertyowned by employerfor use of employees

MV= [5% (FMV or ZV,whichever is higher) x50%]

(3) Purchase ofresidential propertyin installment basisfor the use of theemployee

MV= 5% x acquisitioncost exclusive ofinterest x 50%

(4) Purchase ofresidential propertyand ownership is

transferred in thename of theemployee

MV= FMV or ZV,whichever is higher

ZV = Zonal Value = value of the land orimprovement, as declared in the Real PropertyDeclaration Form

FMV = Fair Market Value = FMV as determined bythe Commissioner of Internal Revenue

Non-taxable housing fringe benefit:(1) Housing privilege of the Armed Forces of the

Philippines (AFP) officials – i.e, those of thePhilippine Army, Philippine Navy, orPhilippine Air Force

(2) A housing unit, which is situated inside of

adjacent to the premises of a business orfactory maximum of 50 meters fromperimeter of the business premises

(3) Temporary housing for an employee whostays in housing unit for three months orless

Motor Vehicle

Motor Vehicle Fringe Benefit TaxBase

(1) Purchased in the nameof the employee

MV= acquisitioncost

(2)

Cash given toemployee to purchasein his own name

MV= cash receivedby employee

(3) Purchase oninstallment, in thename of employee

MV= acquisitioncost exclusive ofinterest

(4) Employee shoulderspart of the purchaseprice, ownership in thename of employee

MV= amountshouldered byemployer

(5) Employer owns andmaintains a fleet of

motor vehicles for useof the business and ofemployees

MV= (AC/5) x 50%

(6) Employer leases andmaintains a fleet forthe use of the businessand of employees

MV= 50% of rentalpayment

Professional Income

Refers to fees received by a professional fromthe practice of his profession, provided thatthere is NO employer-employee relationshipbetween him and his clients.




PAGE 46

Income from Business

(a) Any income derived from doing business(b) Doing business: The term implies a continuity

of commercial dealings and arrangements,and contemplates, to that extent, theperformance of acts or works or the exercise

of some of the functions normally incident to,and in progressive prosecution of, thepurpose and object of its organization.

Income from Dealings in Property

Dealings in property such as sales or exchangesmay result in gain or loss. The kind of propertyinvolved (i.e., whether the property is a capitalasset or an ordinary asset) determines the taximplication and income tax treatment , as follows:

Taxable

Net

Income

=

Ordinary

Net

Income

+

Net Capital

Gains (other

than those

subject to final

CGT)

Ordinary Asset Capital Asset

Gain from sale, exchange or other disposition

Ordinary Gain (part ofGross Income)

Capital Gain

Loss from sale, exchange, or other disposition

Ordinary Loss (part ofAllowable Deductions

from Gross Income)

Capital Loss

Excess of Gains over Losses

Part of Gross Income Net Capital Gain

Excess of Losses over Gains

Part of AllowableDeductions fromGross Income

Net Capital Loss

Types of Properties

Capital v. Ordinary AssetOrdinary Assets Capital Assets

(1)Stock in trade of thetaxpayer or otherproperty of a kindwhich wouldproperly be includedin the inventory ofthe taxpayer if onhand at the close ofthe taxable year.

Property held by thetaxpayer, whether ornot connected withhis trade or businesswhich is not an

ordinary asset.

Generally, theyinclude:

Ordinary Assets Capital Assets(2) Property held by the

taxpayer primarilyfor sale to customersin the ordinarycourse of his trade or

business.(3) Property used in the

trade or business ofa character which issubject to theallowance fordepreciation, or

(4) Real property usedin the trade orbusiness of thetaxpayer, includingproperty held for

rent.

(1) stocks andsecurities held bytaxpayers otherthan dealers insecurities

(2) real property notused in trade orbusiness, such asresidential houseand lot, idle orvacant land orbuilding

(3)investmentproperty, such asinterest in apartnership, stockinvestment

(4)Personal or non-businessproperties, such asfamily car, homeappliances, jewelry.

TYPES OF GAINS FROM DEALINGS INPROPERTY(1) Ordinary income vis-à-vis Capital gain. –

If the asset involved is classified as ordinary , theentire amount of the gain from the transactionshall be included in the computation of grossincome [Sec 32(A)], and the entire amount of theloss shall be deductible from gross income. [Sec 34(D)]. (See Allowable Deductions from GrossIncome - Losses)

If the asset involved is a capital asset , the ruleson capital gains and losses apply in thedetermination of the amount to be included ingross income. (See Capital Gains and Losses).These rules do not apply to: (a) real propertywith a capital gains tax (final tax), or (2) sharesof stock of a domestic corporation with a capital

gains tax (final tax). Also, sale of shares of stockof a domestic corporation, held as capitalassets, through the stock exchange by eitherindividual or corporate taxpayers, is subject to ½of 1% percentage tax based on gross sellingprice.




PAGE 47

The following percentages of the gain or lossrecognized upon the sale or exchange of acapital asset shall be taken into account incomputing net capital gain, net capital loss, andnet income: (a) If the taxpayer is an individual –

100% if the capital asset has been held fornot more than 12 months; and50% of the capital asset has been held formore than 12 months

(b) If the taxpayer is a corporation – 100%, regardless of the holding period of thecapital asset [Sec. 39(B), NIRC]

The tax rules for the gains or losses from salesor exchanges of capital assets over ordinaryassets are as follows:(1) Net capital gain is added to ordinary gain but

net capital loss is not deductible from ordinarygain.(2) Net ordinary loss is deductible from ordinarygain.(3) Capital losses are deductible only to theextent of the capital gain.(4) There is a net capital loss carry-over on thenet capital asset’s loss in a taxable year whichmay be deducted as a short-term capital lossfrom the net capital gain of the subsequenttaxable year; provided that the followingconditions shall be observed:(5) The taxpayer is other than a corporation;

(6) The amount of loss does not exceed theincome before exemptions at the year when theloss was sustained; and(7) The holding period should not exceed 12months. [Valencia]

When a capital gain or capital loss is sustainedby a corporation, the following rules shall beobserved:(1) There is no holding period; hence, there is no

net capital loss carry-over.(2) Capital gains and losses are recognized to

the extent of their full amount.(3) Capital losses are deductible only to the

extent of capital gains.(4) Net capital losses are not deductible from

ordinary gain or income but ordinary lossesare deductible from net capital gains.

Note: For sale, barter, exchange or other formsof disposition of shares of stock subject to the5%/10% capital gains tax on the net capital gainduring the taxable year, the capital lossesrealized from this type of transaction during thetaxable year are deductible only to the extent of

capital gains from the same type of transactionduring the same period. If the transferor of theshares is an individual, the rule on holdingperiod and capital loss carry-over will not apply,notwithstanding the provisions of Section 39 ofthe Tax Code as amended. [RR 6-2008, c.4]

(1) Actual gain vis-à-vis Presumed gainPresumed Gain: In the sale of real propertylocated in the Philippines, classified as capitalasset, the tax base is the gross selling price orfair market value, whichever is higher. The law

presumes that the seller makes a gain fromsuch sale. Thus, whether or not the seller makesa profit from the sale of real property, he has topay 6% capital gains tax. In fact, her has to paythe tax, even if he incurs an actual loss from thesale thereof. (Note, however, that where anindividual sells his real property classified as acapital asset to the government, he has theoption whether to be taxed at the graduatedincome tax rates or at 6% capital gains tax.)

Actual Gain: The tax base in the sale of realproperty classified as an ordinary asset is the

actual gain. If the seller incurs a loss from thesale, such loss may be deducted from his grossincome during the taxable year. The ordinarygain shall be added to the operating incomeand the net taxable income shall be subject tothe graduated rates from 5% to 32% (if anindividual) or to 30% corporate tax or to 2%MCIT (if a corporation).

Computation of the amount of gain or loss

Amount realized from sale or otherdisposition of property

Less: Basis or Adjusted BasisNET GAIN (LOSS)

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




PAGE 48

Note: When a taxpayer sells a real or personalproperty, he should deduct its cost from itsselling price to measure the gain or loss fromthe sales transaction [Sec. 40, NIRC].

(2) Long term capital gain vis-à-vis Short

term capital gain Long-term capital gain: Capital asset is held

for more than twelve month before it is sold.Only 50% of the gain is recognized.

Short-term capital Gain: Capital asset isheld for less than 12 months. 100% of thegain is subject to tax.

(3)

Net Capital Gain vis-à-vis Net CapitalLoss

Net Capital Gain is the excess of the gainsover the losses on sales or exchange of

capital assets during the taxable year. Net Capital Loss means the excess of the

losses over the gains on sales or exchangesof capital assets during the taxable year.[Sec. 39A, NIRC]

(4) Computation of the amount of Gain orLoss

For income tax purposes the following rulesshould be observed regarding the cost andexpenses of the capital assets: (1) the costs and

expenses of the acquisition are to becapitalized, and (2) the expenses of dispositionare to be treated as reduction from the sellingprice. [Valencia]

Cost or basis of the property sold:

In computing the gain or loss from the sale orother disposition of property, the BASIS shall be

as follows: (a) Property acquired by purchase – its

acquisition cost, i.e., the purchase price plusexpenses of acquisition.

(b) Property which should be included in the

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

(c) Property acquired by devise, bequest orinheritance – its fair market price or value asof the date of acquisition (inheritance)

(d) Property acquired by gift or donation – thebasis is the same as it would be in thehands of the donor or at the last precedingowner by whom it was not acquired by gift,or the fair market value at the time the giftwas made, whichever is lower

(e) Property acquired for less than an adequateconsideration in money’s worth – theamount paid by the transferee for theproperty

Cost or basis of the property exchanged in

corporate reorganizations:Sales or exchanges resulting in non-recognition

of gains or losses:

Exchange Solely in Kind – (1) If in pursuance of a plan of merger or

consolidation, exchanges: (a) Between the corporations which areparties to the merger or consolidation(property solely for stocks);

(b) Between a stockholder of a corporationparty to a merger or consolidation andthe other corporation, which is a partyto the merger or consolidation (stock ina corporation solely for the stock ofanother corporation);

(c) Between a security holder of acorporation party to a merger orconsolidation and the other corporation,

which is a party to the merger orconsolidation (securities solely forsecurities)

(2) Transfer to a controlled corporation – aperson transfers his property to a corporation inexchange for stocks in such a corporation,resulting in acquisition of corporate control bysaid person, alone or together with others notexceeding four (4).

Exchange Not Solely in Kind -Gain, but not theloss, shall be recognized if, in connection with

an exchange described in the above exceptions: (a) An individual, a shareholder, a security

holder or a corporation receives not onlystock or securities permitted to be receivedwithout the recognition of gain or loss, butalso money and/or property.




PAGE 49

The gain, if any, but not the loss, shall berecognized but in an amount not in excessof the sum of the money and the fair marketvalue of such other property received.

As to the shareholder, if the money and/or

other property received has the effect of adistribution of a taxable dividend, thereshall be taxed as dividend to theshareholder an amount of the gainrecognized not in excess of hisproportionate share of the undistributedearnings and profits of the corporation.

The remainder, if any, of the gainrecognized shall be treated as a capital gain[Sec. 40 (C) (3) (a), NIRC].

(b) The transferor corporation receives not onlystock permitted to be received without therecognition of gain or loss but also moneyand/or other property, then – (i) if the corporation receiving such money

and/or other property distributes it inpursuance of the plan of merger orconsolidation, no gain to thecorporation shall be recognized fromthe exchange, but

(ii) if the corporation receiving such otherproperty and/or money does notdistribute it in pursuance of the plan of

merger or consolidation, the gain, if any,but not the loss to the corporation shallbe recognized.

The gain shall be recognized in anamount not in excess of the sum of suchmoney and the fair market value of suchother property so received, which is notdistributed [Sec. 40 (C) (3) (b), NIRC].

If an individual, stockholder, securityholder or corporation receives on the

exchange not only stock or securitiesbut also money and/ or property (boot),the gain but not the loss shall berecognized, in an amount not exceedingthe sum of the money and fair marketvalue of the property received.

If the money or other property receivedhas the effect of a distribution of ataxable dividend, there shall be taxed asdividend to the stockholder an amountof the gain recognized not in excess ofhis proportionate share of the

undistributed earnings and profits ofthe corporation.

The remainder, if any, of the gainrecognized shall be treated as a capitalgain.

SUBSTITUTED BASIS OF STOCK OR

SECURITIES RECEIVED BY TRANSFEROR

UPON THE EXCHANGE:

Original basis (cost) of the property, stock orsecurities exchanged/transferred

LESS: (a) money received, if any; and (b) FMV ofthe other property received.BalanceADD: (a) the amount treated as dividend of theshareholder; and (b) the amount of any gainthat was recognized on the exchange.Basis (Cost) of the stock received

Notes:(a) The property received as “boot” shall have

as basis its FMV(b) If as part of the consideration to the

transferor, the transferee of property

assumes a liability of the transferor oracquires from the latter property subject toa liability, such assumption or acquisition (inthe amount of liability), shall be treated asmoney received by the transferor on theexchange

(c) If the transferor receives several kinds ofstocks or securities, the Commissioner isauthorized to allocate the basis among theseveral classes of stocks or securitiesreceived.

SUBSTITUTED BASIS OF PROPERTY

TRANSFERRED:

The basis of the property transferred in thehands of the transferee shall be the same as itwould be in the hands of the transferorincreased by the amount of the gain recognizedto the transferor on the transfer [Sec. 40 (C)(5),NIRC].




PAGE 50

Recognition of gain or loss in exchange of

property:General rule- Upon the sale or exchange ofproperty, the ENTIRE amount of the gain or lossshall be recognized.

Exceptions- No gain or loss shall be recognized: (1) If in pursuance of a plan of merger or

consolidation:(a) A corporation, which is a party to a

merger or consolidation, exchangesproperty solely for stock in acorporation, which is a party to themerger or consolidation;

(b) A shareholder exchanges stock in acorporation, which is a party to a mergeror consolidation, solely for the stock ofanother corporation also a party to the

merger or consolidation; or(c) A security holder of a corporation, whichis a party to the merger orconsolidation, exchanges his securitiesin such corporation, solely for stock orsecurities in another corporation, aparty to the merger or consolidation.

(2) If property is transferred to a corporation bya person in exchange for stock or unit ofparticipation in such a corporation, of whichas a result of such exchange, said person,alone or together with others not exceeding4 persons, gains control of the corporation.

- Stocks issued for services shall not beconsidered as issued in property.

Meaning of merger, consolidation, control,

securities

(a) Merger and consolidation for tax purposes -shall mean (1) The ordinary merger orconsolidation; or (2) The acquisition by onecorporation of all or substantially all theproperties of another corporation solely forstock [Sec. 40(C )(6)(b), NIRC].

(b) Requirements to establish merger orconsolidation

(1) Must be undertaken for a bona fidebusiness purpose and not solely for thepurpose of escaping the burden oftaxation

(2) In determining whether a bona fidebusiness purpose exists, each and everystep of the transaction shall beconsidered and the whole transaction orseries of transaction shall be treated as asingle unit

(3)

The property transferred must constitutea substantial portion of the property ofthe transferor [Sec. 40(C)(6)(b), NIRC]. Note: In determining whether theproperty transferred constitutes asubstantial portion of the property of thetransferor, the term ‘property’ shall betaken to include the cash assets of thetransferor [Sec. 40(C)(b), NIRC].

(c) “Substantially All”: the acquisition by onecorporation of at least 80% of the assets,including cash, of another corporation,

which has the element of permanence andnot merely momentary holding.(d) Securities: bonds and debentures but not

"notes" of whatever class or duration [Sec.40(C)(6)(a), NIRC]

(e) Control: ownership of stocks in a corporationpossessing at least fifty-one percent (51%)of the total voting power of all classes ofstocks entitled to vote [Sec. 40(C)(6)(c),NIRC].

(5)

Income tax treatment of capital loss

(a) Capital loss limitation rule (applicable to both

corporations and individuals)

General Rule: Losses from sales or exchanges ofcapital assets shall be allowed only to the extentof the gains from such sales or exchanges [Sec. 39(C), NIRC].

EXCEPTION for Banks and Trust Companies: If abank or trust company incorporated under thelaws of the Philippines, a substantial part ofwhose business is the receipt of deposits, sellsany bond, debenture, note, certificate or other

evidence of indebtedness issued by anycorporation (including one issued by agovernment or political subdivision thereof) withinterest coupons or in registered form, any lossresulting from such sale shall not be subject tothe foregoing limitation and shall not beincluded in determining the applicability of suchlimitation to other losses [Sec. 39(C), NIRC].




PAGE 52

(d) Notify the Commissioner within thirty (30)days from the date of sale or dispositionthrough a prescribed return of his intentionto avail the tax exemption;

(e) Can only be availed of onlyonce every ten(10) years;

(f) The historical cost or adjusted basis of his oldprincipal residence shall be carried over tothe cost basis of his new principal residence

(g) If there is no full utilization, the portion ofthe gains presumed to have been realizedshall be subject to capital gains tax.

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

Passive Investment Income

Under Sec 24(B), a final tax is imposed upongross passive income of citizen and resident

aliens. An income is considered passive if thetaxpayer merely waits for it to be realized.

(a) Interest Income An earning derived from depositing or lendingof money, goods or credits [Valencia and Roxas]e.g., interest income from government securitiessuch as Treasury Bills.

Unless exempted by law, interest incomereceived by the taxpayer, whether or notusurious, is subject to income tax.

(b) Dividend Income A form of earnings derived from the distributionmade by a corporation out of its earnings orprofits and payable to its stockholders, whetherin money or in property.

In general, dividends are included in the grossincome of the stockholder, unless they areexempt from tax or subject to final ax atpreferential rate under the Tax Code.

(1) Cash dividend – Dividends are included in the

gross income of the stockholder, unless theyare exempt from tax or subject to tax atpreferential rate under the NIRC. Cashdividend is the most common form ofdividend, valued at the amount of moneyreceived by the stockholder. Cash dividendand property dividend are subject to incometax.

(2) Stock dividend – Stock dividend is generallyexempt from income tax, EXCEPT: (a) If a corporation cancels or redeems stock

issued as a dividend at such time and insuch manner as to make thedistribution and cancellation or

redemption, in whole or in part,essentially equivalent to the distributionof a taxable dividend, the amount sodistributed in redemption orcancellation of the stock shall beconsidered as taxable income to theextent that it represents a distributionof earnings or profits (Sec. 73(B), NIRC);or

(b) Where there is an option that somestockholders could take cash orproperty dividends instead of stock

dividends; some stockholders exercisedthe option to take cash of propertydividends; and the exercise of optionresulted in a change of thestockholders’ proportionate share in theoutstanding share of the corporation.

(3) Property dividend - Dividends are included inthe gross income of the stockholder, unlessthey are exempt from tax or subject to tax atpreferential rate under the NIRC. Cashdividend and property dividend are subject toincome tax.

(4) Liquidating dividend – Represents

distribution of all the property or assets of acorporation in complete liquidation ordissolution. It is strictly not dividend income,but rather is treated in effect, as a sale ofshares of stock resulting in capital gain orloss. The difference between the cost orother basis of the stock and the amountreceived in liquidation of the stock is acapital gain or a capital loss. Whereproperty is distributed in liquidation, theamount received is the FMV of suchproperty. The income is subject to ordinary

income tax rates and NOT to the FWT ondividends.




PAGE 53

(a) Royalty Income - Royalty is a valuableproperty that can be developed and sold ona regular basis for a consideration; in whichcase, any gain derived therefrom isconsidered as an active business incomesubject to the normal corporate tax. Wherea person pays royalty to another for the useof its intellectual property, such royalty isgenerally a passive income of the ownerthereof subject to withholding tax.

(b) Rental Income - Refers to earnings derivedfrom leasing real estate as well as personalproperty. Aside from the regular amount ofpayment for using the property, it alsoincludes all other obligations assumed to bepaid by the lessee to the third party inbehalf of the lessor (e.g., interest, taxes,loans, insurance premiums, etc.) [RR 19-86 ]

Rent income may be in the following forms:(a) Cash, at the stipulated price(b) Obligations of the lessor to third persons

paid or assumed by the lessee in

consideration of the contract of lease,e.g., real estate tax on the propertyleased assumed by the lessee

(c) Advance payment (1) If the advance payment is actually a

loan to the lessor, or an optionmoney for the property, or a securitydeposit for the faithful performanceof certain obligations of the lessee,

such advance payment is notincome to the lessor.

(2) However, a security deposit that isapplied to rental is taxable incometo the lessor.

(3) If the advance payment is, in fact, apre-paid rental, received by thelessor under a claim of right andwithout restriction as to its use, thensuch payment is income to thelessor.

(4) Pre-paid rent must be reported in

full in the year of receipt, regardlessof the accounting method used bythe lessor.

(1) Lease of personal property – Rental income onthe lease of personal property located in thePhilippines and paid to a non-resident taxpayershall be taxed as follows:

Non-Resident

Corporation

Non-Resident

AlienVessel 4.5% 25%

Aircraft,machineries andother Equipment

7.5% 25%

Other assets 30% 25%

(2) Lease of real propertyLessor Tax Rate

CitizenResident AlienNon-resident alienengaged in trade orbusiness in thePhilippines

Net taxable incomeshall be subject to thegraduated income taxrates

Non-resident aliennot engaged in tradeor business in thePhilippines

Rental income fromreal property locatedin the Philippinesshall be subject to25% final withholdingtax unless a lower rateis imposed pursuantto an effective taxtreaty




PAGE 54

Lessor Tax RateDomestic CorporationResident ForeignCorporation

Net taxable incomeshall be subject to30% corporateincome tax or its grossincome will be subject

to 2% MCITNon-resident ForeignCorporation

Gross rental incomefrom real propertylocated in thePhilippines shall besubject to 30%corporate income tax,such tax to bewithheld and remittedby the lessee in thePhilippines

(3) Tax treatment of:

(a) Leasehold improvements by lessee-Rent Income from leasehold improvements:

(i) Outright method- lessor shall report asincome FMV of the buildings orimprovements subject to the lease inthe year of completion.

(ii) Spread-out method- lessor shall spreadover the remaining term of the lease theestimated depreciated (book) value ofsuch buildings or improvements at thetermination of the lease, and reports asincome for each remaining term of thelease an aliquot part thereof.

estimated BV at the end of the leasecontract/ remaining lease term =Income per year

If for any reason than a bona fidepurchase from the lessee by the lessor,the lease is terminated, so that thelessor comes into possession or controlof the property prior to the timeoriginally fixed, lessor receives

additional income for the year which thelease is so terminated to the extent ofthe value of such buildings orimprovements when he became entitledto such possession exceeds the amountalready reported as income on accountof the erection of such building orimprovement. No appreciation in valuedue to causes other than the premature

termination of lease shall be included[Sec. 49, Rev. Reg. No. 2 ].

If the building or other leaseholdimprovement is destroyed before theexpiration of the lease, the lessor is

entitled to deduct as a loss for the yearwhen such destruction takes place, theamount previously reported as incomebecause of the erection of theimprovement, less any salvage value, tothe extent that such loss was notcompensated by insurance [Sec. 49,Rev. Reg. No. 2 ]

(b) VAT added to rental/paid by the lessee

If the lessee is VAT-registered, treat VAT

paid as input VAT;

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

(c) Advance Rental/ Long Term Lease

Pre-paid rent must be reported in full in theyear of receipt, regardless of the accountingmethod used by the lessor.

Annuities, Proceeds from life insurance or other

types of insurance

Annuities are installment payments received forlife insurance sold by insurance companies.

The aleatory contract of life annuity binds thedebtor to pay an annual pension or incomeduring the life of one or more determinatepersons in consideration of a capital consistingof money or other property, whose ownership istransferred to him at once with the burden ofthe income. [ Art. 2021, New Civil Code]

The annuity payments represent a part that is

taxable and not taxable. If part of annuitypayment represents interest, then it is a taxableincome. If the annuity is a return of premium, itis not taxable.

Prizes and awards

A prize is a reward for a contest or acompetition. It represents remuneration for aneffort reflecting one’s superiority.




PAGE 55

Contest prizes and awards received aregenerally taxable. Such payment constitutesgain derived from labor.

The EXCEPTIONS are as follows: (1) Prizes and awards made primarily in

recognition of religious, charitable, scientific,educational, artistic, literary or civicachievements are EXCLUSIONS from grossincome if:(a) The recipient was selected without any

action on his part to enter a contest orproceedings; and

(b) The recipient is not required to rendersubstantial future services as a conditionto receiving the prize or award.

(2) Prizes and awards granted to athletes inlocal and international sports competitions

and tournaments held in the Philippines andabroad and sanctioned by their nationalassociations shall be EXEMPT from incometax.

Pensions, retirement benefit, or separation pay

(1) paid for past employment services rendered. (2) a stated allowance paid regularly to a person

on his retirement or to his dependents on hisdeath, in consideration of past services,meritorious work, age, loss or injury. It isgenerally taxable unless the law statesotherwise. [VALENCIA, Income Taxation 5th

ed. (200/’’9)]

Income from any source whatever

Inclusion of all income not expressly exemptedwithin the class of taxable income under thelaws irrespective of the voluntary or involuntaryaction of the taxpayer in producing the gains,and whether derived from legal or illegalsources.

Forgiveness of indebtedness – The cancellationor forgiveness of indebtedness may have any of

three possible consequences:(a) It may amount to payment of income. If, for

example, an individual performs services toor for a creditor, who, in considerationthereof, cancels the debt, income in thatamount is realized by the debtor ascompensation for personal services.

(b) It may amount to a gift . If a creditor wishesmerely to benefit the debtor, and withoutany consideration therefore, cancels thedebt, the amount of the debt is a gift to thedebtor and need not be included in thelatter’s report of income.

(c) It may amount to a capital transaction. If acorporation to which a stockholder isindebted forgives the debt, the transactionhas the effect of a payment of dividend.

Tax Benefit Rule

This is a general principle in taxation whichstates that is a taxpayer deducted an item onhis income tax return and enjoyed a tax benefit(reduced his income tax) thereby, and in asubsequent year recovers all or part of thatitem, he will recognize gross income in the year

the deducted item is recovered. The rule hasboth an inclusionary and an exclusionarycomponent, i.e., the recovery is included in thetaxpayer’s gross income to the extent that thetaxpayer obtained a tax benefit from the prioryear’s deduction, and the recovery is excluded tothe extent that the prior year’s deduction didnot provide a tax benefit.

Recovery of accounts previously written-off – B ddebts claimed as a deduction in the precedingyear(s) but subsequently recovered shall beincluded as part of the taxpayer’s gross income

in the year of such recovery to the extent of theincome tax benefit of said deduction. There is anincome tax benefit when the deduction of thebad debt in the prior year resulted in lesserincome and hence tax savings for the company .[Sec. 4, RR 5-99]




PAGE 56

Illustration:Case A Case B Case C

Year 1

Gross Income 500,000 400,000 500,000

Less: Allowable

Deductions(before write-offof UncollectibleAccounts/Debts) (200,000) (480,000) (495,000)

Taxable Income(Net Loss)before write-off

300,000(60,000) 5,000

Deduction forAccountsReceivable

written off

(2,000) (2,000) (6,000)

Taxable Income(Net Loss) afterwrite-off

298,000 (62,000) (1,000)

Year 2

Recovery ofAmountsWritten Off

2,000 2,000 6,000

Taxable Income

on the Recovery

2,000 - 5,000

In Case A, the entire amount recovered(P2,000) is included in the computation ofgross income in Year 2 because the taxpayerbenefited by the same extent. Prior to the write-off, the taxable income was P300,000; after thewrite-off, the taxable income was reduced toP298,000.

In Case B, none of the P2,000 recovered wouldbe recognized as gross income in Year 2. Note

that even without the write-off, the taxpayerwould not have paid any income tax anyway. The“taxable income” before the write-off wasactually a net loss.

In Case C, only P5,000 of the P6,000 recoveredwould be recognized as gross income in Year 2.It was only to this extent that the taxpayerbenefited from the write-off. The taxpayer didnot benefit from the extra P1,000 because atthis point, the P1,000 was already a net loss.

Receipt of tax refunds or credit – General rule: arefund of a tax related to the business or thepractice of profession, is taxable income (e.g.,refund of fringe benefit tax) in the year of receiptto the extent of the income tax benefit of saiddeduction (i.e., the tax benefit rule applies).

Exceptions: However, the following tax refundsare not to be included in the computation ofgross income:(1) Philippine income tax, except the fringe

benefit tax(2) Income tax imposed by authority of anyforeign country, if the taxpayer claimed acredit for such tax in the year it was paid orincurred.

(3) Estate and donor’s taxes (4) Taxes assessed against local benefits of a

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

(5) Value Added Tax(6) Fines and penalties due to late payment of

tax(7) Final taxes

(8) Capital Gains Tax

Note: The enumeration of tax refunds that arenot taxable (income) is derived from anenumeration of tax payments that are notdeductible from gross income.

If a tax is not an allowable deduction from grossincome when paid (no reduction of taxableincome, hence no tax benefit), the refund is nottaxable.

SOURCE RULES IN DETERMININGINCOME FROM WITHIN ANDWITHOUTThe following items of gross income shall betreated as gross income from sources WITHINthe Philippines:




PAGE 57

InterestsDerived from sources within the Philippines, andinterests on bonds, notes or other interest-bearing obligation of residents.

Ultimately, the situs of interest income is the

residence of the debtor .

DividendsDividends received:(1) from a domestic corporation; and(2) from a foreign corporation, UNLESS less than

50% of its gross income for the previous 3-year period was derived from sources withinthe Philippines [in which case it will betreated as income partly from within andpartly from without].

The income which is considered as derivedfrom within the Philippines is obtained byusing the following formula:

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

Note: of the corporation giving the dividendAs a rule, the situs of dividend income is theresidence of the corporation declaring thedividend.

ServicesCompensation for labor or personal servicesperformed in the Philippines: As a rule, the situs of compensation is the place of performance ofthe services.

Rentals and RoyaltiesFrom property located in the Philippines or fromany interest in such property, including rentalsor royalties for – (1) The use of or the right or privilege to use in

the Philippines any copyright, patent, designor model, plan, secret formula or process,

goodwill, trademark, trade brand or other like property or right ;

(2) The use of, or the right to use in thePhilippines any industrial, commercial orscientific equipment ;

(3) The supply of scientific, technical, industrial orcommercial knowledge or information;

(4) The supply of any assistance that is ancillaryand subsidiary to, and is furnished as ameans of enabling the application orenjoyment of , any such property or right as ismentioned in (a), any such equipment as ismentioned in (b) or any such knowledge or

information as is mentioned in (c);(5) The supply of services by a nonresident

person or his employee in connection withthe use of property or rights belonging to, orthe installation or operation of any brand,machinery or other apparatus purchasedfrom such nonresident person;

(6) Technical advice, assistance or servicesrendered in connection with technicalmanagement or administration of anyscientific, industrial or commercialundertaking, venture, project or scheme;

and(7) The use of or the right to use:(8) Motion picture films;

(i) Films or video tapes for use in connectionwith television; and

(ii) Tapes for use in connection with radiobroadcasting.

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

Sale Of Real PropertyAs a rule, the situs of the income from sale ofreal property is where the realty is located.

Sale Of Personal PropertyGeneral Rule: Gains, profits and income fromthe sale of personal property, subject to thefollowing rules:

Place ofPURCHASE

Place ofSALE

Treatment**

Philippines Abroad Income from

WithoutAbroad Philippines Income from

Within** in other words, the situs of the income fromthe sale of personal property is the place of sale.




PAGE 58

Exceptions:

(1) Gain from the sale of shares of stock in adomestic corporationTreated as derived entirely from sourceswithin the Philippines regardless of where thesaid 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 thePhilippines, or

(b) produced (in whole or in part) by thetaxpayer without and sold within thePhilippinesTreated as derived partly from sourceswithin and partly from sources withoutthe Philippines.

Place ofPRODUCTION Place ofSALE Treatment

Philippines Abroad Partly within,partlywithout

Abroad Philippines Partly within,partlywithout

Shares of Stock of Domestic CorporationTreated as derived entirely from sources withinthe Philippines regardless of where the saidshares are sold.

SITUS OF INCOME TAX Income Situs

Interest Residence of the debtorDividends Residence of the corporationServices Place of performanceRentals Location of the propertyRoyalties Place of exerciseSale of RealProperty

Location of realty

Sale ofPersonal

(a) Tangible

(1)

Purchase and sale:Location of Sale

(2) Manufactured w/in andsold w/o: Partly w/in andpartly w/o

(3) Manufactured w/o andsold w/in: Partly w/inand partly w/o

Income Situs(b) Intangible

General rule: Place of Sale

Exception: Shares of stock of

domestic corporations: Placeof incorporation

Shares ofStock ofDomesticCorporation

Place of incorporation

EXCLUSIONS FROM GROSS INCOMEExclusions from gross income refer to incomereceived or earned but is not taxable as incomebecause it is exempted by law or by treaty. Suchtax-free income is not to be included in the

income tax return unless information regardingit is specifically called for. Receipts which arenot in fact income are, of course, excluded fromgross income.

The exclusion of income should not be confusedwith the reduction of gross income by theapplication of allowable deductions. Whileexclusions are simply not taken into account indetermining gross income, deductions aresubtracted from gross income to arrive at netincome. [De Leon]

Items of Exclusions representing return ofcapital(a) Amount of capital is generally recovered

through deduction of the cost or adjustedbasis of the property sold from the grossselling price or consideration, or through thededuction from gross income ofdepreciation relating to the property used intrade or business before it is sold.

(b) It may also related to indemnities, such asproceeds of life insurance paid to theinsured’s beneficiaries and return of

premiums paid by the insurance companyto the insured under a life insurance,endowment or annuity contract.

(c) Damages, in certain instances, may also beexempt because they represent return ofcapital.




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Items of Exclusion because it is subject toanother internal revenue taxThe value of property acquired by gift, bequest,devise or descent is exempt from income tax onthe part of the recipient because the receipt ofsuch property is already subject to transfer taxes

(estate tax or donor’s tax)

Items of Exclusions because they areexpressly exempt from income tax(1) Under the Constitution(2) Under a tax treaty(3) Under special laws

Rationale for the exclusions The term “exclusions” refers to items that arenot included in the determination of grossincome because:

(a) They represent return of capital or are notincome, gain or profit;(b) They are subject to another kind of internal

revenue tax;(c) They are income, gain or profit expressly

exempt from income tax under theConstitution, tax treaty, Tax Code, or ageneral or special law. [Mamalateo]

Taxpayers who may avail of the exclusions

Exclusion TaxpayerReturn of capital All taxpayers since

there is no income.Already subject tointernal revenue tax

All taxpayers unlessprovided that incomeis to be included.

Express exclusion As expressly provided.

Exclusions distinguished from deductionsand tax credit Exclusions from gross income refer to flow

of wealth to the taxpayer which are nottreated as part of gross income for purposes

of computing the taxpayer’s taxableincome, due to the following reasons: (1) it isexempted by the Constitution or a statute;or (2) it does not come within the definitionof income. Deductions, on the other hand,are the amounts which the law allows to besubtracted from gross income in order toarrive at net income.

Exclusions pertain to the computation ofgross income, while deductions pertain tothe computation of net income.

Exclusions are something received or earnedby the taxpayer which do not form part ofgross income while deductions are

something spent or paid in earning grossincome.

Tax Credit refers to amounts subtracted fromthe computed tax in order to arrive at taxespayable.

(1) Exclusions Under the Constitution

(a) Income derived by the government or itspolitical subdivisions from the exerciseof any essential governmental function

(b) Also, all assets and revenues of a non-

stock, non-profit private educationalinstitution used directly, actually andexclusively for private educationalpurposes shall be exempt fromtaxation.

(2) Exclusions Under the Tax Code (Sec. 32,

NIRC)

(a)

Proceeds of life insurance policies.—

General rule: The proceeds of life insurancepolicies paid to his estate or to any beneficiary(but not a transferee for a valuable

consideration), directly or in trust, upon thedeath of the insured, are excluded from thegross income of the beneficiary. However, ifsuch amounts are held by the insurer under anagreement to pay interest thereon, the interestpayments received by the insured shall beincluded in gross income. The interest incomeshall be taxed at the graduated income taxrates.

(b) Return of premium paid.— General rule: The amount received by theinsured as a return of premiums paid by him

under life insurance, endowment, or annuitycontracts, either during the term or at thematurity of the term mentioned in the contractor upon surrender of the contract is a return ofcapital and not income.

This refers to the cash surrender value of thecontract.




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Social Security Act benefits – Payments ofbenefits received under the Social Security Act of 1954 (RA 8282), as amended, e.g.,Maternity Benefits

GSIS benefits – Benefits received from GSISunder the GSIS Act of 1937, as amended,

and the retirement gratuity received bygovernment officials and employees are nottaxable. [Sec. 32B6., NIRC; Sec. B1, RR 2-98]

Winnings, prizes and award, including those

in sports competitions.—All prizes andawards granted to athletes:(1) in local and international sportscompetitions and tournaments whetherheld in the Philippines or abroad, AND (2) sanctioned by their national sportsassociations shall not be included in grossincome and shall be tax exempt. [Sec. 32

B7d, NIRC] Prizes and awards made primarily in

recognition of charitable, literary,educational, artistic, religious, scientific, orcivic achievement are not taxable, provided:(1) Recipient was selected without any action

on his part to enter the contest orproceeding; and

(2) Recipient is not required to rendersubstantial future services as a conditionto receiving the prize or award

(3) Under special laws

Personal Equity and Retirement Account

(1) Under R.A. 6657 (Comprehensive AgrarianReform Package Law), gain arising from thetransfer of agricultural property covered bythe law shall be exempt from capital gainstax.

(2) Under R.A. 6938 [Cooperative Code of thePhilippines], as amended by R.A. 9520,cooperatives transacting business with bothmembers and non-members shall not besubject to tax on their transactions with

members. In relation to this, thetransactions of members with thecooperative shall not be subject to any taxesand fees, including but not limited to finaltaxes on members' deposits.

(3) Under R.A. 7916 (PEZA Law), as amended,PEZA-registered enterprises are givenincome tax holidays of six or four years fromthe date of commercial operations,depending on whether their activities areconsidered pioneer or non-pioneer.

(4) Under R.A. 9178 [Barangay Micro BusinessEnterprises Act of 2002], BMBEs shall beexempt from income tax for income arisingfrom the operation of the enterprise.

DEDUCTIONS FROM GROSS INCOMEDeductions are items or amounts which the lawallows to be deducted from the gross of incomeof a taxpayer in order to arrive at taxableincome.

In general, deductions or allowable deductions

are business expenses and losses incurredwhich the law allows to reduce gross businessincome to arrive at net income subject to tax.[Sec. 65, Rev. Reg. No. 2].

Deductions are in the nature of an exemptionfrom taxation; they are strictly construed againstthe claimant, who must point to a specificprovision allowing them and who has theburden of proving that they falls within thepurview of such provision. Thus, all deductionsmust be substantiated, except when the lawdispenses with the records, documents or

receipts to support the deductions.

If the exemption is not expressly stated in thelaw, the taxpayer must at least be within thepurview of the exemption by clear legislativeintent [Commissioner of Customs v. Philippine Acetylene Co., G.R. No. L-22443 May 29, 1971]

However, if there is an express mention in thelaw or if the taxpayer falls within the purview ofthe exemption by clear legislative intent, therule on strict construction will not apply.

[Commissioner v. Anoldus Caprentry Shop, G.R.No. 71122 March 25, 1988]

The purpose of deductions from gross income isto provide the taxpayer a just and reasonabletax amount as the basis of income tax. It isbecause many taxpayers spend adequateexpenditures in order to obtain a legitimateincome.




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Types of deductionsThere are three (3) types of deductions fromgross income:(a) itemized deductions in Section 34(A) to (J)

and (M) available to all kinds of taxpayersengaged in trade or business or practice of

profession in the Philippines;(b) optional standard deduction in Section 34(L)

available only to individual taxpayersderiving business, professional, capitalgains and passive income not subject tofinal tax, or other income; and

(c) the special deductions in Sections 37 and 38of the NIRC, and in special laws like the BOIlaw [E.O. 226].

General rules

(a) Deductions must be paid or incurred in

connection with the taxpayer’s trade,business or profession(b) Deductions must be supported by adequate

receipts or invoices (except standarddeduction)

(c) Additional requirement relating towithholding

Return of capital (cost of sales or services)

Income tax is levied by law only on income;hence, the amount representing return ofcapital should be deducted from proceeds fromsales of assets and should not be subject to

income tax.

Costs of goods purchased for resale, with properadjustment for opening and closing inventories,are deducted from gross sales in computinggross income [Sec. 65, Rev. Reg. 2]

(a) Sale of inventory of goods by manufacturersand dealers of properties: In sales of goodsrepresenting inventory , the amount receivedby the seller consists of return of capital andgain from sale of goods or properties. That

portion of the receipt representing return ofcapital is not subject to income tax.Accordingly, cost of goods manufacturedand sold (in the case of manufacturers) andcost of sales (in the case of dealers) isdeducted from gross sales and is reflectedabove the gross income line in a profit andloss statement.

(b) Sale of stock in trade by a real estate dealerand dealer in securities: Real estate dealersand dealers in securities are ordinarily notallowed to compute the amountrepresenting return of capital through costof sales. Rather they are required to deduct

the total cost specifically identifiable to thereal property or shares of stock sold orexchanged.

(c) Sale of services: Their entire gross receiptsare treated as part of gross income.

Itemized DeductionsThese are enumerated in Section 34 of theNIRC. Additional deductions are granted toinsurance companies in Section 37, while lossesfrom wash sales of stock or securities by adealer in securities are provided for in Section

38 of the NIRC. Other itemized deductionscould be granted under general or special laws,e.g. additional training expenses are allowed toenterprises registered with PEZA, BOI, andSBMA.

Timing of Claiming Deductions

A taxpayer has the right to deduct allauthorized allowances for the taxable year. Asa rule, if he does not within any year deductcertain of his expenses, losses, interest, taxes orother charges, he cannot deduct them from theincome of the next of any succeeding year [Sec.

76, Income Tax Regulations].

EXPENSESBusiness expenses deductible from gross incomeinclude the ordinary and necessary expendituresdirectly connected with or pertaining to thetaxpayer’s trade or business. The cost of goodspurchased for resale, with proper adjustment foropening and closing inventories, is deductedfrom gross sales in computing gross income.

Includes:

(a) Salaries, wages, and other forms ofcompensation for personal services actuallyrendered, including the grossed-upmonetary value of fringe benefits furnishedor granted by the employer to the employee

(b) Travel expenses(c) Rentals(d) Entertainment, recreation and amusement

expenses




PAGE 64

(e) Other expenses such as repairs or thoseincurred by farmers and other persons inagribusiness

Requisites for deductibility of businessexpenses

.—

(a) Ordinary AND necessary;ORDINARY - normal and usual in relationto the taxpayer's business and surroundingcircumstances; need not be recurringNECESSARY - appropriate and helpful inthe development of taxpayer's business orare proper for the purpose of realizing aprofit or minimizing a loss

(b) Paid or incurred during the taxable year;(c) Others: (not in the SC syllabus)

(1) Paid or incurred in carrying on orwhich are directly attributable to the

development, management, operationand/or conduct of the trade, business orexercise of profession;

(2) Substantiated by adequate proof – documented by official receipts oradequate records, which reflect theamount of expense deducted and theconnection or relation of the expense tothe business/trade of the taxpayer);

(3) Legitimately paid (not a BRIBE,kickback, or otherwise contrary to law,morals, public policy);

(4) If subject to withholding tax, the tax

required to be withheld on the expensepaid or payable is shown to have beenproperly withheld and remitted to theBIR on time;

(5) Amount must be reasonable.

Note: The expenses allowable to a non-residentalien or a foreign corporation consist of onlysuch expenses as are incurred in carrying on anybusiness or trade conducted within thePhilippines exclusively. [Sec. 77 RR 2]

COHAN Rule: This relief will apply if thetaxpayer has shown that it is usual andnecessary in the trade to entertain and to incursimilar kinds of expenditures, there beingevidence to show the amounts spent and thepersons entertained, though not itemized. Insuch a situation, deduction of a portion of theexpenses incurred might be allowed even ifthere are no receipts or vouchers. Absence of

invoices, receipts or vouchers, particularly lackof proof of the items constituting the expense isfatal to the allowance of the deduction[Gancayco v. Collector, G.R. No. L-13325, April 20, 1961].

Substantiation requirement – Sec. 34(A)(1)(b),NIRC: No deduction from gross income shall beallowed unless the taxpayer shall substantiatewith sufficient evidence, such as official receiptsor other adequate records: (1) the AMOUNT ofthe expense being deducted, and (2) theDIRECT CONNECTION or relation of theexpense being deducted to the development,management, operation and/or conduct of thetrade, business or profession of the taxpayer.

When to ACCRUE expenses: “all–events test”

states that under the accrual method ofaccounting, expenses are deductible in thetaxable year in which: (1) all events haveoccurred which determine the liability; and (2)the amount of liability can be determined withreasonable accuracy.

Kinds of business expenses

These are:(1) Salaries, wages and other forms of

compensation for personal services actuallyrendered, including the grossed-upmonetary value of the fringe benefit

subjected to fringe benefit tax which taxshould have been paid

(2) Travelling expenses(3) Cost of materials(4) Rentals and/or other payments for use or

possession of property(5) Repairs and maintenance(6) Expenses under lease agreements(7) Expenses for professionals(8) Entertainment expenses(9) Political campaign expenses(10) Training expenses

(11) Others




PAGE 65

Salaries, wages and other forms ofcompensation for personal services actuallyrendered, including the grossed-up monetary value of the fringe benefit subjected to fringebenefit tax which tax should have been paid

Given for personal services must be actuallyrendered and reasonable.

For income payment to be allowed asdeduction, the withholding tax must have beenpaid [RR No. 12-2013].

Bonuses are deductible when:(a) made in good faith(b) given as additional compensation for

personal services actually rendered(c) such payments, when added to the

stipulated salaries, do not exceed areasonable compensation for the servicesrendered

Traveling expensesThis include transportation expenses and mealsand lodging [Sections 65 and 66, Rev. Reg. No. 2](1) Expenses must be reasonable and necessary.(2) Must be incurred or paid “while away from

home” (3) Tax home is the principal place of business,

when referring to “away from home”

(4) Incurred or paid in the conduct of trade orbusiness.

Note: However, necessary transportationexpenses of the taxpayer (which are differentfrom the transportation expenses included inthe term “travel expenses”) in its “tax home” aredeductible. Thus, a taxpayer operating itsbusiness in Manila is allowed transportationexpenses from its office to its customers’ placeof business and back. But the transportationexpenses of an employee from his residence to

its office and back are not deductible as they areconsidered personal expenses.

Cost of materialsDeductible only to the amount that they areactually consumed and used in operation duringthe year for which the return is made, providedthat their cost has not been deducted indetermining the net income for any previous

year.

Rentals and/or other payments for use orpossession of property(1) Required as a condition for continued use or

possession of property.(2) For purposes of trade business or profession.(3) Taxpayer has not taken or is not taking title

to the property or has no equity other thanthat of lessee, user, or possessor.

On the accrual basis, rent is deductible as

expense when liability is incurred during theperiod of use. On cash basis, rent is deductiblewhen it is incurred and paid.

If the advance payment is a prepaid rental, suchpayment is taxable income to the lessor in theyear when it was received. However, an advancepayment is not deductible expense of the lesseeuntil the period is used. [Valencia and Roxas]

Repairs and maintenance(a) Incidental or ordinary repairs are deductible.

Repairs which neither materially add to the

value of the property nor appreciablyprolong its life, but keep it in an ordinarilyefficient working condition, may bededucted as expenses, provided the plant orproperty account is not increased by theamount of such expenditure. The life of theasset referred to is the probable, normal,useful life for the purpose of the allowancefor the return of the capital investment – not what the life that would have been if norepairs had been made after the propertywas damaged by a casualty. Since the

repairs prolonged the lives of the saidvessels of petitioners, the disallowancemust be sustained. [Visayan TransportationCo. v. CTA, CTA Case No. 1119, Sept. 30,1964].

(b) Extraordinary repairs are not deductible – they are capital expenditures(1) Repairs which add material value to the

property or appreciably prolong its life




PAGE 66

(2) Repairs in the nature of replacement, tothe extent that they arrest deteriorationand appreciably prolong the life of theproperty, should be charged against thedepreciation reserves if such account iskept. [Sec. 68, Rev. Regs. 2].

All maintenance expenses on account of non-depreciable vehicles for taxation purposes aredisallowed in its entirely. [RR No. 12-2012]

Expenses under lease agreementsRequisites for deductibility:(1) Required as a condition for continued use or

possession;(2) For purposes of the trade, business or

possession;(3) Taxpayer has not taken or is not taking title

to the property or has no equity other thanthat of lessee, user, or possessor.

Expenses for professionalsDeductible in the year the professional servicesare rendered, not in the year they are billed,provided that the “all events” is present.

“All events test” requires:(a) Fixing a right to income or liability to pay;

and(b) The availability of reasonably accurate

determination of such income or liability.

The “all-events test” does not demand that theamount of income or liability be knownabsolutely; it only requires that a taxpayer hasat its disposal the information necessary tocompute the amount with reasonable accuracy,which implies something less than an exact orcompletely accurate amount. [Commissioner v.Isabela Cultural Corporation, GR. 172231, Feb. 12, 2007]

A professional may claim as deductions the cost

of supplies used by him in the practice of hisprofession, expenses paid in the operation andrepair of transportation equipment used inmaking professional calls, dues to professionalsocieties and subscriptions to professional journals. [Mamalateo]

Entertainment/Representation expensesThese are entertainment, amusement andrecreation (EAR) expenses incurred or paidduring the year that are directly connected tothe development, management and operationof the trade, business or profession of the

taxpayer.

Requisites for deductibility:(a) Reasonable in amount.(b) Paid or incurred during the taxable period.(c) Directly connected to the development,

management, and operation of the trade,business or profession of the taxpayer, orthat are directly related to or in furtheranceof the conduct thereof.

(d) Not to exceed such ceiling as the Secretaryof Finance prescribe (under RR 10-02, in no

case to exceed 0.50% of net sales for sellersof goods or properties or 1% of net revenuesfor sellers of services, including taxpayersengaged in the exercise of profession anduse or lease of properties)

(e) Not incurred for purposes contrary to law,morals, public policy or public order.

(f) Must be substantiated with sufficientevidence such as receipts and/or adequaterecords.

Exclusions from EAR expenses:(1) Expenses which are treated as compensation

or fringe benefits for services renderedunder an employer-employee relationship

(2) Expenses for charitable or fund raisingevents

(3) Expenses for bona fide business meeting ofstockholders, partners or directors

(4) Expenses for attending or sponsoring anemployee to a business league orprofessional organization meeting

(5) Expenses for events organized for promotionmarketing and advertising, includingconcerts, conferences, seminars, workshops,

conventions and other similar events; and

(6) Other expenses of a similar nature.

Political campaign expenses

Amount expended for political campaignpurposes or payments to campaign funds arenot deductible either as business expenses or ascontribution [CTA Case No. 695, April 30, 1969,citing Mertens]




PAGE 67

Training expensesUnder Section 30 of the Tax Code, asimplemented by Sec. 20 of the RevenueRegulations No. 2, organization and pre-operating expenses of a corporation (includingtraining expenses) are considered as capital

expenditures and are therefore, not deductiblein the year they are paid or incurred. Buttaxpayers who incur these expenses andsubsequently enter the trade or business towhich the expenditures relate can elect toamortize these expenditures over a period notless than sixty (60) months. [BIR Ruling 102-97(Sept. 29, 1997)]

This rule, however, does not apply to a situationwhere an existing corporation incurs these sameexpenditures for the purpose of expanding its

business in a new line of trade, venture oractivity.

Others(a) Expenses Allowable to Private Educational

Institutions:(b) In addition to the expenses allowable as

deductions under the NIRC, a privateproprietary educational institution may atits OPTION, elect either:(1) To deduct expenditures otherwise

considered as capital outlays ordepreciable assets incurred during the

taxable year for the expansion of schoolfacilities, OR

(2) To deduct allowances for depreciationthereof.

Thus, where the expansion expense has beenclaimed as a deduction, no further claims foryearly depreciation of the school facilities areallowed.

Advertising ExpensesThe media advertising expenses which were

found to be inordinately large and thus, notordinary, and which were incurred in order toprotect the taxpayer’s brand franchise which isanalogous to the maintenance of goodwill ortitle to one’s property, are not ordinary andnecessary expenses but are capitalexpenditures, which should be spread out over areasonable period of time. [CIR v. General FoodsPhils. Inc, GR No. 143672, April 24, 2003]

INTERESTRequisites for deductibility

.—

(a) There is an indebtedness.(b) The indebtedness is that of the taxpayer (c) The indebtedness is connected with the

taxpayer‘s trade, profession, or business.

(d) The interest must be legally due.(e) The interest must be stipulated in writing.(f) The taxpayer is LIABLE to pay interest on the

indebtedness.(g) The indebtedness must have been paid or

accrued during the taxable year .(h) The interest payment arrangement must not

be between related taxpayers(i) The interest must not be incurred to finance

petroleum operations.(j) In case of interest incurred to acquire

property used in trade, business or exercise

of profession, the same was not treated as acapital expenditure

Limitation: The taxpayer's allowable deductionfor interest expense shall be reduced by anamount equal to 33% of the interest incomesubjected to final tax (see chapter on taxation of passive income for interest income); effectiveJanuary 1, 2009.

Non-deductible interest expense.—

(a) Interest paid in advance by the taxpayer whoreports income on cash basis shall only be

allowed as deduction in the year theindebtedness is paid.

(b) If the indebtedness is payable in periodicamortizations, only the amount of interestwhich corresponds to the amount of theprincipal amortized or paid during the yearshall be allowed as deduction in suchtaxable year.

(c) Interest payments made between relatedtaxpayers.

(d) Interest on indebtedness incurred to financepetroleum exploration.

Related Taxpayers(a) Between members of the family , i.e. brothers

and sisters (whether by the whole or half-blood), spouse, ancestor, and linealdescendants; or




PAGE 68

(b) Except in case of distributions in liquidation,between an individual and a corporation,where the individual owns directly orindirectly more than 50% of theoutstanding stock of the corporation

(c) Except in the case of distributions in

liquidation, between two corporationswhere: (1) Either one is a personal holding company

of a foreign personal holding companywith respect to the taxable yearpreceding the date of the sale ofexchange; and

(2) More than 50% of the outstanding stockof each is owned, directly or indirectly,by or for the same individual; or

(d) Between parties to a trust-(1) Grantor and Fiduciary; or

(2) Fiduciary of a trust and fiduciary ofanother trust if the same person is agrantor with respect to each trust; or

(3) Fiduciary and Beneficiary

Interest subject to special rules.Interest paid in advance

(a) No deduction shall be allowed if within thetaxable year an individual taxpayer reportingincome on cash basis incurs an indebtedness onwhich an interest is paid in advance throughdiscount or otherwise.(b) But the deduction shall be allowed in the

year the indebtedness is paid

Interest periodically amortized

If the indebtedness is payable in periodicamortizations, the amount of interest whichcorresponds to the amount of the principalamortized or paid during the year shall beallowed as deduction in such taxable year

Interest expense incurred to acquire property for

use in trade/business/profession

At the option of the taxpayer, interest expense

on a capital expenditure may be allowed as:(1) A deduction in full in the year when incurred;(2) A capital expenditure for which the taxpayer

may claim only as a deduction the periodicamortization of such expenditure.

Should the taxpayer elect to deduct the interestpayments against its gross income, the taxpayercannot at the same time capitalize the interestpayments. In other words, the taxpayer is notentitled to both the deduction from gross incomeand the adjusted (increased) basis for

determining gain or loss and the allowabledepreciation charge. [Paper Industries Corp. v.Commissioner, 250 SCRA 434]

Reduction of interest expense/interest arbitrageThe taxpayer's allowable deduction for interestexpense shall be reduced by an amount equal to33% of the interest income subjected to finaltax; effective January 1, 2009. (RA 9337)

This limitation is apparently intended to counterthe tax arbitrage scheme where a taxpayer

obtains an interest-bearing loan and places theproceeds of such loan in investments that yieldinterest income subject to preferential tax rateof 20% final withholding tax. [Valencia andRoxas]

TAXESTaxes Proper: Refers to national and local taxes;

Requisites for deductibility .—

Such tax must be:(a) Paid or incurred within the taxable year; (b) Paid or incurred in connection with the

taxpayer‘s trade, profession or business;(c) Imposed directly on the taxpayer.(d) Not specifically excluded by law from being

deducted from the taxpayer‘s gross income.

Non-deductible taxes.—

General Rule: All taxes, national or local, paid orincurred during the taxable year in connectionwith the taxpayer's profession, trade orbusiness, are deductible from gross income

Exceptions:

(1) Philippine income tax, except Fringe BenefitTaxes;

(2) Income tax imposed by authority of anyforeign country, if taxpayer avails of theForeign Tax Credit (FTC)(a) Exception to exception: When the taxpayer

does NOT signify his desire to avail of thetax credit for taxes of foreign countries,

the amount may be allowed as a deduction




PAGE 69

from gross income of citizens anddomestic corporations subject to thelimitations set forth by law.

(3) Estate and donor‘s taxes(4) Percentage tax on stock transaction;(5) Taxes assessed against local benefits of a

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

(6) Value Added Tax(7) Fines and penalties(8) Final taxes(9) Capital Gains Tax(10) Import duties(11) Business taxes(12) Occupation taxes(13) Privilege and license taxes(14) Excise taxes(15) Documentary stamp taxes

(16) Automobile registration fees(17) Real property taxes(18) Electric energy consumption tax under BP

36

Treatments of surcharges/interests/fines fordelinquency.— The amount of deductible taxes is limited to thebasic tax and shall not include the amount forany surcharge or penalty on delinquent taxes.However, interest on delinquent taxes, althoughnot deductible as tax, can be deducted asinterest expense at its full amount. [CIR v

Palanca, 18 SCRA 496].

Although interest payment for delinquent taxesis not deductible as tax, the taxpayer is notprecluded thereby from claiming said interestpayment as deduction as such. [CIR v. Vda. dePrieto, 1960]

Treatment of special assessment.—

Special assessments and other taxes assessedagainst local benefits of a kind tending toincrease the value of the property assessed are

non-deductible from gross income.

Tax credit vis-à-vis deduction.—

Tax credit –

amount allowed by law to reducethe Philippine income tax due, subject tolimitations, on account of taxes paid or accruedto a foreign country

Tax Credit Tax DeductionTaxes are deductiblefrom the Phil. Incometax itself

Taxes are deductiblefrom gross income incomputing the taxableincome

Effect: ReducesPhilippine income taxliability

Effect: Reducestaxable income uponwhich the tax liabilityis calculated

Sources: Only foreignincome taxes may beclaimed as creditsagainst Philippineincome tax.

Sources: Deductibletaxes (e.g. businesstax, excise tax)

An amount subtracted from an individual's orentity's tax liability to arrive at the total tax

liability. A tax credit reduces the taxpayer'sliability, compared to a deduction which reducestaxable income upon which the tax liability iscalculated. A credit differs from deduction tothe extent that the former is subtracted fromthe tax while the latter is subtracted fromincome before the tax is computed. [CIR v.Bicolandia Drug Corp. G.R. No. 148083, July 21, 2006 ]

The following may claim tax credits:(1) Resident citizens(2) Domestic corporations, which include all

partnerships except general professionalpartnerships

(3) Members of general professionalpartnerships

(4) Beneficiaries of estates or trusts

The following may NOT claim tax credits:(1) Non-resident citizens(2) Aliens, whether resident or non-resident(3) Foreign corporations, whether resident on

non-resident

Note: Tax credits for foreign taxes are allowedonly for income derived from sources outsidethe Philippines. The above taxpayers are notentitled to tax credit; they are taxable only onincome derived from Philippine sources.




PAGE 70

Limitations on Tax Credit.—

(1) [Per Country Limit]The amount of tax creditshall not exceed the same proportion of thetax against which such credit is taken, whichthe taxpayer's taxable income from sourceswithin such country bears to his entire

taxable income for the same taxable year;and

(2) [Worldwide Limit]The total amount of thecredit shall not exceed the same proportionof the tax against which such credit is taken,which the taxpayer's taxable income fromsources without the Philippines taxablebears to his entire taxable income for thesame taxable year.

Formula:Limit #1

TaxableIncome PerForeignCountry x

Phil.Income Tax

=

Limit onamount oftax credit

(PerCountryLimit)

WorldwideTaxableIncome

Limit #2TaxableIncome Forall ForeignCountries x

Phil.

Income Tax=

Limit onamount oftax credit

(WorldWideLimit)

WorldwideTaxableIncome

Note: Computation of FTC: Limit #2 applieswhere taxes are paid to two or more foreigncountries. Allowable tax credit is the lowerbetween the tax credit computed under Limit #1and that computed under Limit#2.

FTC Limitations – lowest of the 3:(1) Actual FTC

(2) For taxes paid to one foreign country(3) For taxes paid to 2 or more foreign countries

LOSSESRequisites for deductibility.—

(a) Loss must be that of the taxpayer (e.g.,losses of the parent corp. cannot bededucted by its subsidiary);

(b) Actually sustained and charged off withinthe taxable year;

(c) Incurred in trade, business or profession;(d) Of property connected with the trade,

business, or profession, if the loss arisesfrom fires, storms, shipwreck or other

casualties, or from robbery, theft, orembezzlement;

(e) Sustained in a closed and completedtransaction;

(f) Not compensated for by insurance or otherform of indemnity;

(g) Not claimed as a deduction for estate taxpurposes;

(h) In case of casualty loss, filing of notice of losswith the BIR within 45 days from the date ofthe event that gave rise to the casualty; and

(i) The taxpayer must prove the elements of the

loss claimed, such as the actual nature andoccurrence of the event and amount of theloss.

In case a non-depreciable vehicle is sold at aloss, the loss incurred from the sale of non-depreciable vehicle is not allowed as adeduction. [RR No. 2-2013]

No loss is recognized in the following.—

(1) Merger, consolidation, or control securities(where no gains are recognized either);

(2) Exchanges not solely in kind;

(3) Related taxpayers (see above – (c) Interestexpense incurred to acquire property for usein trade/business/profession)

(4) Wash sales;(5) Illegal transactions

Other types of losses.—

Capital losses(1) Incurred in the sale or exchange of capital

assets (allowable only to the extent ofcapital gains, except for banks and trustcompanies under conditions in Sec. 39 of

NIRC where loss from such sale is notsubject to the foregoing limitation);

(2) Resulting from securities becomingworthless and which are capital assets(considered loss from sale or exchange) onlast day of the taxable year ;

(3) Losses from short sales of property;(4) Losses due to failure to exercise privileges or

options to buy or sell property.




PAGE 72

Other Losses:

(1) Abandonment losses in petroleum operationand producing well.

(2) Losses due to voluntary removal of buildingincident to renewal or replacements aredeductible from gross income.

(3) Loss of useful value of capital assets due tocharges in business conditions is deductibleonly to the extent of actual loss sustained(after adjustment for improvement,depreciation and salvage value)

(4) Losses from sales or exchanges of propertybetween related taxpayers are notrecognized, but the gains are taxable.

Losses of farmers incurred in the operation offarm business are deductible.

BAD DEBTSDebts resulting from the worthlessness oruncollectibility, in whole or in part, of amountsdue the taxpayer actually ascertained to beworthless and the corresponding receivableshould have been written off or charged offwithin the taxable year

Requisites for deductibility .(1) Valid and legally demandable debt due to

the taxpayer(2) Debt is connected with the taxpayer's trade,

business or practice of profession;

(3) Debt was not sustained in a transactionentered into between related parties;

(4) Actually ascertained to be worthless anduncollectible as of the end of the taxableyear (taxpayer had determined withreasonably degree of certainty that the claimcould not be collected despite the fact thatthe creditor took reasonable steps to collect);and

(5) Actually charged off the books of accounts ofthe taxpayer as of the end of the taxable year

General rule: Taxpayer must ascertain anddemonstrate with reasonable certainty theuncollectibility of debt

Exceptions:(1) Banks as creditors – BSP Monetary Board

shall ascertain the worthlessness anduncollectibility of the debt and shall approvethe writing off

(2) Receivables from an insurance or suretycompany (as debtor) may be written off asbad debts only when such company isdeclared closed due to insolvency or similarreason

The taxpayer must show that the debt is indeeduncollectible even in the future. He must provethat he exerted diligent efforts to collect:(1) Sending of statement of accounts(2) Collection letters(3) Giving the account to a lawyer for collection(4) Filing the case in court [Phil. Refining Corp. v.

CA, G.R. No. 118794, May 8, 1996]

In ascertaining the debt to be worthless, it is notenough that the taxpayer acted in good faith.He must show that he had reasonablyinvestigated the relevant facts from which it

became evident, in the exercise of sound,objective business judgment, that thereremained no practical, but only a vagueprospect that the debt would be paid [Collectorv. Goodrich, 1967]

Rev. Reg. No. 5-1999:“Actually ascertained to be worthless” – (1) Determination of worthlessness must

depend upon the particular facts andcircumstances of the case. A taxpayer maynot postpone a bad debt deduction on thebasis of a mere hope of ultimate collection orbecause of a continuance of attempts tocollect, where there is no showing that thesurrounding circumstances differ from thoserelating to other notes which were chargedoff in a prior year

(2) Accounts receivable may be written off asbad debts even without conclusive evidencethat they had definitely become worthlesswhen:

(a) the amount is insignificant; and(b) collection through court action may be more

costly to the taxpayer

“Actually charged off from the taxpayer’s bookof accounts”Receivable which has actually becomeworthless at the end of the taxable year hasbeen cancelled and written off. Mere recordingin the books of account of estimateduncollectible accounts does not constitute awrite-off.




PAGE 73

Effect of recovery of bad debts.— Tax Benefit Rule on Bad DebtsBad debts claimed as deduction in thepreceding year(s) but subsequently recoveredshall be included as part of the taxpayer‘s grossincome in the year of such recovery the extent of

the income tax benefit of said deduction. Alsocalled the equitable doctrine of tax benefit.(1) Allowance must be reasonable (2) Charged off during the taxable year from the

taxpayer‘s books of accounts.(3) Does not exceed the acquisition cost of the

property.

DEPRECIATIONAn annual reasonable allowance to reduce thewasteful value of the tangible fixed assetsresulting from wear and tear and normal

obsolescence

For intangible assets, the annual allowance torduce their useful value is called amortization.

Requisites for Deductibility . – (1) It must be reasonable. (2) It must be charged off during the year. (3) The asset must be used in profession, trade

or business. (4) The asset must have a limited useful life. (6) The depreciable asset must be located in the

Philippines if the taxpayer is a nonresident

alien or a foreign corporation. [Valencia andRoxas]

No depreciation shall be allowed for yachts,helicopters, airplanes and/or aircrafts, and landvehicles which exceed the threshold amount ofP2,400,000, unless the taxpayer’s main line ofbusiness is transport operations or lease oftransportation equipment and the vehiclespurchased are used in the operations. [RR No.12-2012]

Methods of computing depreciationallowance.— (a) Straight-line cost- salvage value

estimated life(b) Declining balance cost – depreciation

x Rate

estimated life(c) Sum-of-the-year-

digit (SYD) nth period x cost-salvageSYD

(d) Any other methodwhich may beprescribed by theSecretary of Financeupon therecommendation ofthe CIR

CHARITABLE AND OTHER CONTRIBUTIONSRequisites for deductibility .— (1) Actually PAID or made to the ENTITIES or

institutions specified by law;(2) Made within the TAXABLE year.(3) It must be EVIDENCED by adequate receipts

or records.(4) For Contributions Other than Money: The

amount shall be BASED on the acquisitioncost of the property (i.e., not the fair marketvalue at the time of the contribution).

(5) For Contributions subject to the statutorylimitation: It must NOT EXCEED 10%(individual) or 5% (corporation) of thetaxpayer‘s taxable income before charitablecontributions

Amount that may be deducted.—

Kinds of Contributions:(1) Contributions deductible in full;(2) Contributions subject to the statutory limit.

Contributions Deductible in Full: (a) Donations to the Government of the

Philippines, or to any of its agencies, or political subdivisions, including fully ownedgovernment corporations – (1) Exclusively to finance, provide for, or to be

used in undertaking priority activities in (a) Education(b) Health(c) Youth and sports development(d) Human settlements




PAGE 75

General Rule: An employer establishing ormaintaining a pension trust to provide for thepayment of reasonable pensions to hisemployees shall be allowed as a deduction, areasonable amount transferred or paid intosuch trust in excess of the contributions to such

trust made during the taxable year.

Requisites for deductibility of payments topension trusts.— (1) There must be a pension or retirement plan

established to provide for the payment ofreasonable pensions to employees;

(2) The pension plan is reasonable andactuarially sound;

(3) It must be funded by the employer;(4) The amount contributed must no longer be

subject to the employer’s control or

disposition; and(5) The payment has not theretofore beenallowed before as a deduction.

Deductions under special laws.—

(1) Special deductions for productivity bonusand manpower training under theProductivity Incentives Act of 1990

(2) Deductions for training expenses of qualified jewelry enterprises [Jewelry IndustryDevelopment Act of 1998]

(3) Deductions under the Adopt-a-School Act of1998

(4) Deductions under the Expanded SeniorCitizens Act of 2003. [Domondon]

OPTIONAL STANDARD DEDUCTIONIndividuals, except non-resident aliens(1) May be taken by an individual in lieu of

itemized deductions except those earning purely compensation income.

(2) If an individual opted to use OSD, he is nolonger allowed to deduct cost of sales or costof services.

(3) Amount: 40% of gross sales or gross

receipts(under RA 9504, effective July 6,2008)

Requisites:(a) Taxpayer is a citizen or resident alien;(b) Taxpayer’s income is not entirely from

compensation;

(c) Taxpayer signifies in his return his intention toelect this deduction; otherwise he isconsidered as having availed of the itemizeddeductions.

(d) Election is irrevocable for the year in whichmade; however, he can change to itemized

deductions in succeeding years.

Corporations, except non-resident foreigncorporationsThe option to elect Optional StandardDeduction granted is now granted tocorporations (domestic and resident foreign corporations) by virtue of RA 9504.(1) The OSD is 40% of its gross income.(2) The domestic and resident foreign

corporation shall keep such recordspertaining to his gross income as defined in

Section 32 of the NIRC during the taxableyear, as may be required by the rules andregulations promulgated by the Secretary ofFinance upon recommendation of the CIR.

(3) Corporations availing of OSD are stillrequired to submit their financialstatements when they file their annual ITRand to keep such records pertaining to itsgross income. [RR 2-2010].

Partnerships(1)

General Co-Partnership

For purposes of taxation, the Code

considers general co-partnerships ascorporations. Hence, rules on OSD forcorporations are applicable to general co-partnerships.

(2) General Professional Partnerships (GPP)(a) If the GPP availed of itemized

deductions, the partners are notallowed to claim the OSD from theirshare in the net income because theOSD is a proxy for all the items ofdeductions allowed in arriving at

taxable income. This means that theOSD is in lieu of the items of deductionsclaimed by the GPP and the items ofdeduction claimed by the partners.

(b) If the GPP avails of OSD in computing itsnet income, the partners comprising itcan no longer claim further deductionfrom their share in the said net incomefor the following reasons:




PAGE 76

(i) The partners’ distributive share in theGPP is treated as his gross incomenot his gross sales/receipts and the40% OSD allowed to individuals isspecifically mandated to bededucted not from his gross income

but from his gross sales/receipts;and,

(ii)The OSD being in lieu of the itemizeddeductions allowed in computingtaxable income as defined underSection 32 of the Tax Code, it willanswer for both the items ofdeduction allowed to the GPP andits partners.

(c) Since one-layer of income tax is imposedon the income of the GPP and theindividual partners where the law had

placed the statutory incidence of the taxin the hands of the latter, the type ofdeduction chosen by the GPP must bethe same type of deduction that can beavailed of by the partners. Accordingly,if the GPP claims itemized deductions,all items of deduction allowed underSec. 34 can be claimed both at the levelof the GPP and at the level of thepartner in order to determine thetaxable income. On the other hand,should the GPP opt to claim the OSD,the individual partners are deemed to

have availed also of the OSD becausethe OSD is in lieu of the itemizeddeductions that can be claimed incomputing taxable income.

(d) If the partner also derives other grossincome from trade, business or practiceof profession apart and distinct from hisshare in the net income of the GPP, thededuction that he can claim from hisother gross income would follow thesame deduction availed of from hispartnership income as explained in the

foregoing rules. Provided, however , thatif the GPP opts for the OSD, theindividual partner may still claim 40%of its gross income from trade, businessor practice of profession but not toinclude his share from the net income ofthe GPP. [RR 2-2010]

PERSONAL AND ADDITIONAL EXEMPTION(R.A. NO. 9504, MINIMUM WAGE EARNERLAW)

Basic personal exemptionsAccording to RA 9504 (effective July 6, 2008)

basic personal exemption is Fifty thousandpesos (P50,000) for each individual taxpayer,regardless of status, i.e., whether single, marriedor head of the family.

But note Sec 35(A) of NIRC - In the case ofmarried individuals where only one of the spousesis deriving gross income, only such spouse shallbe allowed the personal exemption.

Additional exemptions for taxpayer withdependents(a) An individual, whether single or married,

shall be allowed an additional exemption ofP25,000 for each qualified dependent child(QDC), provided that the total number ofdependents for which additionalexemptions may be claimed shall notexceed 4 dependents (depends on thenumber of qualified dependent children)(1) Married Individuals: Additional

exemptions for QDC are claimed by onlyone spouse.

Generally, the spouse who is the gross

compensation earner is the claimant ofthe additional exemptions.

(2) Where the husband and wife are bothcompensation income earners: thehusband is the proper claimant of theadditional exemptions EXCEPT if thereis an express waiver by the husband infavor of his wife, as embodied in theapplication for registration (BIR FormNo. 1902) or in the Certificate of Updateof Exemption and of Employer’s and

Employee’s Information (BIR Form No.2305), whichever is applicable.

(3) When the spouses have business and/or professional income only : either mayclaim the additional exemptions at theend of the year.




PAGE 77

(4) The employed spouse shall beautomatically entitled to claim theadditional exemptions for children inthe following instances:(b) spouse is unemployed(c) spouse is a non-resident citizen

deriving income from foreignsources

(5)Legally separated spouses: Additionalexemptions can be claimed by thespouse with custody of the child orchildren (but the total amount for thespouses shall not exceed the maximumof four). [Sec 35(B), NIRC]

(6) If the taxpayer should have additionaldependents during the taxable year, hemay claim the corresponding additionalexemption, as the case may be, in full for

such year.(b) Who is a dependent for purposes ofadditional exemptions?

(1) A taxpayer’s child, whether legitimate,illegitimate or legally adopted child

(2) chiefly dependent for support upon onthe taxpayer

(3) living with the taxpayer(4) not more than 21 years old, unmarried

and not gainfully employed or(5) regardless of age, is incapable of self-

support because of mental or physicaldefect. [Sec 35 B, NIRC]

Note: Only children (not parents) may beconsidered “dependent” for purposes ofadditional exemptions.

The definition of the term “dependent”under Section 35(B) of the NIRC nowincludes a “Foster Child” or a child placedunder planned temporary substituteparental care by a Foster Parent or aFoster Family. [RMC No. 41-20i3, Jan. 23,

2013](c) Who may claim personal exemptions?

(1) Citizens (whether resident or non-resident) and resident aliens

(2) Non-resident aliens engaged in trade orbusiness are entitled personalexemptions subject to reciprocity. (Seebelow)

Status-at-the-end-of-the-year ruleChange of Status[Sec 35(C), NIRC] (1) If taxpayer marries during taxable year,

taxpayer may claim the corresponding BPEin full for such year (i.e., no need to pro-ratethe exemption).

(2) If taxpayer should have additionaldependent(s) during taxable year, taxpayermay claim corresponding AE in full for suchyear.

(3) If taxpayer dies during taxable year, hisestate may claim BPE and AE as if he died atthe 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 gainfullyemployed, taxpayer may still claim

same exemptions as if the spouse orany of the dependents died, or married,turned 21 years old or became gainfullyemployed at the close of such year .

Note: When it comes to change of status, thestatus beneficial to the taxpayer is used forpurposes of claiming deductions as long as thetaxpayer achieved such status at any timeduring the taxable period.

Exemptions claimed by non-resident aliensNon-resident aliens engaged in trade or business

are entitled personal exemptions subject toreciprocity.It means that NRAETB shall be allowed apersonal exemption only if the income tax law inhis country grants allowance for personalexemptions to the citizens and residents of thePhilippines as stipulated in the reciprocity taxtreaty with the Philippine Government.

Limit of PE Allowed to NRAETB: An amountequal 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 .[Inother words, whichever is lower]




PAGE 78

Items not deductibleGeneral rule: In determining deductions, one ofthe general rules (see above) is that deductionsmust be paid or incurred in connection with thetaxpayer’s trade, business or profession. Capitalexpenditures (e.g. acquisition cost of a building)

are also not deductible, because these are notexpenses, but form part of assets.

In computing taxable net income, no deductionshall be allowed in respect to:(1) Personal, living or family expenses (note: they

are not deductible from compensation andbusiness/professional income under Section 24(A), NIRC

(2) Any amount paid out for new buildings or for permanent improvements (capitalexpenditures), or betterments made to

increase the value of any property or estate (3) Any amount expended in restoring property(major repairs) or in making good theexhaustion thereof for which an allowance[for depreciation or depletion] is or has beenmade

(4) Premiums paid on any life insurance policycovering the life of any officer, employee, orany person financially interested in the tradeor business carried on by the taxpayer ,individual or corporate, when the taxpayer isdirectly or indirectly a beneficiary under suchpolicy

(3) Interest expense and bad debts betweenrelated parties [See Sec. 36(B), NIRC].

(4) Losses from sales or exchanges of propertybetween related taxpayers.

(5) Non-deductible interest – should thetaxpayer elect to deduct interest paymentsagainst its gross income, he cannot at thesame time capitalize such interest andclaim depreciation on the undepreciatedcost which includes the interest. [PICOP v.Commissioner, G.R. No. 106949-50, Dec. 1,1995]

(6) Non –deductible taxes(7) Non-deductible losses(8) Losses on Wash Sales ( except if by dealer in

securities in ordinary course of)

EXEMPT CORPORATIONSThese are:(1) Proprietary Educational Institutions and

hospitals

(2) Government owned and controlledcorporations

(3) Others

Corporations & associations enumerated underSection 30 of the 1997 NIRC, as amended,

including those which have been issued taxexemption rulings/certificates prior to June 30,2012, shall file their respective Applications forTax Exemption/Revalidation with the RevenueDistrict Office (“RDO”) where they areregistered. If a corporation or association whichhas been issued a Tax Exemption Ruling fails tofile its annual information return, it shallautomatically lose its income tax-exempt statusbeginning the taxable year for which it failed tofile an annual information return, in addition tothe sanctions imposed under Section 250 of the

NIRC, as amended. [RMO No. 20-2013]

Proprietary Educational Institutions andhospitals

By way of exception, proprietary educationalinstitutions and hospitals are liable for netincome at a rate of only ten percent (10%).

All hospitals and non-stock, non-profitorganizations operating hospitals which wereissued tax exempt rulings prior to November 1,2012 shall submit a Request for Revalidation oftheir tax exemption. [Revenue Memorandum

Circular No. 4-2013]

(See Tax on Domestic Corporations, Tax onProprietary Educational Institutions andHospitals)

Government owned and controlledcorporationsAll corporations, agencies, or instrumentalitiesowned or controlled by the Government aresubject to income tax, except :(1) GSIS

(2) SSS(3) PHIC(4) Local water districts (LWDs)(5) PCSO

(See Tax on Domestic Corporations, Tax onGovernment-Owned or Controlled Corporations,Agencies or Instrumentalities)




PAGE 79

OthersThe following organizations shall not be taxed inrespect to income received by them as such:(1) Labor,agricultural or horticultural

organization not organized principally forprofit

(2) Mutual savings bank not having a capitalstock represented by shares, andcooperative bank without capital stockorganized and operated for mutualpurposes and without profit

(3) A Beneficiary society , order or association,operating for the exclusive benefit of themembers such as a fraternal organizationoperating under the lodge system, ormutual aid association or a non-stockcorporation organized by employees providing for the payment of life, sickness,

accident, or other benefits exclusively to themembers of such society, order, orassociation, or non-stock corporation ortheir dependents

(4) CEMETERY company owned and operatedexclusively for the benefit of its members

(5) Non-stock corporation or associationorganized and operated exclusively forReligious, charitable, scientific, athletic, orcultural purposes, or for the rehabilitation ofveterans, no part of its net income or assetshall belong to or inure to the benefit of anymember , organizer, officer or any specific

person(5) Business league chamber of commerce, or

board of trade, not organized for profit andno part of the net income of which inures tothe benefit of any private stock-holder, orindividual

(6) Civic league or organization not organized forprofit but operated exclusively for the promotion of social welfare

(7) A non-stock and non-profit Educational institution

(8) Government Educational institution

(9) Farmers' or other mutual typhoon or fireinsurance company, mutual ditch orirrigation company, mutual or cooperativetelephone company, or like organization of a

purely local character , the income of whichconsists solely of assessments, dues, andfees collected from members for the solepurpose of meeting its expenses and

(9) Farmers', fruit growers', or like associationorganized and operated as a Sales agent for

the purpose of marketing the products of itsmembers and turning back to them theproceeds of sales, less the necessary sellingexpenses on the basis of the quantity ofproduce finished by them;

Note:(a) Notwithstanding the exemptions, income of

whatever kind and character of theenumerated organizations from any of their properties, real or personal, or from any oftheir activities conducted for profit regardlessof the disposition made of such income,

shall be subject to tax .(b) RA 9178 Act to Promote the Establishment ofBarangay Micro Business Enterprises(BMBEs) implemented by DO 17-04, April 20, 2004 (1) BMBEs shall be exempt from income tax

for income arising from the operationsof the enterprise.

(2) BMBE is any business entity or enterpriseengaged in the production, processingor manufacturing of products orcommodities, including agro-processingtrading and services, whose total assets

including those arising from loans butexclusive of land on which the particularbusiness entity’s office, plant andequipment are situated, shall not bemore than P3M.

(c) Recreational Clubs - RMC 35-2012 (August 3, 2012) clarifies taxability of clubs organizedexclusively for pleasure, recreation andother non-profit purposes (recreationalclubs). Income from whatever sourcesincluding but not limited to membership fees,assessment dues, rental income, and service

fees are subject to income tax and VAT .




PAGE 80

TAXATION OF RESIDENT CITIZENS, NON-RESIDENT CITIZENS ANDRESIDENT ALIENS

Summary Table for Taxation of Individuals (all individual taxpayers, including non-resident aliens)

Classification Taxable Income Basic PersonalExemption

AdditionalPersonal

Exemption

Tax Rates

ResidentCitizen

Income fromsources within and

outside thePhilippines

Allowed Allowed 5%-32%

Non-ResidentCitizen

Income fromsources within the

Philippines


Resident Alien Income fromsources within the

Philippines


Non-residentAlien Engaged

in Trade orBusiness


Philippines

Lower amountbetween PE allowed

to Filipinos in theforeign country

where he resides vs.PE in the Philippines

No specificprovision

5%-32%

Non-residentAlien Not

Engaged inTrade orBusiness


Philippines

Not allowed Not allowed 25%




PAGE 81

General rule that resident citizens are taxableon income from all sources within and withoutthe Philippines

General rule: A Filipino resident citizen is taxableon income from all sources (within and without

the Philippines)

(a) Non-resident citizens: A non-resident citizenis taxable only on income derived from sourceswithin the Philippines.

A non-resident citizen is a Filipino citizenwho:(1) Establishes to the satisfaction of the CIR

the fact of his physical presence abroadwith a definite intention to residetherein

(2) Leaves the Philippines during the

taxable year to reside abroad (asimmigrant or for employment on apermanent basis)

(3) Works and derives income from abroadand whose employment requires him tobe present abroad most of the timeduring the taxable year

(4) Has been previously considered as anon-resident and arrives in thePhilippines at any time during thetaxable year to reside here permanently(only with respect to his income fromsources abroad until the date of his

arrival in the country)(b) Other considerations:

(1) A Filipino citizen working and derivingabroad as an Overseas Contract Worker istaxable only on income from sources WITHINthe Philippines.(i) OCW refers to Filipino citizens in foreign

countries, who are physically present ina foreign country as a consequence oftheir employment in that country. Theirsalaries and wages are paid by anemployer abroad and is not borne by an

entity or person in the Philippines. Theymust be duly registered with thePhilippine Overseas EmploymentAdministration (POEA) with validOverseas Employment Certificate(OEC).

(ii) An OCW’s income arising out of hisoverseas employment is exempt fromincome tax.

(2) A resident alien or non-resident alien istaxable only on income from sourcesWITHIN the Philippines.(i) A resident alien is an individual whose

residence is in the Philippines and whois not a Filipino citizen.

(ii) A non-resident alien is an individualwhose residence and citizenship is notin the Philippines.(1) An alien actually present in the

Philippine who is not a meretransient or sojourner is a resident ofthe Philippines for purposes of theincome tax.

(2) Whether he is a transient or not isdetermined by his intentions withregard to the length and nature ofhis stay. A mere floating intention

indefinite as to time, to return toanother country is not sufficient toconstitute him a transient.

(3) If he lives in the Philippines and hasno definite intention to stay, he is aresident.

(4) One who comes to the Philippinesfor a definite purpose which, in itsnature, may be promptlyaccomplished is a transient.

(5) But if his purpose is of such a naturethat an extended stay may benecessary for its accomplishment,

and to that end the alien makes hishome temporarily in the Philippines,he becomes a resident, though itmay be his intention at all times toreturn to his domicile abroad whenthe purpose of which he came hasbeen consummated or abandoned.(Sec. 5, RR No.2)

(c) In general, a non-resident alien individualwho shall come to the Philippines and staytherein for an aggregate period of more than180 days during any calendar year shall be

deemed a non-resident alien doing business inthe Philippines. Intended Stay in thePhilippines:

Up to 180 days – NRANETB

More than 180 days up to 2 years – NRAETB

Greater than 2 years – Resident alien




PAGE 82

Taxation on Compensation IncomeIncome arising from an ER-EE relationship. Itmeans all remuneration for services performedby an EE for his ER, including the cash value ofall remuneration paid in any medium other thancash. [Sec. 78(A)]. It includes, but is not limited

to salaries and wages, commissions, tips,allowances, bonuses, Fringe Benefits of rankand file EEs and other forms of compensation.

Inclusions

(1) Monetary compensation– If compensation ispaid in cash, the full amount received is themeasure of the income subject to tax.

(a) Regular salary/wage(1) Salary – earnings received

periodically for a regular work otherthan manual labor, such as monthly

salary of an employee(2) Wages – all remuneration (otherthan fees paid to a public official)for services performed by anemployee for his employer,including the cash value of allremuneration paid in any mediumother than cash. [Sec. 78A, NIRC]

(b) Separation pay/retirement benefit nototherwise exempt

(1) Retirement Pay – a lump sumpayment received by an employeewho has served a company for a

considerable period of time and hasdecided to withdraw from work intoprivacy. [RR 6-82, Sec. 2b]General rule: retirement pay istaxableExceptions:(a) SSS or GSIS retirement pays.(b) Retirement pay (R.A. 7641) due

to old age provided thefollowing requirements are met:(i) The retirement program is

approved by the BIR

Commissioner;(ii) It must be a reasonable

benefit plan. (fair andequitable)

(iii) The retiree should havebeen employed for 10 yearsin the said company;

(iv) The retiree should havebeen 50 years old or aboveat the time of retirement;and

(vi) It should have been availedof for the first time.

(2) Separation pay – taxable if voluntarily availed of. It shall not be taxable ifinvoluntary i.e. Death, sickness,disability, reorganization /merger ofcompany and company at the brinkof bankruptcy or for any causebeyond the control of the saidofficial or employee

(c) Bonuses, 13th month pay, and otherbenefits not exempt

(1) Tips and Gratuities – those paiddirectly to the employee (usually by

a customer of the employer) whichare not accounted for by theemployee to the employer. (taxableincome but not subject towithholding tax) [RR NO. 2-98, Sec. 2.78.1]

(2) Thirteenth month pay and otherbenefits – Not taxable if the totalamount received is P30,000 or less. Any amount exceeding P30,000 istaxable. [Sec. 32 (7)e, NIRC]

(3) Overtime Pay – premium paymentreceived for working beyond regular

hours of work which is included inthe computation of gross salary ofemployee. It constitutescompensation.

(d) Directors’ fees Fees – received by an employee for theservices rendered to the employerincluding a director’s fee of the company,fees paid to the public officials such asclerks of court or sheriffs for servicesrendered in the performance of theirofficial duty over and above their regular

salaries.

(2) Nonmonetary compensation - If services arepaid for in a medium other than money, the fairmarket value of the thing taken in payment isthe measure of the income subject to tax.

(a) Fringe benefit not subject to tax (SeeChapter on Gross Income for the discussionof Taxable and Non-taxable fringe benefits)




PAGE 83

If the recipient of the fringe benefits is a rankand file employee, and the said fringe benefit isnot tax-exempt, then the value of such fringebenefit shall be considered as part of thecompensation income of such employee subjectto tax payable by the employee. [Domondon]

Exclusions

(1) Fringe benefit subject to tax(See Chapter on Gross Income for thediscussion of Taxable and Non-taxable fringebenefits)

Where the recipient of the fringe benefit isnot a rank and file employee, and the saidbenefit is not tax-exempt, then the sameshall not be included in the compensationincome of such employee subject to tax. The

fringe benefit [tax] is instead levied upon theemployer, who is required to pay.[Domondon]

Convenience of the ER RuleIf meals, living quarters, and other facilitiesand privileges are furnished to an employeefor the convenience of the employer, andincidental to the requirement of theemployee’s work or position, the value of thatprivilege need not be included ascompensation (Henderson v. Collector (1961)).

(2) De minimis benefits(a) Facilities or privileges of relatively small

value furnished by an employer to hisemployees and are as a means ofpromoting the health, goodwill,contentment, or efficiency of hisemployees.

(b) These are exempt from fringe benefit taxand compensation income tax.

(3) Bonuses, 13th month pay and other benefitsand payments specifically excluded from

taxable compensation income(a) Gross benefits received by employees of

public and private entities provided thatthe total exclusion shall not exceedP30,000 (amounts in excess areconsidered compensation income)

(b) Benefits include:(1) Benefits received by government

employees under RA 6686

(2) Benefits received by employeespursuant to PD 851 (13th Month PayDecree)

(3) Benefits received by employees notcovered by PD 851 as amended byMemorandum Order No. 28; and,

(4) Other benefits such as productivityincentives and Christmas bonus

Deductions

(1) Personal exemptions and additional

exemptions (See the Chapter on Deductions

for the full discussion of Personal and

additional exemptions) (a) Basic Personal Exemptions

According to RA 9504 (effective July 6,2008) basic personal exemption is Fiftythousand pesos (P50,000) for each

individual taxpayer, regardless whethersingle, married or head of the family.(b) Additional Exemptions (AE)- depends on

the number of qualified dependentchildren Amount allowed as a deductionP25,000 per dependent child, butnot to exceed four children (RA 9504)

(2) Health and hospitalization insurance

(a) Premium Paid on Health orHospitalization Insurance [Sec.34 (M)]

(b) Amount of premium paid on healthand/or hospitalization by an individual

taxpayer (head of family or married), forhimself and members of his familyduring the taxable year.

Requisites for Deductibility(1) Insurance must have actually been taken(2) The amount of premium deductible does not

exceed P2,400 per family or P200 permonth whichever is lower during thetaxable year.

(3) That said family has a gross income of notmore than P250,000 for the calendar year.

(4) In case of married individual, only the spouseclaiming additional exemption shall beentitled to this deduction.

Note: The spouse claiming the additionalexemptions for qualified dependent childrenshall be the same spouse to claim thedeductions for premium payments.




PAGE 85

(4) regional operating headquarters ofmultinational companies

(b) share of an individual in the distributable netincome after tax of a partnership (except ageneral professional partnership) of whichhe is a partner

(c) share of an individual member or co-venturerin the net income after tax of an association,

(d) a joint account, or a joint venture orconsortium taxable as a corporation

(e) RATE:(1) 10%for residents (RC, RA) and non-

resident citizens (NRC);(2) 20% for NRAETB(non-resident aliens

engaged in trade or business)(e) A stock dividend representing the

transfer of surplus to capital accountshall not be subject to tax .

(f) However, if a corporation cancels or redeemsstock issued as a dividend at such time andin such manner as to make the distributionand cancellation or redemption, in whole orin part, essentially equivalent to thedistribution of a taxable dividend, theamount so distributed in redemption orcancellation of the stock shall be consideredas taxable income to the extent that itrepresents a distribution of earnings orprofits. [Sec. 73B, NIRC] (1) In other words, stock dividends are

generally not subject to tax as long as

there are no options in lieu of the sharesof stock.

(2) On the other hand, a stock dividendconstitutes income if it gives theshareholder an interest different fromthat which his former stockholdingsrepresented.

Prizes and other winnings(1) Winnings, except Philippine Charity

sweepstakes / lotto winnings – 20%(2) Prizes exceeding P10,000 – 20%

Prize, differentiated from winnings

A prize is the result of an effort made (e.g., prizein a beauty contest), while winnings are theresult of a transaction where the outcomedepends upon chance (e.g., betting).




PAGE 86

Summary Table of Rates

(Includes NRAETB and NRANETB)

Section 24(B). Final Tax Rates on Certain Passive Income fromPhilippine sources

(1) INTEREST, ROYALTIES, PRIZES AND OTHER WINNINGS Citizens,Residents

NRAETB NRANETB

(a)

Interest from any currency bank deposit 20% 20% 20%(b) Yield or any other monetary benefit from deposit substitute 20% 20% 20%(c) Yield or any other monetary benefit from trust funds and

similar arrangements20% 20% 20%

(d) Royalties, in general (other than royalties described in letter“e”)

20% 20% 20%

(e) Royalties on books as well as other literary works andmusical compositions

10% 10% 25%

(f) Prizes exceeding P10,000 20% 20% 25%(g) Other winnings (other than Philippine Charity Sweepstakes

and Lotto winnings)20% 20% 25%

(h) Interest incomes received from a depositary bank under

expanded foreign currency deposit system

7 1/2%

Note: NRC– Exempt

(RR 1-2011)

Exempt Exempt

(i) Interest income from long-term deposit or investmentevidenced by certificates prescribed by BSP. If preterminatedbefore fifth year, a final tax shall be imposedbased on remaining maturity:(a) 4 years to less than 5 years(b) 3 years to less than 4 years(c) Less than 3 years

Exempt

5%12%

20%

Exempt

5%12%

20%

25%

25%25%

25%

(2)

CASH AND/OR PROPERTY DIVIDENDS Citizens,Residents NRAETB NRANETB

(a) Cash and/or property dividends actually or constructivelyreceived from a domestic corp. or from a joint stock co.,insurance or mutual fund companies and regional operatingheadquarters of multinational companies (beginningJanuary 1, 2000) 10% 20% 25%

(b) Share of an individual in the distributable net income aftertax of a PARTNERSHIP (other than a general professionalpartnership) (beginning January 1, 2000)

10% 20% 25%(c) Share of an individual in the net income after tax of an

ASSOCIATION, a JOINT ACCOUNT, or a JOINT VENTURE orCONSORTIUM taxable as a corporation, of which he is amember or a co-venturer (beginning January 1, 2000)

10% 20% 25%




PAGE 87

(a) For interest from foreign currency loansgranted by FCDUs to residents other thanOffshore Banking Units (OBUs) or otherdepository banks under the expandedsystem – tax rate is 10% if payors areRESIDENTS , whether individuals or

corporations.

(b) For interest from foreign currency loansgranted by OBUs to residents other thanOBUs or local commercial banks, includingbranches of foreign banks that may beauthorized by the BSP to transact businesswith OBUs - tax rate is 10% if payors areRESIDENTS , whether individuals orcorporations.

(c) Gross income from all sources within the

Philippines derived by non-residentcinematographic film owners, lessors ordistributors – tax rate is 25% if payee is: (a)non-resident alien individual, or (b) non-resident foreign corporation. The term“cinematographic films” includes motionpicture films, films, tapes, discs and othersuch similar or related products.

(d) Informer’s reward given to persons whovoluntarily provide definite and sworninformation that lead to or wasinstrumental in the discovery of fraud or

violation of the provisions of the NIRC orspecial laws being administered by the BIRand resulted in the actual recovery orcollection of revenues, surcharges and feesand/or the conviction of the guilty party orparties, and/or the imposition of any fine orpenalty or the actual collection of acompromise amount, in case of amicablesettlement, shall be subject to income tax,collected as a final withholding tax, at therate of 10%, pursuant to Sec. 282 of theNIRC (RR 16-2010).

Passive income not subject to tax(1) Interest income from long-term deposit orinvestment in the form of savings, common orindividual trust funds, deposit substitutes,investment management accounts and otherinvestments evidenced by certificates in suchform prescribed by the BSP shall be exemptfrom tax

But should the holder of the certificate pre-terminate the deposit or investment beforethe 5th year, a final tax shall be imposed onthe entire income and shall be deducted andwithheld by the depository bank from theproceeds of the long-term deposit or

investment certificate based on theremaining maturity thereof:(a) Four (4) years to less than five (5) years -

5%;(b) Three (3) years to less than four (4) years

- 12%; and(c) Less than three (3) years - 20%.

(2) Any income of nonresidents, whetherindividuals or corporations, from transactionswith depository banks under the expandedsystem shall be exempt from income tax.

TAXATION OF CAPITAL GAINS

Income from sale of shares of stock of aPhilippine corporation

Shares traded and listed in the stock exchange

–

exempt

The transaction is exempt from income taxregardless of the nature of business of theseller or transferor. However, it is subject tothe one-half of one percent (1/2 of 1%) stocktransaction tax imposed under Sec. 127(A) ofthe Tax Code based on the gross selling priceor gross value in money of the shares of stocksold or transferred.

Shares not listed and traded in the stock

exchange

–

subject to final tax

On sale, barter, exchange or other disposition ofshares of stockof a domestic corporation notlisted and traded through a local stock exchange,held as a capital asset:

On the net capital gain:(1) Not over P100,000 = Final Tax of 5% (2) On any amount in excess of P100,000 =

plus Final Tax of 10% on the excess




PAGE 88

Key Definitions(a) Net capital gain: selling price less cost(b) Selling price: consideration on the sale OR

fair market value of the shares of stock atthe time of the sale, whichever is higher

(c) Cost: original purchase price

Income from the sale of real propertysituated in the Philippines

What property covered Property located in the PH classified as capitalassets

What transactions covered Sales, exchanges, or other disposition of realproperty (classified as capital assets), includingpacto de retro sales and other forms of

conditional sales of the following: citizens,resident aliens, NRAETB, NRANETB, domesticcorporations.

Tax rateGeneral rule: 6% of—whichever is higher(a) Gross selling price, or (b) Fair market value (determined in accordance

with Sec. 6(E)).

Except(1) In case of sales made to the government, any

of its political subdivisions or agencies, or to

GOCCs, it can be taxed either:(a) Under Sec. 24(C)(1) – 6% CGT, or (b) Under Sec. 24(A), at the option of the

taxpayer (2) In case of the sale of or disposition of their

principal residence by natural persons(a) Requirements: (i) Sale or disposition by a natural person of

his principal residence, (ii) The proceeds of which is fully utilized in

acquiring/constructing a new principalresidence

(iii) Such acquisition/construction takingplace within 18 calendar months fromthe date of sale or disposition

(iv) The taxpayer notifies the Commissionerwithin 30 days from the sale/dispositionthrough a prescribed return of hisintention to avail of the exemption,

(3) The tax exemption can only be availed ofonce every 10 years.

(a) Tax treatment: Exempt from capitalgains tax (CGT). If there is no fullutilization of the proceeds of sale ordisposition, the portion of the gainpresumed to have been realized fromthe sale or disposition shall be subject

to CGT. (b) How taxable portion and tax determined:

(i) The historical cost or adjusted basis of the

real property sold or disposed shall becarried over to the new principal residencebuilt or acquired.

(ii) Computation for the basis of new principal

residence:

Historical cost of old principalresidence

XXX

Add: Additional cost to acquirenew principal residence*

XXX

Adjusted cost bases of the newprincipal residence

XXX

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

residence

XXX

Less: Gross selling price of oldprincipal residence

(XXX)

Additional cost to acquire newprincipal residence

XXX

Income from the sale, exchange, or other

disposition of other capital assets

Other properties shall be subject to incometax—

(1) At the graduated income tax rates, if the selleris an individual;

(a) Long-term capital gains: only 50% isrecognized.

(b) Short-term capital asset transactions:100% subject to tax. [Sec. 39(B)]

Determination of whether short- or long-term: Ifheld for <12 mos, then short-term. Otherwise,long-term.




PAGE 89

(2) At 30% corporate income tax, if the seller is acorporation.

(a) Rule: Capital gain/loss is recognized infull.

Capital assets shall refer to all real properties

held by a taxpayer, whether or not connectedwith his trade or business, and which are notincluded among the real properties consideredas ordinary assets under Section 39(A)(1) of the NIRC .

Ordinary assets shall refer to all real propertiesspecifically excluded from the definition ofcapital assets under Section 39(A)(1) of the NIRC , namely:

(1) Stock in trade of a taxpayer or other real

property of a kind which would properly beincluded in the inventory of the taxpayer ifon hand at the close of the taxable year; or

(2) Real property held by the taxpayer primarilyfor sale to customers in the ordinary courseof his trade or business; or

(3) Real property used in trade or business (i.e.,buildings and/or improvements) of acharacter which is subject to the allowancefor depreciation provided for under Sec.34(F) of the Code; or

(4) Real property used in trade or business ofthe taxpayer.

Summary Tables of Rates(Tables include NRAETB and NRANETB)

Section 24(C).Capital Gains Tax from Sale ofShares of Stock of a domestic corporation NOTTRADED in the Stock Exchange

RES/CIT NRAETB NRANETB

Tax base:Net CapitalGainTax rate:Not overP100,000

Amount inexcess ofP100,000

5%10%

5%10%

5%10%

Section 24(D).Capital Gains Tax from Sale ofReal Property Classified as Capital AssetRES/CIT NRAETB NRANETB

Tax base:Gross sellingprice orcurrent fairmarketvalue,whichever ishigherTax rate: 6% 6% 6%




PAGE 90

Category of Income

Resident Non-Resident

CITIZEN ALIEN CITIZEN NRAETB NRANETB

Allsources

Within thePhilippines




(1) Compensation / Business /Profession

(2) Prizes of P10,000 or lessBased on Taxable (i.e, Net) IncomeSchedular Income Tax Rates (Sec. 24, NIRC)(i.e, 5% to 32%)

GIW – 25%

NotApplicable

(3) Interest from any currency bankdeposit , etc., Royalties (other thanfrom books, literary works andmusical compositions), Winnings /Prizes (except prizes P10,000 andbelow)

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

(4)

Royalties from books, literaryworks, musical compositions GIW – 10% Final Withholding Tax

(5) Interest from long-term deposit orinvestment certificates, which havea maturity of 5 years or more

EXEMPT; However:In case of pre-termination, with remaining maturityof:4 years to less than 5 years – 5% on entire income3 years to less than 4 years – 12% on entire incomeless than 3 years – 20% on entire income

(6) Cash / Property Dividends from adomestic corporation, etc., ORshare in the distributable netincome after tax of a partnership

(except a general professionalpartnership), etc.

GIW – 10% Final Withholding Tax GIW – 20%

(7) Interest (Expanded ForeignCurrency Deposit System)

GIW – 7.5% FinalWithholding Tax

EXEMPT

(8) Winnings on PhilippineSweepstakes / Lotto

EXEMPT

(9) Capital Gains on Sale of Shares ofDomestic Corp. (not traded in adomestic stock exchange)

Net Capital Gains within:Not Over P100,000 – 5% Final TaxAmount in Excess of P100,000 – plus 10% Final Tax on the excess

(10) Capital Gains on Sale of RealProperty in the Philippines

Gross Selling Price or FMV, whichever is higher –

6% Final Withholding Tax(11) Sale of Shares of Domestic Corp.

(traded in a domestic stockexchange)

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

(12) Sale of Real Property locatedAbrWoad Schedular Income Tax Rates (Sec. 24, NIRC)

(i.e, 5% to 32%)(13) Sale of Shares of Foreign Corp

(14) Passive Income from Abroad




PAGE 92

Except:(1) The following Royalties shall be subject to a

final tax of ten percent (10%) on the totalamount thereof:(a) On books as well as other literary works;

and

(b) On musical compositions(2) Cinematographic films and similar works

shall be subject to twenty-five percent(25%) of the gross income

(3) Interest income from long-term deposit orinvestment in the form of savings, commonor individual trust funds, depositsubstitutes, investment managementaccounts and other investments evidencedby certificates in such form prescribed bythe Bangko Sentral ng Pilipinas (BSP) shallbe exempt from the tax

But should the holder of the certificate pre-terminate the deposit or investment before thefifth (5th) year, a final tax shall be imposed onthe entire income and shall be deducted andwithheld by the depository bank from theproceeds of the long-term deposit orinvestment certificate based on the remainingmaturity thereof:(a) Four (4) years to less than five (5) years - 5%;(b) Three (3) years to less than four (4) years -

12%; and(c) Less than three (3) years - 20%.

CAPITAL GAINSCapital gains realized from sale, barter orexchange of shares of stock in domesticcorporations not traded through the local stockexchange, and real properties shall be subjectto the similar tax prescribed on citizens andresident aliens. (a) Sale, barter or exchange of Shares of stock in

domestic corporation not traded –

(1) Net over P100,000 – 5% of net capitalgains realized

(2) On any amount in excess of P100,000 –

10% of net capital gains realized(b) Sale, barter or exchange of real properties –

6% of gross selling price or current FMVwhichever is higher

NON-RESIDENT ALIENS NOTENGAGED IN TRADE ORBUSINESS(1) Alien individuals employed by:

(a) Regional or Area Headquarters (RAHQ)

and Regional Operating Headquarters(ROHQ) established in the Philippinesby multinational companies

Multinational company, defined a foreignfirm or entity engaged in internationaltrade with affiliates or subsidiaries orbranch offices in the Asia-Pacific Regionand other foreign markets

(b) Offshore Banking Units established in thePhilippines

(2) Alien individuals who are permanent residentsof a foreign country but who are employed andassigned in the Philippines by a foreign servicecontractor or by a foreign service subcontractorengaged in petroleum operations in thePhilippines

Tax Rate and Base - 15% of gross incomereceived as salaries, wages, annuities,compensation, remuneration and otheremoluments, such as honoraria and allowances.

The same tax treatment shall apply to Filipinosemployed and occupying the same positions asthose of aliens employed by these multinationalcompanies, offshore banking units andpetroleum service contractors andsubcontractors.

Note that the coverage of the specialclassification (and the corresponding tax rate) islimited to income received as wages. Hence, anyincome earned from all other sources within thePhilippines by the alien employees shall be

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




PAGE 93

INDIVIDUAL TAXPAYERSEXEMPT FROM INCOME TAXIndividual Taxpayers exempt from income taxare:(1) Senior Citizens

(2) Minimum wage earners(3) Exemptions granted under internationalagreements

All individuals and entities claiming exemptionfrom imposition of taxes on income and,consequently, from withholding taxes arerequired to provide a copy of a valid, current andsubsisting tax exemption certificate or ruling, asper existing administrative issuances and anyissuance that may be issued from time to time,before payment of the related income. The taxexemption certificate or ruling must explicitlyrecognize the grant of tax exemption, as well asthe corresponding exemption from impositionof withholding tax. Failure on the part of thetaxpayer to present the said tax exemptioncertificate or ruling as herein required shallsubject him to the payment of appropriatewithholding taxes due on the transaction. [RMCNo. 8=2014]

SENIOR CITIZENSWho covered: any resident citizen—

(a) At least 60 years old, and

(b) Who are considered minimum wage earnersunder RA 9504. (Sec. 4 (b) RA 7432 , asamended by RA 9994) and/or theaggregate amount of gross income earnedby the senior citizen during the taxable yeardoes not exceed the amount of his personalexemptions (BPE and APE).

MINIMUM WAGE EARNERS

Rule: they shall be exempt from payment ofincome tax on their taxable incomeLimit: however, if he receives “other benefits” in

excess of the allowable statutory amount ofP30,000, then he shall be taxable on theexceeds benefits as well as his salaries, wages,and allowances, just like an employee receivingcompensation income beyond the statutoryminimum wage.

EXEMPTIONS GRANTED UNDERINTERNATIONAL AGREEMENTS(SEC. 32(B))See RMC No, 31-2013, April 12, 2013

–

taxation ofcompensation income of Philippine nationalsand alien individuals employed by foreigngovernments/embassies/diplomatic missionsand international organizations situated in thePhilippines

TAXATION OF DOMESTICCORPORATIONS

TAX PAYABLETaxes payable are:(1) Regular tax(2) Minimum Corporate Income Tax

REGULAR TAXNormal Corporate Income Tax Rate: 30%ofTaxable Income (effective January 1, 2009)

Gross Income XXXLess: Allowable Deductions XXXTaxable Income XXX

MINIMUM CORPORATE INCOME TAX (MCIT)(a) applies to domestic corporations and RFCs

whenever such corporations have zero or

negative taxable income or whenever theMCIT is greater than the normal income taxdue from such corporations.

(b) Imposed upon any domestic corporationbeginning the fourth taxable year in whichsuch corporation commenced its businessoperations. For purposes of the MCIT, thetaxable year in which business operationscommenced shall be the year when thecorporation registers with the BIR (not inwhich the corporation started commercialoperations).

(c) Tax rate: 2% of the Gross Income

IMPOSITION OF MCITGross Sales XXXLess: Sales Returns

Sales Discounts &Allowances

Cost of Goods Sold

XXXXXXXXX XXX

MCIT GI XXX




PAGE 94

Computation of Gross Income.— The term “Gross Income” shall be equivalent togross sales less sales returns, discounts andallowances and cost of goods sold. “Cost ofgoods sold” shall include all business expensesdirectly incurred to produce the merchandise to

bring them to their present location and use.

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

This means that the term “gross income” willalso include all items of gross income

enumerated under Section 32(A) of the NIRC,except: (a) income exempt from income tax, and(b) income subjected to FWT.

The computation by type of business.—

Merchandising/Manufacturing

Concerns

Service Concerns

Net SalesP xxx

Grossreceipts/revenueP xxx

Less: Cost of Salesxxx

Less: Direct costof servicesxxx

Gross IncomeP xxx

Gross incomeP xxx

“Net Sales” is gross sales less sales returns,discounts and allowances.

“Direct cost of services” includes salaries ofpersonnel rendering the services, expenses onthe facilities directly utilized, cost of supplies,and the like. “Direct costs and expenses” shallonly pertain to those costs exclusively anddirectly incurred in relation to the revenue

realized by the sellers of services. These refer tocosts which are considered indispensable to theearning of the revenue such that without suchcosts, no revenue can be generated.

Pointers.— MCIT is in the nature of a tax credit , not anallowable deduction. Its purpose is to preventcorporations from escaping being taxed byincluding frivolous expenses in their statementof income.

Is the Minimum Corporate Income Tax (MCIT) anaddition to the regular or normal income tax?No, the MCIT is not an additional tax. The MCITis compared with the regular income tax, whichis due from a corporation. If the regular incomeis higher than the MCIT, then the corporationdoes not pay the MCIT.

Who are covered by MCIT?The MCIT covers domestic and resident foreigncorporations which are subject to the regular

income tax. The term “regular income tax”refers to the regular income tax rates under theTax Code. Thus, corporations which are subjectto a special corporate tax system do not fallwithin the coverage of the MCIT .

These special corporations are:(a) Corporations that are subject to ten percent

(10%) preferential tax rate: Proprietaryeducational institutions, nonprofit hospitals,Offshore Banking Units (OBUs) on theirincome from foreign currency transactionswhich has been subjected to a final income

tax at 10% of such income, and depositorybanks under the expanded foreign currencydeposit system on their income from foreigncurrency transactions which has subjectedto final income tax at 10%; RFCs engaged inbusiness as Regional OperatingHeadquarters

(b) Firms under special income tax regime suchas those under the PEZA law [Rep. Act7916], the Bases Conversion DevelopmentAct [Rep. Act 7227] and forms enjoyingIncome Tax Holiday (ITH) under Exec. Order

No. 226; (c) International carriers subject to tax at 2 ½%

of their gross Philippine billings;




PAGE 95

Note: For domestic corporations whoseoperations or activities are partly covered by theregular income tax and partly covered under aspecial income tax system, the MCIT shall applyon operations covered by the regular corporateincome tax system.

MCIT gross income differentiated from thenormal tax gross incomeThe latter would include other incidentalincome items, such as rent income, interest,gain on sale of assets, certain tax refunds, etc.

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

Illustration.— E Co., a domestic trading corporation, in itsfourth year of operations had a gross profit fromsales of P300,000 and net taxable income ofP100,000. How much was the income tax paidby the corporation for the year?

MCIT (P300,000 x 2%) P6,000Normal income tax(P100,000 x 30%) P30,000Income Tax to be paid for the year(whichever is higher) P30,000

Quarterly MCIT Computation.— The computation and the payment of MCITshall likewise apply at the time of filing thequarterly corporate income tax. In thecomputation of the tax due for the taxablequarter, if the quarterly MCIT is higher than thequarterly normal income tax, the tax due to bepaid for such taxable quarter at the time offiling the quarterly corporate income tax returnshall be the MCIT.

Items allowed to be credited against quarterly

MCIT due: (a) CWT, (b) Quarterly income taxpayments under the normal income tax; and (c)MCIT paid in the previous taxable quarter(s).

Excess MCIT from the previous taxable year/sshall not be allowed to be credited against thequarterly MCIT tax due.

Annual Income Tax Computation.— The final comparison between the normalincome tax payable and the MCIT shall be madeat the end of the taxable year. The payable orexcess payment in the Annual Income TaxReturn shall be computed taking into

consideration corporate income tax paymentmade at the time of filing of quarterly corporateincome tax returns whether this be MCIT ornormal income tax.

In the computation of annual income tax due, ifthe normal income tax due is higher than thecomputed annual MCIT, the following shall beallowed to be credited against the annualincome tax: (a) quarterly MCIT payments, (b)quarterly normal income tax payments, (c)excess MCIT in the prior year/s (subject to the

prescriptive period allowed for its creditability),(d) CWTs in the current year, (d) excess CWTs inthe prior year.

If in the computation of annual income tax due,the computed annual MCIT due is higher thanthe annual normal income tax due, thefollowing may be credited against the annualincome tax: (a) quarterly MCIT payments ofcurrent taxable quarter, (b) quarterly normalincome tax payments in current year, (c) CWTsin the current year, (d) excess CWTs in the prioryear.

Excess MCIT from the previous taxable year/sshall not be allowed to be credited against theannual MCIT due as the same can only beapplied against normal income tax.

Manner of Filing and Payment.— The MCIT shall be paid in the same mannerprescribed for the payment of the normalcorporate income tax which is on a quarterlyand on a yearly basis.

CARRY FORWARD OF EXCESS MINIMUMTAXAny excess of the minimum corporate incometax over the normal income tax shall be carriedforward on an annual basis. The excess can becredited against the normal income tax in thenext hree (3) succeeding taxable years. [Sec.27(E)(2)] In the year to which carried forward,the normal tax should be higher than the MCIT.




PAGE 96

Illustration.— A domestic corporation had the following data on computations of the normal tax (NT) and theminimum corporate income tax (MCIT) for five years.

Yr 4 Yr 5 Yr 6 Yr 7 Yr 8MCIT 80K 50K 30K 40K 35K

NT 20K 30K 40K 20K 70K

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

Year 4 Year 5 Year 6 Year 7 Year 8MCIT 80,000 50,000 30,000 40,000 35,000NT 20,000 30,000 40,000 20,000 70,000

NT is higher n/a n/a 40,000 n/a 70,000Less: 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 MCITcarry-forward against it.

*Cannot carry forward an amount higher than the NT, hence the excess of 60K from Year 4 was reducedto 40K. The unused P20,000 cannot be used in Year 8 because Year 8 was beyond three years from Year4.

> >

>




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RELIEF FROM THE MCIT UNDER CERTAINCONDITIONS (SEC. 27 (E ), NIRC)The Secretary of Finance, upon therecommendation of the Commissioner, maysuspend the imposition of the MCIT uponsubmission of proof by the applicant-

corporation that the corporation sustainedsubstantial losses on account of the following(LMB): (1) Prolonged labor dispute (losses from a strike

staged by employees that lasts for morethan 6 months and caused the temporaryshutdown of operations), or

(2) Force majeure (acts of God and othercalamity; includes armed conflicts like waror insurgency), or

(3) Legitimate business reverses (substantiallosses due to fire, robbery, theft or other

economic reasons).

Optional Gross Income Tax (OGIT).— Section 27 (A) of the NIRC provides for anoptional gross income tax of 15% based ongross income. The President, upon therecommendation of the Secretary of Finance,may, effective January 1, 2000, allow domesticcorporations the option to be taxed at fifteenpercent (15%) of gross income as definedtherein, after the following conditions have beensatisfied:

Tax effort ratio 20% of GNPRatio of Income Tax collectionto total tax revenues

40%

VAT tax effort 4% of GNP

Ratio of Consolidated PublicSector Financial Position(CPSFP) to GNP

0.90%

Ratio of the Corporation’s Costof Sales to Gross Sales

Does notexceed 55%

Gross Sales XXXLess: Sales Returns

SalesDiscounts&Allowances

Cost of Goods Sold

XXXXXXXXX XXX

GI XXX

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

For purposes of gross income tax, gross income

should be the same as gross income forpurposes of MCIT in cases of trading,merchandising and manufacturing concernbusiness. However, for service enterprises, grossincome means gross receipts less sales returns,discounts, allowances and cost of services.

Note: At present, the OGIT has not beenimplemented in the Philippines.

CORPORATIONS EXEMPT FROM THE MCIT:( BIPTENG)

(1) Banks and other non-bank financialintermediaries;(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 andDevelopment Act of 1992 under R.A.7227; and

(c) under special economic zones declared bylaw which enjoy payment of special taxrate on their registered operations oractivities in lieu of other taxes, national orlocal.

Note: Words in regular letters are found in Sec.29(B)(2) of the NIRC. Words in italics areadditions made by the revenue regulation toconsolidate Sec. 29 with other pertinent laws.

Applicability of the MCIT where a corporation is

governed both under the regular tax system and

a special income tax system

For corporations whose operations or activitiesare partly covered by the regular income tax andpartly covered under special income tax system,the MCIT shall apply on operations by the regularincome tax system




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ALLOWABLE DEDUCTIONS

Itemized deductions

(1) Bad debts(2) Expenses(3) Losses

(4) Taxes(5) Depreciation(6) Interest(7) Depletion of oil and gas wells and mines(8) Charitable and other contributions(9) Research and development(10 Pension trusts

Optional standard deduction

(a) Before RA 9504, effective July 6, 2009, OSDonly applied to individuals except non-residentaliens.

(b) But by virtue of RA 9504, it now also applies tocorporations, except non-resident foreign

corporation.(c) Moreover, the rate was increased from 10% to

40%.

TAXATION OF PASSIVE INCOME

PASSIVE INCOME SUBJECT TO TAXNote: (1) and (5) below are more appropriate forthe next section. The SC Syllabus, however,included both in this section

Passive income subject to tax:(1) Interest from deposits and yield or any other

monetary benefit from deposit substitutesand from trust funds and similararrangements and royalties

(2) Capital gains from the sale of shares of stocknot traded in the stock exchange

(3) Income derived from depository bank underthe expanded foreign currency depositsystem

(4) Inter-corporate dividends(5) Capital gains realized from the sale,

exchange, or disposition of lands and/orbuildings

Interest from deposits and yield or any other

monetary benefit from deposit substitutes and

from trust funds and similar arrangements and

royalties

On any currency bank deposit , yield or any othermonetary benefit from deposit substitutes, trustfunds and similar arrangements - 20%

Capital gains from the sale of shares of stock not

traded in the stock exchange

On sale, barter, exchange or other disposition ofshares of stock of a domestic corporation notlisted and traded through a local stock exchange,held as a capital asset:

On the net capital gain:(a) First P100,000: Final Tax of 5%(b) On any amount in excess of P100,000: plus

10% Final tax on the excess

Income derived from depository bank under the


Under the expanded foreign currency depositsystem (EFCDS) - 7.5%

Inter-corporate dividends

Dividends received from another domesticcorporation - exempt

Capital gains realized from the sale, exchange,

or disposition of lands and/or buildings

On the sale, exchange or disposition of landsand/or buildings which are not actually used inthe business of a corporation and are treated ascapital assets On the gross selling price, orthe current fair market value at the time of thesale, whichever is higher, a final tax of 6%

(a) Note: Tax treatment is the same as that ofindividuals.

(b) The capital gains tax is applied on the grossselling price, or the current fair market valueat the time of the sale, whichever is higher.Any gain or loss on the sale is immaterialbecause there is a conclusive presumptionby law that the sale resulted in a gain.

PASSIVE INCOME NOT SUBJECT TO TAX(a) Income derived by a depository bank under

the expanded foreign currency depositsystem from foreign currency transactionswith nonresidents, offshore banking units in

the Philippines, local commercial banks,including branches of foreign banks thatmay be authorized by the Bangko Sentralng Pilipinas (BSP) to transact business withforeign currency depository system unitsand other depository banks under theexpanded foreign currency deposit systemshall be exempt from income exempt fromincome tax




PAGE 99

Except : net income from transactionsspecified by the Secretary of Finance uponrecommendation by the Monetary Board

BUT: Interest income from foreign currencyloans granted by such depository banks

under said expanded foreign currencydeposit system to residents, other thanoffshore banking units in the Philippines,shall be subject to a final tax at the rate of10%.

(b) Any income of nonresidents, whetherindividuals or corporations, fromtransactions with depository banks underthe expanded system shall be exempt fromexempt from income tax .

TAXATION OF CAPITAL GAINSINCOME FROM SALE OF SHARES OF STOCK

On sale, barter, exchange or other disposition ofshares of stock of a domestic corporation notlisted and traded through a local stock exchange,held as a capital asset:



INCOME FROM THE SALE OF REALPROPERTY SITUATED IN THE PHILIPPINES

Philippine & (iii) Income from the sale, exchange,

or other disposition of other capital assets

On the sale, exchange or disposition of landsand/or buildings which are not actually used inthe business of a corporation and are treated ascapital assets On the gross selling price, orthe current fair market value at the time of thesale, whichever is higher, a final tax of 6%

Note: Tax treatment is the same as that ofindividuals.The capital gains tax is applied on the grossselling price, or the current fair market value atthe time of the sale, whichever is higher. Anygain or loss on the sale is immaterial becausethere is a conclusive presumption by law thatthe sale resulted in a gain.

TAX ON PROPRIETARYEDUCATIONAL INSTITUTIONS ANDNON-PROFIT HOSPITALSTax Rate and Base – 10% on net income (excepton income subject to capital gains tax andpassive income subject to final tax) within andwithout the Philippines

Caveat : If gross income from unrelated trade orbusiness or other activity exceeds 50%of totalgross income derived from all sources, the taxrate of 30% shall be imposed on the entiretaxable income.

Unrelated trade, business or other activity - anytrade, business or other activity, the conduct ofwhich is not substantially related to the exerciseor performance by such educational institution

or hospital of its primary purpose or function.

Proprietary educational institution- any privateschool maintained and administered by privateindividuals or groups with an issued permit tooperate from the DECS, CHED or TESDA. [Sec. 27(B), NIRC]

TAX ON GOVERNMENT-OWNED ORCONTROLLED CORPORATIONS,AGENCIES OR INSTRUMENTALITIES

FOR GOCCS:General rule:GOCCs are taxable as any othercorporation engaged in similar business,industry or activity, except: (a) Government Service Insurance System

(GSIS)(b) Social Security System (SSS)(c) Philippine Health Insurance Corporation

(PHIC)(d) Local water districts (LWDs)

(e) Philippine Charity Sweepstakes Office(PCSO)[Sec. 27(C), NIRC]




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FOR INSTRUMENTALITIES AND AGENCIESOF GOVERNMENT:General Rule: The government is exempt fromtax.

Exception: When it chooses to tax itself. Nothing

can prevent Congress from decreeing that eveninstrumentalities or agencies of the governmentperforming governmental functions may besubject to tax. Where it is done precisely tofulfilfulfill a constitutional mandate andnational policy, no one can doubt its wisdom.[Mactan Cebu Airport v Marcos, 1996]

If the taxing authority is the local gov’t unit RA 7160 expressly prohibits LGUs from levyingtax on the Nat’l Gov’t, its agencies andinstrumentalities and other LGUs.

TAXATION OF RESIDENTFOREIGN CORPORATIONS

GENERAL RULEA resident foreign corporation is a corporationorganized under the laws of a foreign country,which is engaged in trade or business in thePhilippines. (a) A Philippine branch of a foreign corporation

duly licensed by the SEC is considered aresident foreign corporation. Thus, only the

income of the Philippine branch from sourceswithin the Philippines is subject to Philippineincome tax.

(b) Marubeni v. Commissioner: As general rule,the head office of a foreign corporation isthe same juridical entity as its branch in thePhilippines following the single entityconcept. Thus, the income from sourceswithin the Phils. of the foreign head officeshall thus be taxable to the Philippinebranch.

But, when the head office of a foreigncorporation independently and directly investedin a domestic corporation without the fundspassing through its Philippine branch, thetaxpayer, with respect to the tax on dividendincome, would be the non-resident foreigncorporation itself anditself and the dividendincome shall be subject to the tax similarlyimposed on non-resident foreign corporations.

Definition of “doing business” under the ForeignInvestment Act of 1991The phrase "doing business" shall includesoliciting orders, service contracts, openingoffices, whether called "liaison" offices orbranches; appointing representatives or

distributors domiciled in the Philippines or whoin any calendar year stay in the country for aperiod or periods totaling one hundred eighty[180] days or more; participating in themanagement, supervision or control of anydomestic business, firm, entity or corporation inthe Philippines; and any other act or acts thatimply a continuity of commercial dealings orarrangements and contemplate to that extentthe performance of acts or works, or the exerciseof some of the functions normally incident to,and in progressive prosecution of commercial

gain or of the purpose and object of thebusiness organization: Provided, however, Thatthe phrase "doing business" shall not bedeemed to include mere investment as ashareholder by a foreign entity in domesticcorporations duly registered to do business,and/or the exercise of rights as such investor;nor having a nominee director or officer torepresent its interests in such corporation; norappointing a representative or distributordomiciled in the Philippines which transactsbusiness in its own name and for its ownaccount; [Sec. 3 (d)]

WITH RESPECT TO THEIR INCOMEFROM SOURCES WITHIN THEPHILIPPINESResident foreign corporations are subject to anyor some of the following:(1) Capital Gains Tax(2) Final Tax on Passive Income(3) Normal Tax [OR] Minimum Corporate

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

(4) Branch Profit Remittance Tax

MINIMUM CORPORATE INCOME TAXThe discussion with respect to this topic (incomesubject to normal tax, MCIT, or GIT) under thesubheading of domestic corporations is equallyapplicable to resident foreign corporations, bothas to concepts and computations, except that




PAGE 101

RFCs are taxed only on income from sourceswithin the Philippines.(a) Normal Corporate Income Tax Rate 30% of

net taxable income from sources within thePhilippines [RA 9337]

(b) Minimum Corporate Income Tax (MCIT) 2%

of MCIT Gross Income from sources withinthe Philippines. The MCIT is imposed onRFCs underRFCsunder the same conditionsas domestic corporations. [Sec. 28(A)(2)]

(c) Gross Income Tax (GIT) The President,upon the recommendation of the Secretaryof Finance, may allow resident foreigncorporations the option to be taxed atfifteen percent (15%) of gross income withinthe Philippines, under the same conditionsas domestic corporations. [Sec. 28(A)(1)]

TAX ON CERTAIN INCOMEInterest from deposits and yield or any other

monetary benefit from deposit substitutes, trust

funds and similar arrangements and royalties

On any currency bank deposit, yield or any othermonetary benefit from deposit substitutes, trustfunds and similar arrangements – Final tax of20%

Income derived from a depository bank under the


Under the expanded foreign currency deposit

system (EFCDS) – Final tax of 7.5%

Capital gain from sale of shares of stock not


On sale, barter, exchange or other disposition ofshares of stock ofstockof a domestic corporationnot listed and traded through a local stockexchange, held as a capital asset:



Intercorporate dividends

Dividends received from a domestic corporation liable to tax under the NIRC- exempt

Exclude:

(1) International carrier(2) Offshore banking units

(3) Branch profits remittances(4) Regional or area headquarters and regional

operating headquarters of multinationcompanies

(NOTE: Expressly excluded as indicated in the SC

Syllabus. The following discussion is forinformation purposes)

International carrier

Tax Rate and Base – 2.5% on Gross PhilippineBillings (GPB)

What is GPB.— In the case of International Air Carrier s, GPBrefers to the amount of:(a) gross revenue derived from carriage of

persons, excess baggage, cargo and mail

originating from the Philippines in acontinuous and uninterrupted flight , irrespective of the place of sale or issue andthe place of payment of the ticket orpassage document

(b) gross revenue from tickets revalidated,exchanged and/or indorsed to anotherinternational airline if the passenger boardsa plane in a port or point in the Philippines

(c) for flights which originate from thePhilippines, but transshipment of passengertakes place at any port outside thePhilippines on another airline, the gross

revenue consisting of only the aliquotportion of the cost of the ticketcorresponding to the leg flown from thePhilippines to the point of transhipmenttransshipment[RR 15-2002]

Air Canada vs. CIR (CTA Case No. 6572):(a) A foreign airline company selling tickets in

the Philippines through their local agentsshall be considered as resident foreigncorporation engaged in trade or business inthe country.

(b) The absence of flight operations within thePhilippine territory cannot alter the fact thatthe income received was derived fromactivities within the Philippines.

(c) The test of taxability is the source, and thesource is that activity which produced theincome.




PAGE 102

In the case of International Shipping, GPBmeans:Gross revenue whether for passenger, cargo ormail originating from the Philippines up to finaldestination, regardless of the place of sale orpayments of the passage or freight documents.

Offshore banking units

Coverage of the Rule.— Only income derived by offshore banking unitsfrom foreign currency transactions with:(1) non-residents,(2) other offshore banking units(3) local commercial banks including branches

of foreign banks that may be authorized bythe BangkoSentralngPilipinas (BSP) totransact business with offshore banking

units

Tax Rate.— Exempt from all taxes, except net income fromsuch transactions as may be specified by theSecretary of Finance, upon recommendation bythe Monetary Board to be subject to the regularincome tax payable by banks

Exception: Interest income derived from foreigncurrency loans granted to residents other thanoffshore banking units or local commercialbanks, including local branches of foreign banks

that may be authorized by the BSP to transactbusiness with offshore banking units, shall besubject only to a final tax at the rate of 10%.

Branch profits remittances

Taxable transaction – any profit remitted by abranch of a multinational corporation to itshead office

Tax Rate and Base – 15% final tax based on thetotal profits applied or earmarked for remittance without any deduction for the tax component.

The 15% final tax should excluding:(a) profits on activities which are registered with

the Philippine Economic Zone Authority(PEZA) and

(b) passive income gains and profits receivednot directly connected with the conduct of itstrade or business in the Philippines.

Income not treated as branch profits unlesseffectively connected with the conduct of tradeor business in the Philippines:(1) Interests, dividends, rents, royalties

remuneration for technical services(2) salaries, wages premiums, annuities,

emoluments(3) other fixed or determinable annual, periodic

or casual gains, profits, income(4) capital gains received during each taxable

year from all sources within the Philippines

Notes: (a) imposed whether the head office of the

foreign corporation is located in a tax treatycountry, in a tax haven or other non-treatycountry.

(b) imposed only on the profits remitted by aPhilippine branch to the head office of a

foreign corporation.

Regional or area headquarters and Regional

operating headquarters of multinational

companies

Regional or area headquarters: not subject toincome tax

Regional or area headquarters: a branchestablished in the Philippines by multinationalcompanies and which headquarters do not earnor derive income from the Philippines and whichact as supervisory, communications andcoordinating center for their affiliates,subsidiaries, or branches in the Asia-PacificRegion and other foreign markets.

Regional operating headquarters(a) 10%of their taxable income(b) a branch established in the Philippines by

multinational companies which are engagedin any of the following services:(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.




PAGE 103

TAXATION OF NON-RESIDENTFOREIGN CORPORATIONS

GENERAL RULEExcept as otherwise provided, the tax is 30% of

the gross income (except certain passiveincome)received during each taxable year fromall sources within the Philippines, such asinterests (except interests on foreign loans,dividends, rents, royalties, salaries, premiums(except reinsurance premiums), annuities,emoluments or other fixed or determinableannual, periodic or casual gains, profits andincome, and capital gains EXCEPT capital gainson the sale of shares of stock (not listed andtraded through a local stock exchange), of adomestic corporation which are subject to the taxrates prescribed for individuals and residentforeign corporations.

TAX ON CERTAIN INCOME

Interest on foreign loans

(a) on foreign loans contracted on or afterAugust 1, 1986 – 20%

(b) under the expanded foreign currency depositsystem (EFCDS) - exempt

Intercorporate dividends

(a) (Intercorporate Dividend) – 15%, as long as

the country in which the nonresident foreigncorporation is domiciled allows a tax creditfor taxes “deemed paid” in the Philippinesequivalent to at least15%

(b) 15% represents the difference between theregular income tax of 30% on corporationsand the 15% tax on dividends (“tax sparingcredit”)

(c) If the country within which the NRFC isdomiciled does NOT allow a tax credit, afinal withholding tax at the rate of 30% isimposed on the dividends received from a

domestic corporation.

Capital gains from sale of shares of stock not


On sale, barter, exchange or other disposition ofreal property or on shares of stock of a domesticcorporation not listed and traded through a localstock exchange, held as a capital asset:

On the net capital gain: (a) First P100,000 Final Tax of 5%

(b) On any amount in excess of P100,000 plusFinal Tax of 10% on the excess

Exclude:

(1) Film rentals and other payments to non-resident cinematographic film owner, lessoror distributorFinal tax of 25% of gross income from allsources within the Philippines

(2) Rental, lease and charter fees payable tonon-resident owner or lessor of vesselschartered by Philippine nationals

Final tax of 4.5% of gross rentals, lease orcharter fees from leases or charters to

Filipino citizens or corporations, asapproved by the Maritime Authority

(3) Rentals, charter and other fees payable tonon-resident owner or lessor of aircraftmachineries and other equipmentFinal tax of 7.5% of gross rentals or fees




PAGE 104

Summary of Tax Bases and Rates of Special

Corporations

Quick Glance

Type of Corporation Tax BaseTaxRate

Domestic Corporations

Proprietary Educational Institutions and Hospitals(Non-profit)

Taxable Income from all sources 10%

Depository Banks (Foreign Currency Deposit Units)(1) With respect to income derived under the expanded

foreign currency deposit system from certainforeign currency transactions

(2) With respect to interest income from foreigncurrency loans to residents other than offshoreunits in the Philippines or other depository banksunder the expanded system

Exempt (except that net incomefrom such transactions is subjectto the regular income tax payableby banks)

-

Amount of interest income 10%

Resident Foreign Corporations

International Carriers Gross Philippine Billings 2.5%Offshore Banking Units(1) With respect to income derived by offshore

banking units from certain foreign currencytransactions

(2) With respect to interest income derived fromforeign currency loans granted to residents otherthan offshore banking units or local commercialbanks

Exempt (except that net incomefrom such transactions is subjectto the regular income tax payableby banks)

-


Resident Depository Bank (Foreign Currency DepositUnits)(1) With respect to income derived under the

expanded foreign currency deposit system fromcertain foreign currency transactions(2) With respect to interest income from foreign

currency loans to residents other than offshoreunits in the Philippines or other depository banksunder the expanded system

Exempt (except that net incomefrom such transactions is subject

to the regular income tax payableby banks)

-


Regional or Area Headquarters Exempt -Regional Operating Headquarters of MultinationalCompanies

Taxable Income from within thePhilippines

10%

Non-resident Foreign Corporations [EXCLUDED]

Non-resident cinematographic film owners, lessors ordistributors

Gross Income from the Philippines25%

Non-resident Owner or Lessor of Vessels Chartered byPhilippine Nationals Gross Rentals, Lease and CharterFees from the Philippines 4.5%

Non-resident Owner or Lessor of Aircraft, Machineriesand Other Equipment

Gross Rentals, Charges and Feesfrom the Philippines

7.5%




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(1) Stock Not Owned by Individuals. - Stockowned directly or indirectly by or for acorporation, partnership, estate or trustshall be considered as being owned proportionately by its shareholders, partnersor beneficiaries.

(2) Family and Partnership Ownership. - Anindividual shall be considered as owningthe stock owned, directly or indirectly, by orfor his family, or by or for his partner.

For purposes of this paragraph, the ‘family of anindividual’ includes his brothers or sisters(whether by whole or half-blood), spouse,ancestors and lineal descendants.

(3) Option to Acquire Stocks. - If any person hasan option to acquire stock, such stock shall

be considered as owned by such person.

For purposes of this paragraph, an option toacquire such an option and each one of aseries of option shall be considered as anoption to acquire such stock.

(3) Constructive Ownership as Actual Ownership.- Stock constructively owned by reason ofthe application of (a) or (c) shall, forpurposes of applying (1) or (2), be treated asactually owned by such person.

But stock constructively owned by theindividual by reason of the application of (b) shall NOT be treated as owned by him forpurposes of again applying such paragraphin order to make another the constructiveowner of such stock.

BIR RULING 025-02The ownership of a domestic corporation forpurposes of determining whether it is a closelyheld corporation or a publicly held corporationis ultimately traced to the individual shareholders

of the parent company.

Where at least 50% of the outstanding capitalstock or at least 50% of the total combinedvoting power of all classes of stock entitled tovote in a corporation is owned directly orindirectly by at least 21 or more individuals , thecorporation is considered as a publicly-heldcorporation, thus, exempt from IAET.

Determination of Reasonable Needs of the

Business:

An accumulation of earnings or profits(including undistributed earnings or profits ofprior years) is unreasonable if it is not necessaryfor the purpose of the business, considering all

the circumstances of the case.

To determine the “reasonable needs” of thebusiness in order to justify an accumulation ofearnings, the Regulations adhere to the so-called “Immediacy Test” under American jurisprudence as adopted in this jurisdiction.Accordingly, the term “reasonable needs of thebusiness” means the immediate needs of thebusiness, including reasonably anticipatedneeds. In either case, the corporation should beable to prove: (a) an immediate need for the

accumulation of the earnings and profits, or (b)the direct correlation of anticipated needs tosuch accumulation of profits. Otherwise, suchaccumulation would be deemed to be not forthe reasonable needs of the business, and thepenalty tax would apply.

TAX EXEMPT CORPORATIONS(1) Government educational institutions.(2) Non-stock and non-profit educational

institutions.(3) Nonprofit labor, agricultural or horticultural

organizations(4) Associations of farmers, fruit growers, and

the like whose primary function is to marketthe product of their members

(5) Organizations with a purely local operationwhose income is derived only fromassessment, duties and fees collected fromtheir members to meet operationalexpenses such as fire insurance company,farmers’ or other mutual typhoon associations, mutual ditch or irrigationcompany and mutual or cooperativetelephone company

(6) Non-stock corporation or associationorganized and operated exclusively forreligious, charitable, scientific, athletic, orcultural purposes or for the rehabilitation ofveterans, provided that no individual personowns its assets or no individual personreceives benefit on its earnings

(7) Non-stock/ non-profit mutual savings bankor non-stock/ non-profit cooperative bank




PAGE 107

(8) Non-profit civic league or organizationoperating exclusively for the promotion ofsocial welfare

(9) Cemetery company owned and operatedexclusively for the benefit of its members

(10) Non-profit business league, chamber of

commerce, or board of trade(11) Associations, orders, beneficiary societies

operating for the exclusive benefits of theirmembers. [Sec.30, NIRC ]

NPC in general is subject to income tax;PAGCOR is not subject to income tax [RA 9337 ]

Qualification for Tax Exemption Under Section

30 of the 1997 NIRC:

(1) It must be a non-stock corporation orassociation organized and operated

exclusively for religious, charitable,scientific, athletic or cultural purposes, orfor the rehabilitation of veterans.

(2) It should meet the following tests:(a) Organizational Test – requires that the

corporation or association’s constitutivedocuments exclusively limit its purposesto one or more of those described inparagraph (E) of Section 30 of the 1997NIRC.

(b) Operational Test – mandates that theregular activities of the corporation orassociation be exclusively devoted to

the accomplishment of the purposesspecified in paragraph (E) of Section 30of the 1997 NIRC, as amended. Acorporation or association fails to meetthis test if a substantial part of itsoperations may be considered “activitiesconducted for profit”.

(3) All the net income or assets of thecorporation or association must be devotedto its purpose/s and no part of its netincome or asset accrues to or benefits anymember or specified person.

(4) It must not be a branch of a foreign non-stock, non-profit corporation.

[RMO No. 20-2013]

TAXATION OF PARTNERSHIPS

CLASSIFICATION OF PARTNERSHIPS FORTAX PURPOSES(1) General Professional Partnerships (GPP)–

partnerships formed by persons for the sole

purpose of exercising their commonprofession, no part of the income of which isderived from engaging in any trade orbusiness. A GPP is exempt from incometax. It is, however, required to file a taxreturn for its income for the purpose offurnishing information as to the share in thegains or profits that each partner shallinclude in his individual tax return.

(2) Other Partnerships (or General Co- partnerships) – partnerships wherein all orpart of their income is derived from the

conduct of trade or business. An ordinarybusiness partnership is considered as acorporation and is thus subject to corporatetax of 30%.

Other Partnerships (or general co-partnerships)

Rules:(1) The partnership is subject to the same rules

on corporations (capital gains tax, final taxon passive income, normal tax, minimumcorporate income tax [MCIT] and grossincome tax [GIT]), but is not subject to the

improperly accumulated earnings tax [IAET].The partnership must file quarterly andyear-end income tax returns.

(2) The taxable income of the partnership, lessthe normal corporate income tax (30%)thereon, is the distributable net income ofthe partnership.

The share of a partner in the partnership’sdistributable net income of a year shall bedeemed to have been actually or constructivelyreceived by the partners in the same taxableyear and shall be taxed to them in their

individual capacity, whether actually distributedor not. [Sec. 73(D)] Such share will be subjectedto a final tax of 10% to be withheld by thepartnership. [Sec. 24(B)(2)]




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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 taxWhen the co-ownership’s activities are limitedmerely to the preservation of the co-ownedproperty and to the collection of the incomefrom the property. The income derived by a co-owner from the property shall be reported in hisindividual tax return regardless of whether suchincome is actually or constructively received.

When Co-ownership is subject to taxThe following circumstances would render a co-

ownership subject to a corporate income tax: (a)When a co-ownership is formed or establishedvoluntarily, or upon agreement of the parties;(b) When the individual co-owner reinvested hisshare, and (c) When the inherited propertyremained undivided for more than ten years,and no attempt was ever made to divide tosame among the co-heirs, nor was the propertyunder administration proceedings nor held intrust, the property should be considered asowned by an unregistered partnership.

Automatically converted into an unregistered

partnership the moment the said common properties and/or the incomes derived fromthem are used as a common fund with intent to produce profits for the heirs in proportion totheir respective shares in the inheritance asdetermined in a project partition either dulyexecuted in an extrajudicial settlement orapproved by the court in the correspondingtestate or intestate proceeding. [Ona v. CIR,May, 25 1972]

Joint Venture and Consortium

To constitute a” joint venture,” certain factorsare essential. Each party to the venture mustmake a contribution, not necessarily of capital,but by way of services, skill, knowledge, materialor money; profits must be shared among theparties; there must be a joint proprietaryinterest and right of mutual control over thesubject matter of the enterprise; and usually,there is single business transaction.

An unincorporated joint venture is taxed likes acorporation. The share of the joint venturepartners will no longer be taxable to thembecause they partake of dividends if paid to adomestic or resident corporation. However, anunincorporated joint venture formed for the

purpose of undertaking a construction project orengaging in petroleum operations pursuant tothe consortium agreement with the PhilippineGovernment is not subject to the corporateincome tax. Only the joint venture partners willbe taxed on their respective shares in theincome of the joint ventures.

Two elements necessary to exempt a joint ventureor consortium from tax(a) The joint venture must be an unincorporated

entity formed by two or more persons(b) The joint venture was formed for the purpose

of undertaking a construction project, orengaging in the petroleum and other energyoperations with operating contract with thegovernment.

TAXATION OF GENERALPROFESSIONALPARTNERSHIPS

RULES(1) A GPP is a partnership formed by persons for

the purpose of exercising their commonprofession, no part of the income of which isderived from engaging in trade or business.A GPP as such shall not be subject to theincome tax . It is not a taxable entity forincome tax purposes.

(2) The partners shall only be liable for income taxonly in their separate and individualcapacities.

(3) For purposes of computing the distributiveshare of the partners, the net income of theGPP shall be computed in the same manneras a corporation.

(4) Each partner shall report as gross income hisdistributive share, actually or constructivelyreceived, in the net income of thepartnership. (5) The distributive share of a partner (actual or constructive) shall besubject to a creditable withholding incometax of 10% if the amount share is not morethan P720,000 and 15% if the amount of theshare is more than P720,000. (RR 2- 1998)




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(6) If the partnership sustains a net operatingloss, the partners shall be entitled to deducttheir respective shares in the net operatingloss from their individual gross income.

GPP is not a taxable entity

(1) The GPP is deemed to be no more than amere mechanism or a flow-through entity inthe generation of income by, and theultimate mechanism distribution of suchincome to the individual partners. [Tan v.Commissioner, Oct. 3, 1994]

(2) But the partnership itself is required to fileincome tax returns for the purpose offurnishing information as to the share in thegains or profits which each partner shallinclude in his individual return. (RR 2- 1998)

(3) The share of an individual partner in the net

profit of a general professional partnershipis deemed to have been actually orconstructively received by the partner in thesame taxable year in which such partnershipnet income was earned, and shall be taxedto them in their individual capacities,whether actually distributed or not, at thegraduated income tax ranging from 5% to32%.

Thus, the principle of constructive receipt ofincome or profit is being applied toundistributed profits of GPPs. The payment

[to the partners] of such tax-paid profits inanother year should no longer be liable toincome tax. (Mamalateo)

WITHHOLDING TAX

CONCEPTWithholding tax is a method of collectingincome tax in advance from the taxable incomeof the recipient of income. It is a systematic wayof collecting taxes at source, an indispensablemethod of collecting taxes to ensure adequate

revenue for the government.

The withholding of income tax on compensationincome, on certain income payments made toresident taxpayers, and on income paymentsmade to non-resident taxpayers is veryimportant for all taxpayers, because theobligation to withhold and remit the tax ismandatory and prescribed by law.

In the operation of the withholding tax system,the payee is the taxpayer, the person on whomthe tax is imposed, while the payor, a separateentity, acts no more than an agent of thegovernment for the collection of the tax in orderto ensure its payment. The amount thereby

used to settle the tax liability is deemed sourcedfrom the proceeds constitutive of the tax base.In an ad valorem tax, the tax paid or withheld isnot deducted from the tax base, except whenthe law clearly spells out in defining the taxbase.

The duty to withhold is different from the dutyto pay income tax. The revenue officersgenerally disallow the expenses claimed asdeduction from gross income, if no withholdingof tax as required by law or the regulations was

withheld and remitted to the BIR within theprescribed dates.

In addition, the withholding tax that shouldhave been withheld and remitted to the BIR aswell as the penalties for non-, late or erroneouspayment of the withholding tax such assurcharges and deficiency interest are assessedby the BIR. [Mamalateo]

Withholding Agent Any person or entity who is required to deductand remit the taxes withheld to the

government.(a) In general, any juridical person, whether or

not engaged in trade or business;(b) An individual, with respect to payments

made in connection with his trade orbusiness. However, insofar as taxable sale,exchange or transfer of real property isconcerned, individual buyers who are notengaged in trade or business are alsoconstituted as withholding agents. In anycase, no Certificate Authorizing Registration(CAR)/Tax Clearance Certificate (TCL) shall

be issued to the buyer unless thewithholding tax due on the sale, transfer orexchange of real property has been dulypaid; ac. All government offices, includingGOCCs, as well as local government units.




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All income payments which are required to besubjected to withholding tax shall be subject tothe corresponding withholding tax rate to bewithheld by the person having control over thepayment and who, at the same time, claims theexpenses. [RR 30-2003]

Duties and Obligations of the Withholding Agent(a) To Register - withholding agent is required

to register within ten (10) days afteracquiring such status with the RevenueDistrict office having jurisdiction where thebusiness is located

(b) To Deduct and Withhold - withholding agentis required to deduct tax from all moneypayments subject to withholding tax

(c) To Remit the Tax Withheld - withholdingagent is required to remit tax withheld at

the time prescribed by law and regulations(d) To File Annual Return - withholding agent isrequired to file the corresponding AnnualInformation Return at the time prescribedby law and regulations

(e) To Issue Withholding Tax Certificates -withholding agent shall furnish WithholdingTax Certificates to recipient of incomepayments subject to withholding [Available,BIR Website]

(f) To submit an alphabetical list of employeesand list of payees on income paymentssubject to creditable and final withholding

taxes which are required to be attached asintegral part of the Annual InformationReturns (BIR Form No. 1604-CF/1604-E)and Monthly Remittance Returns (BIR FormNo. 1601-C, etc.). [RR No. 1-2014, as clarifiedby RMC No. 5-2014]

(g) For hospitals and clinics, to submit thenames and addresses of medicalpractitioners in the following classifications,every 15th day after the end of eachcalendar quarter, to the Collection Divisionof the Revenue Region for non-large

taxpayers and at the Large TaxpayersDocument Processing and QualityAssurance Division (LTDP&QAD) in theNational Office or Large Taxpayers DistrictOffice (LTDO) in the Region for largetaxpayers, where such hospital or clinic isregistered, using the prescribed format. [RRNo. 14-2013]

(h) In cases covered by substituted filing, tofurnish each employee with the originalcopy of Certificate of Compensation/TaxWithheld (BIR Form No. 2316) and submitto the BIR the duplicate copy not later thanFebruary 28 following the close of the

calendar year.

Withholding agents shall require all individualsand entities claiming exemption fromimposition of taxes on income and,consequently, from withholding taxes to providea copy of a valid, current and subsisting taxexemption certificate or ruling, as per existingadministrative issuances and any issuance thatmay be issued from time to time, beforepayment of the related income. The withholdingagent’s failure to withhold notwithstanding the

lack of tax exemption certificate or ruling shallcause the imposition of penalties under Section251 and other pertinent Sections of the 1997 TaxCode. [RMC No. 8-2014]

KINDSWithholding of final tax of certain incomes

Subject to rules and regulations the Secretary ofFinance may promulgate, upon therecommendation of the Commissioner,requiring the filing of income tax return bycertain income payees, the tax imposed orprescribed by specific section of the NIRC on

specified items of income shall be withheld bypayor-corporation and/or person and paid inthe same manner and subject to the sameconditions as provided in Section 58 of theNIRC.

Withholding of creditable tax at source

The Secretary of Finance may, upon therecommendation of the Commissioner, requirethe withholding of a tax on the items of incomepayable to natural or juridical persons, residingin the Philippines, by payor-corporation/persons

as provided for by law, at the rate of not lessthan one percent (1%) but not more than thirty-two percent(32%), which shall be creditedagainst the income tax liability of the taxpayerfor the taxable year.




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Withholding of Creditable Tax (RR 2-98)(a) Under the creditable withholding tax system,

taxes withheld on certain income paymentsare intended to equal or at least approximatethe tax due of the payee on said income.

(b) The income recipient is still required to file

an income tax return, to report the incomeand/or pay the difference between the taxwithheld and the tax due on the income.

(c) Taxes withheld on income payments coveredby the expanded withholding tax andcompensation income are creditable innature.

WITHHOLDING OF VAT(1) On gross payments for the purchase of goods

(2) On gross payments for the purchase ofservices

(3) Payments made to government public workscontractors

(4) Payments for lease or use of property orproperty rights to non-resident owners

FILING OF RETURN AND PAYMENT OFTAXES WITHHELD

Where to file and pay:

(1) Authorized agent bank;(2) Collection Agent;(3) the duly authorized Treasurer of the city or

municipality where the employer has his

legal residence or principal place ofbusiness, or in case the employer is acorporation, where the principal office islocated; or

(4) As Commissioner otherwise permits.

Period for filing and payment:

(a) The return shall be filed and the paymentmade within twenty-five (25) days from theclose of each calendar quarter.

(b) The Commissioner may, with the approval ofthe Secretary of Finance, require the

employers to pay or deposit the taxesdeducted and withheld at more frequentintervals, in cases where such requirement isdeemed necessary to protect the interest ofthe Government.

Taxes as Special Fund in Trust

The taxes deducted and withheld by employersshall be held in a special fund in trust for theGovernment until the same are paid to the saidcollecting officers.

Return and payment in case of government

employees

If the employer is the Government of thePhilippines or any political subdivision, agencyor instrumentality thereof, the return of theamount deducted and withheld upon any wageshall be made by the officer or employee havingcontrol of the payment of such wage, or by anyofficer or employee duly designated for thepurpose.

Statements and returns

Every employer required to deduct and withholda tax shall:(1) Furnish to each such employee in respect of

his employment a written statement confirming the wages paid by the employerto such employee during the calendar year,and the amount of tax deducted andwithheld and such other information as theCommissioner may prescribe(a) During the calendar year, on or before

January thirty-first (31st) of thesucceeding yea; or

(b) If his employment is terminated before

the close of such calendar year, on thesame day of which the last payment ofwages is made

(2) Submit to the Commissioner an annualinformation return on or before Januarythirty-first (31st) of the succeeding yearcontaining:(a) A list of employees;(b) The total amount of compensation

income of each employee;(c) The total amount of taxes withheld

therefrom during the year, accompanied

by copies of the written statementsfurnished to employees, and such otherinformation as may be deemednecessary.

The Commissioner may grant to any employer areasonable extension of time to furnish andsubmit the statements and returns required.




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sales based on the gross selling price orfair market value as determined inaccordance with Sec. 6(E) of the NIRC,whichever is higher

(8) Income Payments to a Resident ForeignCorporation

(a)

Offshore Banking Units(b) Tax on branch Profit Remittances(c) Interest on any currency bank deposits

and yield or any other monetary benefitfrom deposit substitute and from trustfunds and similar arrangements androyalties derived from sources withinthe Philippines

(d) Interest income on FCDU(e) Income derived by a depository bank

under the expanded foreign currencydeposits system from foreign currency

transactions with local commercialbanks(9) Income Derived from all Sources Within the

Philippines by a Non-Resident ForeignCorporation(a) Gross income from all sources within

the Philippines such as interest,dividends, rents, royalties, salaries,premiums (except re-insurancepremiums), annuities, emoluments orother fixed determinable annual,periodic or casual gains, profits andincome or capital gains

(b)

Gross income from all sources withinthe Philippines derived by a non-resident cinematographic film owner,lessor and distributor

(c) On the gross rentals, lease and charterfees derived by a non-resident owner orlessor of vessels from leases or chartersto Filipino citizens or corporations asapproved by the Maritime IndustryAuthority

(d) On the gross rentals, charter and otherfees derived by a non-resident lessor of

aircraft, machineries and otherequipment

(e) Interest on foreign loans contracted onor after August 1, 1986

(10) Fringe Benefits Granted to the Employee(except Rank and File)

Goods, services or other benefits furnishedor granted in cash or in kind by an employerto an individual employee (except rank and

file) such as but not limited to the following:(a) Housing(b) Vehicle of any kind(c) Interest on loans(d) Expenses for foreign travel(e) Holiday and vacation expenses(f) Educational assistance to employees or

his dependents(g) Membership fees, dues and other

expense in social and athletic clubs orother similar organizations- Health insurance

(h)

Informers Reward

CREDITABLE WITHHOLDING TAXTaxes withheld on certain income payments areintended to equal or at least approximate thetax due of the payee on the income. The incomerecipient is still required to file his income taxreturn as prescribed in Section 51 of the NIRC,wither to report the income and/or pay thedifference between the tax withheld and the taxdue on the income.

Expanded Withholding Tax

(a)

a kind of withholding tax which is prescribedon certain income payments and iscreditable against the income tax due of thepayee for the taxable quarter/year in whichthe particular income was earned.

(b) An income payment is subject to theexpanded withholding tax if the followingconditions concur:(i) An expense is paid or payable by the

taxpayer, which is income to therecipient thereof subject to income tax;

(ii) The income is fixed or determinable at

the time of payment;(iii) The income is one of the income

payments listed in the regulations thatis subject to withholding tax;

(iv) The income recipient is a resident of thePhilippines liable to income tax; and

(v) The payor-withholding agent is also aresident of the Philippines.




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Income payments subject to Expanded

Withholding Tax:

(1) Professional fees / talent fees for servicesrendered by the following individuals:(a) Those individually engaged in the

practice of profession or callings

(b)

Professional entertainers such as butnot limited to actors and actresses,singers and emcees

(c) Professional athletes includingbasketball players, pelotaris and jockeys

(d) Directors involved in movies, stage,radio, television and musical directors

(e) Insurance agents and insuranceadjusters

(f) Management and technical consultants(g) Bookkeeping agents and agencies(h) Other recipient of talent fees

(i)

Fees of directors who are not employeesof the company paying such fees whoseduties are confined to attendance artand participation in the meetings of theBoard of Directors

(2) Professional fees, talent fees, etc forservices of taxable juridical persons

(3) Rental of real property used in business

(4) Rental of personal properties in excess of P10,000 annually

(5) Rental of poles, satellites and transmissionfacilities

(6) Rental of billboards

(7)

Cinematographic film rentals and otherpayments

(8) Income payments to certain contractors

(a) General engineering contractors(b) General building contractors(c) Specialty contractors(d) Other contractors like:

(i) Transportation contractors whichinclude common carriers for thecarriage of goods and merchandiseof whatever kind by land, air orwater, where the gross payments by

the payor to the same payeeamounts to at least two thousandpesos (P2,000) per month,regardless of the number ofshipments during the month

(ii) Filling, demolition and salvage workcontractors and operators of minedrilling apparatus

(iii) Operators of dockyards

(iv) Persons engaged in the installationof water system, and gas or electriclight, hear or power

(v) Operators of stevedoring,warehousing or forwardingestablishments

(vi)

Printers, bookbinders, lithographersand publishers, except thoseprincipally engaged in thepublication or printing of anynewspaper, magazine, review orbulletin which appears at regularintervals, with fixed prices forsubscription and sale

(vii) Advertising agencies, exclusive ofpayments to media

(viii) Independent producers oftelevision, radio and stage

performances or shows (ix) Independent producers of "jingles"

(x) Labor recruiting agencies

(xi) Persons engaged in the installationof elevators, central air conditioningunits, computer machines and otherequipment and machineries and themaintenance services thereon

(xii) Messengerial, janitorial, security,private detective and other businessagencies

(xiii) Persons engaged in landscapingservices

(xiv)

Persons engaged in the collectionand disposal of garbage

(xv) TV and radio station operators onsale of TV and radio airtime, and

(xvi) TV and radio blocktimers on sale ofTV and radio commercial spots

(xvii) Persons engaged in the sale ofcomputer services, computerprogrammers, softwaredeveloper/designer, etc.

(9) Income distribution to the beneficiaries ofestates and trusts

(10)

Gross commission or service fees ofcustoms, insurance, stock, real estate,immigration and commercial brokers andfees of agents of professional entertainers

(11) Commission, rebates, discounts and othersimilar considerations paid/granted toindependent and exclusive distributors,medical/technical and sales representatives




PAGE 115

and marketing agents and sub-agents ofmulti level marketing companies

(12) Income payments to partners of generalprofessional partnerships

(13) Payments made to medical practitionersthrough a duly registered professional

partnership

(14) Payments for medical/dental/veterinaryservices thru hospitals/clinics/healthmaintenance organizations, including directpayments to service providers

(15) Gross selling price or total amount ofconsideration or its equivalent paid to theseller/owner for the sale, exchange ortransfer of real property

(16) Additional income payments to governmentpersonnel from importers, shipping andairline companies or their agents

(17)

Certain income payments made by creditcard companies

(18) Income payments made by the top 10,000private corporations to their purchase ofgoods and services from their local/residentsuppliers other than those covered by otherrates of withholding

(19) Income payments by government offices ontheir purchase of goods and services, fromlocal/resident suppliers

(20) Tolling fees paid to refineries

(21) Payments made by pre-need companies tofuneral parlors

(22)

Payments made to embalmers by funeralparlors

(23) Income payments made to suppliers ofagricultural products

(24) Income payments on purchases ofmineral, mineral products and quarryresources

Income payments to RESPs (i.e., real estateconsultants, real estate appraisers and realestate brokers) who passed the licensureexamination given by the Real Estate Service

under the Professional Regulations Commission(PRC) are classified as professional fees subjectto 10%/15% EWT.

On the other hand, income payments to RESPs(i.e., real estate consultants, real estateappraisers and real estate brokers) who failed ordid not take up the licensure examination givenby the Real Estate Service under the PRC are

classified as commission/brokerage fees subjectto 10% EWT. [RR No. 10-2013]

It shall be the duty and responsibility of thehospitals, clinics, HMOs and similarestablishments to withhold and remit taxes due

on the professional fees of their respectiveaccredited medical practitioners, paid bypatients who were admitted and confined tosuch hospitals and clinics. [RR No. 14-2013]

The withholding tax on professional fees paid tomedical practitioners shall not apply wheneverthere is proof that no professional fee has in factbeen charged by the medical practitioner andpaid by his patient, as shown in a sworndeclaration jointly executed by the medicalpractitioner and his patient. [RR No. 14-2013]

Withholding tax on compensation

The tax withheld from income payments toindividuals arising from an employer-employeerelationship.

Compensation is any remuneration received forservices performed by an employee from hisemployer under an employee-employerrelationship.

The different kinds of compensation are:

(1) Regular compensation - includes basic

salary, fixed allowances for representation,transportation and others paid to anemployee

(2) Supplemental compensation - includespayments to an employee in addition to theregular compensation such as but notlimited to the following:(a) Overtime Pay(b) Fees, including director's fees(c) Commission(d) Profit Sharing(e) Monetized Vacation and Sick Leave

(f)

Fringe benefits received by rank & fileemployees

(g) Hazard Pay(h) Taxable 13th month pay and other

benefits(i) Other remunerations received from an

employee-employer relationship




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Exemptions from Withholding tax on

compensation:

Remuneration as an incident of employment (a) Retirement benefits received under RA 7641

(Retirement Pay Law) and those received byofficials and employees of private firms,

under a reasonable private benefit plan. (b) Any amount received by an official or

employee or by his heirs from the employerdue to death, sickness or other physicaldisability or for any cause beyond thecontrol of the said official or employee suchas retrenchment, redundancy or cessationof business

(c) Social security benefits, retirementgratuities, pensions and other similarbenefits

(d) Payment of benefits due or to become due

to any person residing in the Philippinesunder the law of the US administered USVeterans Administration

(e) Payment of benefits made under the SSSAct of 1954, as amended

(f) Benefits received from the GSIS Act of 1937,as amended, and the retirement gratuityreceived by the government employee

(g) Remuneration paid for agricultural labor

(h) Remuneration for domestic services

(i) Remuneration for casual labor not in thecourse of an employer's trade or business

(j) Compensation for services by a citizen or

resident of the Philippines for a foreigngovernment or an internationalorganization

(k) Payment for damages – actual, moral,exemplary damages received by anemployee or his heirs pursuant to a final judgment or compromise agreement arisingout of or related to an employer-employeerelationship.

(l) Proceeds of Life Insurance – the proceeds oflife insurance policies paid to the heirs orbeneficiaries upon the death of the insured,

whether in a single sum or otherwise;provided however, that interest paymentsagreed under the policy for the amountswhich are held by the insured under such anagreement shall be INCLUDED in the grossincome.

(m) Amount received by the insured as a returnof premium

(n) Compensation for injuries or sickness – amounts received through accident orhealth insurance or under Workmen’sCompensation Acts, as compensation forpersonal injuries or sickness, plus theamount of any damages received whether

by suit or agreement on account of suchinjuries or sickness.

(o) Income exempt under Treaty

(p) Thirteenth (13th) month pay and otherbenefits (not to exceed P 30,000)(i) Mandatory 1 month basic salary received

after the twelfth *12th) month pay(ii) Other benefits such as Christmas bonus,

productivity incentives, loyalty award, giftin cash or in kind and other benefits ofsimilar nature actually received byofficials and employees of bothgovernment and private offices including

the Additional Compensation Allowance(ACA) granted and paid to all officials andemployees of the Nations Government(NGAs) including State Universities andColleges (SUCs), Government-Owned-or-Controlled Corporations (GOCCs),Government Financial Institutions (GFIs)and Local Government Units (LGUs)

(a) De minimis benefits, given in excessof the ceilings prescribed inregulations, shall be taxable to therecipient –employee only if suchexcess is beyond the P30,000threshold.

(q) GSIS, SSS, Medicare and othercontributions – GSIS, SSS, Medicare andPag-Ibig contributions, and union dues ofindividual employees

(r) Compensation income of MWEs who workin the private sector and being paid thestatutory minimum wage (SMW), as fixed byRegional Tripartitie Wage and ProductivityBoard (RTWPB)/National Wages andProductivity Commission (NWPC),applicable to the place where he/she is

assigned(s) Compensation income of employees in the

public sector with compensation income ofnot more than the SMW in the non-agricultural sector, as fixed byRTWPB/NWPC, applicable to the placewhere he/she is assigned.




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TIMING OF WITHHOLDINGThe obligation of the payor to deduct andwithhold the tax arises at the time an incomepayment is paid or payable, or the incomepayment is accrued or recorded as an expenseor asset, whichever is applicable, in the payor’s

books, whichever comes first. The term“payable” refers to the date the obligationbecomes due, demandable or legallyenforceable.

Where income is not yet paid or payable but thesame has been recorded as an expense or asset,whichever is applicable, in the payor’s books,the obligation to withhold shall arise in the lastmonth of the return period in which the same isclaimed as an expense or amortized for taxpurposes. [Mamalateo]




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Estate Tax

Estate tax laws rest in their essence upon theprinciple that death is the generating sourcefrom which the taxing power takes its being,and that it is the power to transmit or thetransmission from the dead to the living onwhich the tax is more immediately based.[Lorenzo v. Posadas, 1937 ]

DEFINITION(a) A graduated tax imposed upon the privilege

of the decedent to transmit property at deathand is based on the net estate, considered asa unit, and it is determined by subtractingfrom the gross estate the allowabledeductions.

(b) Tax on the right to transmit property at

death and on certain transfers which aremade by the statute the equivalent oftestamentary dispositions and is measuredby the value of property at time of death.

IN SEC. 84, NIRC, THE FOLLOWING ARE THEAPPLICABLE TAX RATES:

Over But not over Tax is PlusOf the

excess over

200,000 Exempt

200,000 500,000 0 5% 200,000

500,000 2 million 15,000 8% 500,0002 million 5 million 135,000 11% 2 million

5 million 10 million 465,000 15% 5 million

10 million and over 1,215,000 20% 10 million

NATURELorenzo v Posadas (1937): It is in reality an exciseor privilege tax imposed on the right to succeedto, receive, or take property by or under a will orthe intestacy law, or deed, grant, or gift tobecome operative at or after death.

JUSTIFICATION (THEORIES) FOR THEIMPOSITION OF ESTATE TAX(1) Benefit received theory – The State collects

the tax because of the services it renders inthe distribution of the estate of the decedent,either by law or in accordance with his will.

(2)

Privilege theory or state partnership theory – Succession to the property of a deceasedperson is not a right but a privilege grantedby the State and consequently, thelegislature can constitutionally burden suchsuccession with a tax. The State collects thetax because of the protection it provides inthe acquisition of large estates. Hence, theState is a “silent or passive partner” in theaccumulation of said large property.

(3) Ability to pay theory – Receipt of inheritance,which is in the nature of unearned wealth or

windfall, places assets into the hands of theheirs and beneficiaries. This creates anability to pay the tax and thus contributes togovernment income.

(4) Redistribution of wealth theory – Receipt ofinheritance is a contributing factor to theinequalities in wealth and income. Theimposition of estate tax reduces the propertyreceived by the successor, which helpspromote a more equitable distribution ofwealth in society. The tax base is the value ofthe property and the progressive scheme of

taxation is precisely motivated by the desireto mitigate the evils of inheritance in thepresent form. The taxes paid by rich peopleare programmed for disbursement byCongress for the benefit of the poor in termson social services, education, health, etc.

PURPOSE OR OBJECT

PURPOSE OF ESTATE TAX(1) The object of estate tax is to tax the shifting

of economic benefits and enjoyment of

property from the dead to the living.(2) Death taxes are imposed to give addedincome to the government.




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TIME AND TRANSFER OFPROPERTIESDecedent’s interest is to its extent at the time ofhis death. [Sec. 85(A), NIRC ]

Art. 777, Civil Code. The rights to the successionare transmitted from the moment of the deathof the decedent.

Sec. 3, RR 2-2003. THE LAW THAT GOVERNSTHE IMPOSITION OF ESTATE TAX. It is a well-settled rule that estate taxation is governed bythe statute in force at the time of death of thedecedent. The estate tax accrues as of the deathof the decedent and the accrual of the tax isdistinct from the obligation to pay the same.Upon the death of the decedent, succession

takes place and the right of the State to tax theprivilege to transmit the estate vests instantlyupon death.

Time of death governs:(1) The determination of the extent of the

decedent’s interest for computing hisgross estate.

(2) The statute that governs estate taxation.(3) The accrual of the estate tax.

TAXABLE TRANSFERS(1) Transfers Mortis Causa – Gratuitous transfersthat take effect after death, either testate orintestate.

(2) Transfers Inter Vivos – Generally attractdonor’s tax. However, certain transfers intervivos are treated by law as substitutes fortestamentary dispositions (i.e., transferswhich are inter vivos in form but mortis causa in substance) where certain circumstancesprovided by law are present, and areaccordingly included in the computation ofthe gross estate in order to arrive at the

proper estate tax liability. These are:(a) Transfers in contemplation of death [Sec.

85(B), NIRC ](b) Transfer with retention or reservation of

certain rights [Sec. 85(B), NIRC ](c) Revocable transfers [Sec. 85(C), NIRC ](d) Transfers of property arising under

general power of appointment [Sec.85(D), NIRC ]

(e) Transfers for insufficient consideration[Sec. 85(G), NIRC ]

Dison v Posadas (1932): The law presumes thatsuch gifts have been made in anticipation ofinheritance, devise, bequest or gift mortis causa,

when the donee, after the death of the donorproves to be his heir, devisee or donee mortiscausa, for the purpose of evading the tax, and itis to prevent this that it provides that they shallbe added to the resulting amount.

CLASSIFICATION OFDECEDENTThe decedent may be classified into:(1) Citizen,(2) Resident alien; or(3) Non-resident alien.

DEFINITION OF RESIDENCECorre v Tan Corre (1956): It refers to thepermanent home, the place to which wheneverabsent, for business or pleasure, one intends toreturn, and depends on facts andcircumstances, in the sense that they discloseintent.

Collector v Lara (1958); Vellila v Posadas (1935): It is, therefore, not necessarily the actual placeof residence. The term “residence” and

“domicile” are synonymous and are usedinterchangeably without distinction.

Vellila v. Posadas (1935): To effect theabandonment of one’s domicile, there must bea deliberate and provable choice of a newdomicile, coupled with actual residence in theplace chosen, with a declared or provable intentthat it should be one’s fixed and permanentplace of abode, one’s home. Note: In this case,the Supreme Court held that the motive of thedecedent in leaving the Philippines was to avoidconfinement in a Leper Colony and not effect achange in domicile.




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GROSS ESTATE AND NETESTATE

GROSS ESTATESec. 104, NIRC. DEFINITIONS. For purposes of

this Title, the terms “gross estate” and “gifts”include real and personal property, whethertangible or intangible, or mixed, whereversituated x x x

The gross estate of a decedent who is a citizenor resident alien includes the following,wherever these may be situated:(1) Real Property(2) Personal Property

(a) Intangible(b) Tangible

(3) Mixed

For a non-resident decedent who is not aFilipino citizen at the time of his death, his realand personal property situated outside thePhilippines shall not be included as part of hisgross estate. Thus, only the following areincluded in the gross estate:(1) Real property in the Philippines(2) Tangible personal property in the

Philippines(3) Intangible personal property in the

Philippines, unless excluded under the

reciprocity rule

RECIPROCITY RULEThere is reciprocity if the foreign country ofwhich the decedent was a citizen and residentat the time of his death:(a) Did not impose a transfer tax of any

character, in respect of intangible personalproperty of citizens of the Philippines notresiding in that foreign country; OR

(b) Allowed a similar exemption from transfertax in respect of intangible personal property

owned by citizens of the Philippines notresiding in that country

Note: In sum, both states must exemptnonresidents (citizens of the other state) fromtransfer taxes in respect of intangible personalproperty.

CIR v Fisher (1961): For the reciprocity rule toapply, there must be TOTAL reciprocity. [Forinstance,] the reciprocity rule will not apply ifCalifornia imposes only the inheritance taxwhile the Philippines imposes both estate andinheritance taxes. Reciprocity has to be total.

Collector v. Campos-Rueda (1971); Collector v

Lara (1958): Reciprocity in exemption does notrequire the “foreign country” to possessinternational personality in the traditional sense(i.e., compliance with the requisites ofstatehood). Thus, Tangier, Morocco andCalifornia, a state in the American Union wereheld to be foreign countries within the meaningof Section 104.

Collector v Lara (1958): When the owner ofpersonal 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 personor property within the reach of the Philippines,the reason for a single place of taxation no longerobtains. His property in the Philippines enjoys

the protection of the government so that the

right to collect the estate tax cannot be

questioned.

INTANGIBLE PROPERTIES WHICH ARECONSIDERED SITUATED IN THE

PHILIPPINES(1) Franchise which must be exercised in the

Philippines(2) Shares, obligations or bonds issued by any

corporation or sociedad anonima organizedor constituted in the Philippines inaccordance with its laws

(3) Shares, obligations or bonds issued by anyforeign corporation 85% of the business ofwhich is located in the Philippines

(4) Shares, obligations or bonds issued by anyforeign corporation if such shares,

obligations or bonds have acquired abusiness situs in the Philippines(5) Shares or rights in any partnership, business

or industry established in the Philippines[Sec. 104, NIRC ]




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SUMMARY OF RULES UNDER SEC. 104,NIRC

Citizen or Resident Alien Non-resident Alien

Real property in the Philippines

Included Included

Real property outside the Philippines

Included Not included

Tangible personal property in the Philippines

Included Included

Tangible personal property outside the Philippines

Included Not included

Intangible personal property in the Philippines

Included Included, unlessexempted on the basis

of the principle of

reciprocity

Intangible personal property outside the

Philippines

Included Included

NET ESTATEValue of the estate after all deductions havebeen made against the gross estate; subject tothe graduated tax rates. [Sec. 6, RR 2-2003]

Net estate is arrived at using the followingformula:

The net estate is the basis for determining thetax rate.

DETERMINATION OF GROSSESTATE AND NET ESTATE

GROSS ESTATE is determined by the value ofthe properties owned by the decedent at the

time of his death.

Sec. 85, NIRC. GROSS ESTATE. The value of thegross estate of the decedent shall bedetermined by including the value at the time ofhis death of all property, real or personal,tangible or intangible, wherever situated:Provided, however, that in the case of anonresident decedent who at the time of hisdeath was not a citizen of the Philippines, onlythat part of the entire gross estate which issituated in the Philippines shall be included in

his taxable estate.

General rule: Gross estate is determined byincluding the value of all of the decedent’sproperties, wherever situated, at the time of hisdeath.

Exception: The gross estate shall be determinedby including only that part of the estate of thedecedent that is situated in the Philippines if thedecedent is a nonresident who at the time of hisdeath was not a Filipino citizen.

DETERMINATION OF THE VALUE OFTHE ESTATE [Sec. 5, RR 2-2003] For properties, the general rule is that the estateshall be appraised at its fair market value as ofthe time of death.

For real property, the FMV shall be the fairmarket value as determined by theCommissioner or the FMV as shown in theschedule of values fixed by the provincial andcity assessors, whichever is HIGHER.

For personal property, FMV at the time of

death

Manila Railroad Co. v Velasquez (1915): Themarket value of property is the price which it willbring when it is offered for sale by one whodesire, but is not obliged to sell it, and is boughtby one who is under no necessity of having it.




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For shares of stocks, the following rules apply:(1) Unlisted common shares – valued based

on their book value. In determining thebook value of common shares, appraisalsurplus shall not be considered as well asthe value assigned to preferred shares, if

there are any.(2) Unlisted preferred shares – valued at par

value(3) Listed shares – FMV shall be based on the

arithmetic mean between the highest andlowest quotation on the date of death. Ifnone is available, then on the datenearest the date of death.

For right to usufruct, use or habitation, as wellas that of annuity, the probable life of thebeneficiary in accordance with the latest basicstandard mortality table shall be taken intoaccount.

NET ESTATE is determined by deducting thefollowing from the gross estate of the decedent:In case of a citizen or a resident:(1) Expenses, losses, indebtedness, and taxes;(2) Properties previously taxed;(3) Transfers for public use;(4) The family home;(5) Standard deduction;(6) Medical expenses;(7) Amount received by heirs under RA 4917;

In case of a nonresident foreign individual: Expenses, losses, indebtedness, and taxes; Properties previously taxed; Transfers for public use;

The net share of the surviving spouse in theconjugal partnership property as diminished bythe obligations properly chargeable to suchproperty shall be deducted from the net estateof the decedent [Sec. 86, NIRC ].

COMPOSITION OF THE GROSSESTATEThe following properties, rights and interestsare included in the gross estate at the time ofthe decedent’s death: (1) As to resident (citizen or alien) or citizen

(resident or non-resident)(a) Real property wherever situated

(b) Personal property (tangible or intangible)wherever situated

(2) As to non-resident alien(a) Real property in the Philippines(b) Tangible personal property in the

Philippines

(c)

Intangible personal property in thePhilippines, unless excluded on the basisof reciprocity under Section 104 NIRC (seeabove)

ITEMS TO BE INCLUDED IN GROSSESTATE

DECEDENT’S GROSS ESTATE (1) Property owned by the decedent actually and

physically present in his estate at the time ofhis death;

(2)

Decedent’s interest; (3) Properties not physically in the estate, such

as:(a) Transfers in contemplation of death [Sec.

85(B), NIRC ];(b) Transfers with retention or reservation of

certain rights [Sec. 85(B), NIRC ];(c) Revocable transfers [Sec. 85(C), NIRC ];(d) Property passing under general power of

appointment [Sec. 85(D), NIRC ];(e) Transfers for insufficient consideration

[Sec. 85(G), NIRC ];(f) Proceeds of life insurance [Sec. 85(E),

NIRC ];(g) Claims against insolvent persons; and(h) Capital of the surviving spouse [Sec.

85(H), NIRC ].

Property Owned by the Decedent Actuallyand Physically Present in His Estate at theTime of DeathLand, buildings, shares of stock, vehicles, bankdeposits, etc.

Decedent’s Interest

Decedent’s interest refers to the extent of equityor ownership participation of the decedent onany property physically existing and present inthe gross estate, whether or not in hispossession, control or dominion; also refers tothe value of any interest in property owned orpossessed by the decedent at the time of hisdeath (interest having value or capable of beingvalue or transferred. [cf. Sec. 85(A), NIRC ]




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Examples: dividends declared before his deathbut received after death; partnership profitswhich have accrued before his death.

Properties Not Physically in the EstateThese have already been transferred during the

lifetime of the decedent but are still subject topayment of estate tax), such as the following:

Transfers in Contemplation of Death

The transfers referred to are those where themotivating factor or controlling motive is thethought of death, regardless of whether thetransferor was near the possibility of death ornot. Note: There is no transfer in contemplationof death when the transfer of property is a bonafide sale for an adequate and full considerationin money or money’s worth [Sec. 85(B), NIRC ].

US v Wells (1931): The mere fact that deathensues even shortly after the gift does notdetermine absolutely that it is in contemplationof death. The question, necessarily, is as to thestate of mind of the donor. Furthermore, it is thecontemplation of death, not necessarilycontemplation of imminent death, to which thestatute refers.

Transfers with retention or reservation of certain

rights

It involves cases where the owner transfers his

property his lifetime but still retains economicbenefits during his life or for any period whichdoes not in fact end before his death.The rights retained or reserved include:(1) The possession or enjoyment of the

property;(2) The right to the income from the property;

or(3) The right, either alone or in conjunction with

any person, to designate the person whoshall possess or enjoy the property or theincome therefrom.

By reason of the restriction or encumbrance, thetransferee is incapable of freely enjoying anddisposing of the property until the transferor’sdeath, and the transfer may be regarded ashaving been intended to take effect inpossession or enjoyment at the transferor’sdeath.

Exception: Bona fide sale for an adequate andfull consideration.

Illustration:

X transfers his property to Y in naked ownershipand 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 duringZ’s life, the value of the reversionary interest ofX at death is includible in his gross estate (seeArticles 756-757 of the Civil Code). The transferis taxable as intended to take effect at or afterdeath because the possibility of reversion to Xmakes Z’s interest conditional as long as X lives.

Revocable Transfers

Decedent’s transfer of any interest by trust orotherwise, where the enjoyment thereof wassubject at the date of his death to any changethrough the exercise of power by the decedentALONE or by the decedent IN CONJUNCTION

WITH ANY OTHER person, to alter, amend,

revoke, or terminate such transfer, OR wheresuch power which would bring the property inthe taxable estate is relinquished incontemplation of the decedent’s death [Sec.85(C )(1), NIRC ].


The power to alter, amend or revoke shall beconsidered to exist on the date of thedecedent’s death EVEN THOUGH: (a) The exercise of the power is subject to a

precedent giving of notice, orThe alteration, amendment or revocation takeseffect only on the expiration of a stated periodafter the exercise of the power, whether or noton or before the date of the decedent’s deathnotice has been given or the power has beenexercised.

If notice has not been given or the power hasnot been exercised before the date of his death,such notice shall be considered to have beengiven, or the power exercised, on the date of hisdeath.




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Property Passing under General Power of

Appointment

Power of appointment refers to the right todesignate the person or persons who willsucceed to the property of the prior decedent[Sec. 85(D), NIRC ].

When general. — The power of appointment isgeneral when the power of appointmentauthorizes the donee of the power to appointany person he pleases. The power may beexercised in favor of anybody including thedone-decedent. The donee of a general powerof appointment holds the appointed propertywith all the attributes of ownership, and, thus,the appointed property shall form part of thegross estate of the donee of the power upon hisdeath.

When special. — Special power of appointmentexists when the done can appoint only from arestricted or designated class of persons otherthan himself. Property transferred under aspecial power of appointment should beexcluded from the gross estate of the donee ofthe power because the done-decedent onlyholds the property in trust.

Gross estate shall include any property passedor transferred under a general power of

appointment exercised by the decedent:(1) By will, or(2) By deed executed in contemplation of, or

intended to take effect in possession orenjoyment at, or after his death, or

(3) By deed under which he has retained (for hislife or any period not ascertainable withoutreference to his death or for any period whichdoes not in fact end before his death):(a) the possession or enjoyment of, or the

right to the income from, the property, or(b) the right, either alone or in conjunction

with any person, to designate the personswho shall possess or enjoy the property orthe income therefrom [Sec. 85(D), NIRC ].


Two Kinds of Appointment and their Effects

:

General Special

As to nature. — DONEEhas power to appointany person he chooses

who shall possess orenjoy the propertywithout restriction

DONEE must appointsuccessor to theproperty only within a

limited group or classof persons

As to tax implications.

— Makes appointedproperty, for all legalintents, the property ofthe DONEE (includible

in his estate)

Not includible in thegross estate of theDONEE when he dies

As to effects. — DONEEholds the appointedproperty with all the

attributes ofownership, under theconcept of owner

DONEE holds theappointed property intrust, or under the

concept of trustee

Transfers for Insufficient Consideration

When a sale of transfer (other than a bona fidesales of property for an adequate and fullconsideration in money or money’s worth) wasmade for a price less than its fair market valueat the time of sale or transfer, the excess of thefair market value of the transferred property atthe time of death over the value of the

consideration received should be included in thegross estate [Sec. 85(G), NIRC ]..Case A: If bona fide sale – no value shall beincluded in the gross estateCase B: If not a bona fide sale - the excess of thefair market value at the time of death over thevalue of the consideration received by thedecedent shall form part of his gross estate.Case C: If inter vivos transfer is provenfictitious/simulated – total value of the propertyat the time of death included in the gross

estate.




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DEDUCTIONS FROM ESTATE[Sec. 86, NIRC ]

Resident or citizendecedent

Non-resident aliendecedent

Gross Estate

All property at the timeof death, whereversituated

Includes only that partof gross estate located

in the Philippines

Deductions

Ordinary deductions(1) Expenses, losses,indebtedness, taxes.

(a) Funeral expenses(b) Judicial expenses(c) Claims against

the estate

(d)

Claims againstinsolvent persons

(e) Unpaid mortgageand debt

(f) Taxes(g) Losses

(2) Vanishingdeductions(3) Transfers for publicuse(4) Amounts receivedunder R.A. 4917

Ordinary deductions(1) Proportionatedeductions forexpenses, losses,indebtedness, taxes.

(a) Funeral expenses(b) Judicial expenses

(c)

Claims againstthe estate

(d) Claims againstinsolvent persons

(e) Unpaid mortgageand debt

(f) Taxes(g) Losses

(2) Vanishingdeductions(3) Transfers for publicuse(4) Amounts receivedunder R.A. 4917

Special deductions

(a) Family home(b) Standard deduction(c) Medical expenses

Share in conjugalproperty

Share in conjugalproperty

Note: For non-resident aliens, this formula isused to compute for total allowable deductionsof the first six items above [Sec. 7(1), RR 2-2003]:

WHEN DEDUCTION NOT ALLOWED No deduction shall be allowed in the case of anon-resident decedent not a citizen of thePhilippines, 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 ofthe decedent’s death of that part of his grossestate NOT situated in the Philippines [Sec. 86(D), NIRC; Sec 7, RR 2-2003.]

ORDINARY DEDUCTIONS

EXPENSES, LOSSES, INDEBTEDNESS ANDTAXES

Funeral Expenses

Allowable deduction is not to exceed P200,000

and whichever is lower of:(a) The actual funeral expenses (whether or notpaid) up to the time of interment, or(b) An amount equal to 5% of the gross estate[Sec. 86 (A)(1), NIRC ].

Actual funeral expenses shall mean those whichare actually incurred in connection with theinterment or burial of the deceased and must bepaid out of the estate and not by another personor out of contributions from friends andrelatives. These must be duly supported byreceipts or invoices or other evidence to showthat they were actually incurred.

The unpaid portion of the funeral expensesincurred which is in excess of the P200,000threshold is NOT allowed to be claimed as adeduction under “claims against the estate”(see 1(c) below). [Sec. 6(A)(1), RR 02-2003]

Examples of Funeral Expenses

The term “funeral expenses” is not confined toits ordinary or usual meaning [RR 2-2003, Sec. 6(A)(1)].

(1)

The MOURNING APPAREL of the survivingspouse and unmarried minor children of thedeceased, bought and used on the occasionof the burial

(2) EXPENSES of the WAKE preceding theburial, including food and drinks

(3) PUBLICATION CHARGES for death notices




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(4) TELECOMMUNICATIONS EXPENSESincurred in informing relatives of thedeceased

(5) Cost of BURIAL PLOT, TOMBSTONES,MONUMENT or MAUSOLEUM but not theirupkeep. In case the deceased owns a family

estate or several burial lots, only the valuecorresponding to the plot where he is buriedis deductible

(6) INTERMENT and/or CREMATION FEES andCHARGES

(7) All other expenses incurred for theperformance of the RITES and CEREMONIESincident to interment

Expenses Not Deductible as FuneralExpenses

(1) Expenses incurred AFTER INTERMENT, suchas for prayers, masses, entertainment, or thelike

(2) Any portion of the funeral and burialexpenses BORNE or DEFRAYED byRELATIVES and FRIENDS of the deceased

(3) Medical expenses as of the last illness willnot form part of funeral expenses but shouldbe claimed as medical expenses.

Illustrations(1) If five percent (5%) of the gross estate is

P220,000 and the amount actually incurredis P215,000, the maximum amount that may

be deducted is only P200,000;(2) If five percent (5%) of the gross estate is P

100,000 and the total amount incurred isP150,000 where P20,000 thereof is stillunpaid, the only amount that can be claimedas deduction for funeral expenses isP100,000. The entire P50,000 excessamount consisting of P30,000 paid amountand P20,000 unpaid amount can no longerbe claimed as FUNERAL EXPENSES. Neithercan the P20,000 unpaid portion bededucted from the gross estate as CLAIMS

AGAINST THE ESTATE.

Judicial Expenses of Testamentary andintestate Proceedings

[Sec. 86 (A)(1), NIRC ]Allowable deductions are administrationexpenses essential in the settlement of theestate or necessarily incurred, such as but notlimited to the following:

(1) Inventory-taking or collection of the assetscomprising the estate, their administration,

(2) The payment of debts of the estate, as wellas the distribution of the estate among theheirs or those entitled thereto, DURING THESETTLEMENT OF THE ESTATE BUT NOT

BEYOND THE LAST DAY PRESCRIBED BYLAW, or the extension thereof, FOR THEFILING OF THE ESTATE TAX RETURN [Sec.6 (A)(2), RR 02-2003].

The expenses should be supported by receiptsor invoices or by a sworn statement of accountissued by the creditor.

CIR v. CTA, CTA and Pajonar (2000): Althoughthe Tax Code specifies “judicial expenses of thetestamentary and intestate proceedings”, thereis no reason why expenses incurred in theadministration and settlement of an estate inextrajudicial proceedings should not beallowed.

Attorney’s fees in order to be deductible fromthe gross estate must be essential to thecollection of assets, payment of debts or thedistribution of the property to the personsentitled thereto. The services for which the feesare charged must relate to the propersettlement of the estate. Attorney’s fees paid bythe heirs to their respective lawyers arising from

conflicting claims are not deductible as judicialexpenses. These expenses should be separatelyborne by them.

Examples of Judicial Expenses

(1) Actual judicial or court expenses(2) Fees of executor or administrator(3) Attorney’s fees (4) Expenses of administration such as:

(a) Accountant’s fees (b) Appraiser’s fees (c) Clerk hire

(d)

Costs of preserving and distributing theestate

(e) Costs of storing or maintaining propertyof the estate

(f) Brokerage fees for selling property of theestate




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Commissioner v. CA (2000): The notarial fee paid for the extrajudicial settlement isdeductible since such settlement effected adistribution of the estate to the lawful heirs.Attorney’s fees to be deductible from the grossestate must be essential to the collection of

assets, payment of debts or the distribution ofproperty to the persons entitled to it.

Claims Against the EstateClaims are debts or demands of a pecuniarynature which could have been enforced againstthe deceased in his lifetime and could havebeen reduced to simple money judgments [Sec.86 (A)(1), NIRC ].

It may arise out of contract, tort or operation oflaw. [Sec. 6 (A)(3), RR 2-2003]

Substantiation RequirementsSimple Loans(1) Duly notarized debt instrument at the time

the indebtedness was incurred, except forloans granted by financial institutions wherenotarization is not part of the businesspractice/policy of the financial institution-lender.

(2) Duly notarized Certification from thecreditor as to the unpaid balance of thedebt, including interest as of the time ofdeath.

(3)

Proof of financial capacity of the creditor tolend the amount at the time the loan wasgranted. In case the creditor is an individualwho is no longer required to file income taxreturns with the Bureau or a non-resident, aduly notarized Declaration by the creditor ofhis capacity to lend at the time when theloan was granted. For non-residentcreditors, the declaration must beauthenticated or certified by the taxauthority of the country where he is aresident.

(4)

A Statement under oath executed by theadministrator or executor of the estatereflecting the disposition of the proceeds ofthe loan, if the loan was contracted withinthree (3) years prior to the death of thedecedent.

Unpaid obligation arising from purchase ofgoods or services:(1) Documents evidencing the purchase of

goods or services.(2) Duly notarized certification from the

creditor as to the unpaid balance of the

debt, including interest as of the time ofdeath.

(3) Certified true copy of the latest auditedbalance sheet of the creditor with a detailedschedule of its receivable showing theunpaid balance of the decedent-debtor.

(4) If settlement is made through a testate orintestate proceeding, documents filed withthe Court evidencing the claim and thecorresponding Court Order approving theclaims, if already issued.

Requisites for Deductibility [Sec. 6 (A)(3), RR 2-2003] (1) Must be a PERSONAL OBLIGATION of the

deceased existing at the time of his death(except unpaid funeral expenses and unpaidmedical expenses, which are classified intotheir own separate categories)

(2) Liability must have been contracted in GOODFAITH and for adequate and fullconsideration in money or money’s worth

(3) The claim must be a debt or claim which isVALID IN LAW and ENFORCEABLE INCOURT

(4)

Indebtedness NOT CONDONED by thecreditor or the action to collect from thedecedent must NOT HAVE PRESCRIBED.

Dizon v. CTA (2008): The term "claims" requiredto be presented against a decedent's estate isgenerally construed to mean debts or demandsof a pecuniary nature which could have beenenforced against the deceased in his lifetime, orliability contracted by the deceased before hisdeath. Therefore, the claims existing at the timeof death are significant to, and should be made

the basis for the determination of allowabledeductions (and post-death developments, i.e.reduction or condonation through compromiseagreements entered into by the Estate with itscreditors, should not be considered).




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Claims Against Insolvent Persons[Sec. 86 (A)(1), NIRC ] These are claims that are not collectible. To bedeductible from the gross estate:(a) The incapacity of the debtor to pay his

obligation should be proven, although a

judicial declaration of insolvency is notrequired;

(b) The full amount owed by the insolvent mustfirst be included in the decedent’s grossestate; and

(c) If the insolvent could only pay a partialamount, the full amount owed shall beincluded in the gross estate, and the amountuncollectible shall be allowed as adeduction.

Unpaid Mortgages, Losses and Taxes

[Sec. 86 (A)(1), NIRC; Sec. 6 (A)(5), RR 2-2003]

Unpaid Mortgages

These are deductible from the gross estate,provided:(a) That the gross estate must include the fair

market of the property encumbered by suchmortgage or indebtedness;

(b) That the deduction shall be limited to theextent that they were contracted bona fideand for an adequate and full consideration inmoney or money’s worth, if such unpaidmortgages or indebtedness were founded

upon a promise or an agreement. [Sec. 6- A5(a), RR 2-2003]

In case unpaid mortgage payable is beingclaimed by the estate, verification must bemade as to who was the beneficiary of the loanproceeds. If loan is merely an accommodationloan where the loan proceeds went to anotherperson, the value of the unpaid loan must beincluded as a receivable of the estate. If there isa legal impediment to its recognition as areceivable, such unpaid obligation/mortgage

payable shall NOT be allowed as a deductionfrom the gross estate. [Sec. 6 (A)(5), RR 2-2003]In all instances, the mortgaged property, to theextent of the decedent’

Taxes

These are deductible from the gross estate if:(a) They have accrued as of the death of the

decedent, and

(b) They were unpaid as of the time of death.

This deduction DOES NOT include income taxupon income received after death, or propertytaxes accrued after his death, or the estate taxdue from the transmission of his estate. [Sec. 6

(A)(5)(b), RR 2-2003]

Losses

These are deductible from the gross estate ifALL of the following conditions are satisfied:(a) The losses were INCURRED DURING the

SETTLEMENT of the estate(b) The losses arose from acts of God, such as

FIRES, STORMS, SHIPWRECK or OTHERCASUALTIES, or from acts of man, such asROBBERY, THEFT or EMBEZZLEMENT

(c) The losses are NOT COMPENSATED BYINSURANCE or otherwise

(d) The losses are not claimed as a deduction forincome tax purposes in an income tax returnof the estate subject to income tax

(e) The losses were incurred NOT LATER THANTHE LAST DAY FOR PAYMENT OF THEESTATE TAX (6 months after the death ofthe decedent) [Sec. 6 (A)(5)(c), RR 2-2003]

The amount deductible is the amount of theproperty lost.

Property Previously Taxed

Deduction allowed on the property left behind bythe decedent, which he had acquired previously,by inheritance or donation [Sec. 86 (A)(2), NIRC ].

Rationale

As a previous transfer tax had already beenimposed on the property, either the estate tax (ifproperty inherited) or the donor’s tax (if propertydonated), the law allows a deduction to beclaimed on the said property to minimize theeffects of a double tax on the same propertywithin a short period of time, i.e. five (5) years.

Example: Mr. A died in December 2003. InMarch 2003, Mr. B (Mr. A’s father) died and leftMr. A some properties as inheritance. Mayvanishing deductions be claimed as deductionsin computing Mr. A’s net taxable estate?

YES, vanishing deductions shall be allowed ifthe following conditions are met:




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Requisites for Deductibility(1) Death – the present decedent (Mr. A) died

within five years from date of death of theprior decedent (Mr. B) or date of gift;

(2) Identity of the property – The property withrespect to which deduction is sought can be

identified as the one received from the priordecedent or the donor, or as the propertyacquired in exchange for the originalproperty so received.

(3) Location of the property – The property onwhich vanishing deduction is claimed mustbe located in the Philippines.

(4) Inclusion of the property – The property musthave formed part of the gross estate situatedin the Philippines of the prior decedent, ormust have been included in the total amountof the gifts of the donor made within five (5)

years prior to the present decedent’s death. (5) Previous taxation of the property – thedonor's tax on the gift or estate tax on theprior succession (Mr. B’s succession) musthave been finally determined and paid by thedonor or the prior decedent, as the case maybe.

(6) No previous vanishing deduction on the

property, or the property exchanged therefor,

was allowed in determining the value of the

net estate of the prior decedent. (Illustrationof how this requirement may NOT be met: Inthe example above, if Mr. B received the

same properties as a donation from Mr. C inJuly 2002, a vanishing deduction on theproperties was claimed with respect to Mr.B’s estate. Thus, no more vanishingdeduction may be claimed by Mr. A’s estate)

Computation of Vanishing Deduction(1) Using the facts above, assume that Mr. A

inherited a car and a piece of land from hisfather Mr. B.

(2) At the time of Mr. B’s death, the FMV of thecar was P120,000 and the FMV of the land

was P800,000.(3) At the time Mr. A inherited the land, it was

subject to a mortgage of P80,000. Mr. Apaid P70,000 of the mortgage during hislifetime (leaving a balance of P10,000).

(4) The FMV of the properties at the time of Mr.A’s death were P850,000 for the land andP70,000 for the car.

(5) Mr. A’s gross estate amounted toP3,200,000 while total deductions(excluding medical expenses, standarddeductions, family home, including theabove unpaid mortgage of P70,000)amounted to P600,000.

(a) First, GET THE VALUE OF THE PROPERTY

PREVIOUSLY TAXED (PPT): compare thevalues of the property at the time of theprior decedent’s death and at the time ofthe present decedent’s death. The loweramount shall be the initial basis.

In the example, the value of the PPT shall beP800,000 for the land and P70,000 for the car,for a total of P870,000

Note: The value used on the PPT is significantonly for purposes of computing the amount ofvanishing deduction. The value included in thedecedent’s gross estate is ALWAYS the fairmarket value at the time of his death.

(b) Then, THE PPT VALUE SHALL BE

REDUCED BY ANY PAYMENT MADE BY

THE PRESENT DECEDENT ON ANY

MORTGAGE or lien on the property(i) Mr. A paid P70,000 of the mortgage.

Thus, P870,000 less 70,000 is P800,000(ii) The P800,000 is known as the INITIAL

BASIS

(c) The INITIAL BASIS shall be FURTHER

REDUCED by the SECOND DEDUCTION, anamount equal to:

* Ordinary, thus excluding family home, medicalexpenses, standard deduction and amountsreceived under RA 4917

(i) 800,000/3,200,0008 x 600,000 equals150,000. This will be deducted from theinitial basis of P800,000, which gives abalance of P650,000

(ii) The 650,000 is known as the FINAL

BASIS.




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(d) Finally, the remaining balance shall bemultiplied by the corresponding percentage:

VanishingDeduction

RateIf received by inheritance or gift

100%Within one (1) year prior to thedeath of the present decedent

80%More than one year but not morethan two years prior to the deathof the decedent

60%More than two years but notmore than three years prior tothe death of the decedent

40%More than three years but notmore than four years prior to thedeath of the decedent

20%More than four years but notmore than five years prior to thedeath of the decedent

(i) Since Mr. A received the inheritance inMarch 2003 (within 1 year from his death inDecember 2003] , the balance of P650,000shall be multiplied by 100%. Thus, theallowable vanishing deduction is P650,000

Formula

(1) VALUE TAKEN FOR PPT (always the lowervalues)

LESS: MORTGAGE (OR LIEN) PAID IF ANY(1ST

deduction)

(2) INITIAL BASIS IB)

LESS: 2ND deduction = (IB/GE) x (ELIT + transfer

for public use)

(3) FINAL BASIS

X RATES IN Sec 86A-2

V NISHING DEDUCTION in an Estate Tax Return,

this is deducted from the Exclusive Properties of

the decedent that form part of the gross estate.

Transfers for Public Purpose

These are dispositions in a last will andtestament or transfers to take effect after deathin favor of the Government of the Republic ofthe Philippines, or any political subdivisionthereof, for exclusively public purposes. Thewhole amount of all the BEQUESTS, LEGACIES,

DEVISES or TRANSFERS to or for the use ofshall be deductible from gross estate, providedsuch amount or value had been included in thecomputation of the gross estate [Sec. 86 (A)(3),NIRC].

Amounts Received by Heirs Under RA 4917Any amount received by the heirs from thedecedent’s employer as a consequence of thedeath of the decedent-employee in accordancewith RA No. 4917 (this law provides thatretirement benefits of private employees shallnot be subject to attachment, levy execution orany tax), PROVIDED that such amount isincluded in the gross estate of the decedent[Sec. 86 (A)(7), NIRC ] .

SPECIAL DEDUCTIONS

Family Home (maximum: P1,000,000)It is the dwelling house, including the land onwhich it is situated, where the husband andwife, or a head of the family, and members oftheir family reside, as certified to by theBarangay Captain of the locality. It is deemedconstituted on the house and lot from the timeit is actually occupied as the family residenceand considered as such for as long as any of itsbeneficiaries actually resides therein. [ Arts. 152and 153, Family Code]

Temporary absence from the constituted familyhome due to travel or studies or work abroad,etc. does not interrupt actual occupancy. Thefamily home is generally characterized bypermanency, that is, the place to which,whenever absent for business or pleasure, onestill intends to return. [Sec. 6(D), RR 2-2003]

It must be part of the ACP or CPG, or theexclusive properties of either spouse. It may alsobe constituted by an unmarried head of a familyon his or her own property. [Sec. 6(D), RR 2-

2003 citing Art. 156, FC ]

For purposes of availing this deduction, aperson may constitute only one family home.[Sec. 6(D), RR 2-2003 citing Art. 161, FC ]




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Requisites for Deductibility[Sec. 6(D)(b), RR 2-2003] (1) The family home must be the actual

residential home of the decedent and hisfamily at the time of his death, as certified bythe barangay captain of the locality.

(2)

The total value of the family home must beincluded as part of the gross estate of thedecedent

(3) Allowable deduction must be in an amountequivalent to the current FMV of the familyhome as declared or included in the grossestate, or the extent of the decedent’sinterest (whether conjugal/community orexclusive property), whichever is lower, but inno case shall the deduction exceedP1,000,000

(4) The decedent was married or if single, was a

head of the family.(5) Along with the decedent, any of thebeneficiaries* must be dwelling in the familyhome.

(6) The family home as well as the land on whichit stands must be owned by the decedent.Therefore, the FMV of the family homeshould have been included in thecomputation of the decedent’s gross estate.

Beneficiaries of a Family Home(1) The husband and wife, or an unmarried

person who is the head of a family; and

(2)

Their parents, ascendants, descendants(including legally adopted children), brothersand sisters, whether the relationship belegitimate or illegitimate, who are living inthe family home and who depend upon thehead of the family for legal support.

Standard Deduction (maximum: P1,000,000) An amount equivalent to One million pesos(P1,000,000) shall be deducted from the grossestate without need of substantiation [Sec.86(A)(5), NIRC; Sec. 6(E), RR 2-2003].

Medical Expenses

All medical expenses (cost of medicine, hospitalbills, doctors’ fees, etc.) incurred (whether paidor unpaid) [Sec. 86(A)(6), NIRC; Sec. 6(F), RR 2- 2003].

Requisites for Deductibility[Sec. 6(F), RR 2-2003] (1) The expenses were incurred by the decedent

within one (1) year prior to his death(2) The expenses are duly substantiated with

receipts and other documents in support

thereofPROVIDED, that in no case shall the deductiblemedical expenses exceed Five HundredThousand Pesos (P500,000).

Note: Any amount of medical expenses incurredwithin one year from death in excess ofP500,000 shall no longer be allowed as adeduction under this subsection. Neither canany unpaid amount thereof in excess of theP500,000 threshold nor any unpaid amount formedical expenses incurred prior to the one-year

period from date of death be allowed to bededucted from the gross estate under “Claimsagainst the estate”. [RR 2-2003, Sec. 6-F ]

NET SHARE OF THE SURVIVING SPOUSE INTHE CONJUGAL PARTNERSHIP PROPERTYThe amount deductible is the net share of thesurviving spouse in the conjugal partnershipproperty. The net share is equivalent to ½ of50% of the conjugal property after deductingthe obligations chargeable to such property.The share of the surviving spouse must beremoved to ensure that only the decedent’s

interest in the estate is taxed. Net share of thesurviving spouse is neither an ordinary nor aspecial deduction [Sec. 86(A)(6), NIRC; Sec. 6(F),RR 2-2003].

EXCLUSIONS FROM THE GROSSESTATE

EXCLUSIONS UNDER SEC. 85 AND 86 OFTHE TAX CODE(1) Exclusive Property (capital/paraphernal) of

surviving spouse [Sec. 85 (H), NIRC ]

(2)

Property outside the Philippines of a non-resident alien decedent

(3) Intangible personal property in thePhilippines of a non-resident alien if there isreciprocity




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EXCLUSIONS UNDER SPECIAL LAWS(1) Proceeds of life insurance benefits received

by members of the GSIS [RA 728](2) Benefits received by members from the SSS

by reason of death [RA 1792 ](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 inthe Philippines under laws administered bythe U.S. Veterans Administration [RA 360]

TAX CREDIT FOR ESTATE TAXESPAID IN A FOREIGN COUNTRY

TAX CREDITIt is a remedy against international doubletaxation. To minimize the onerous effect of

taxing the same property twice, tax creditagainst Philippine estate tax is allowed forestate taxes paid to foreign countries.

WHO MAY AVAIL OF TAX CREDITOnly the estate of a decedent who was a citizenor a resident of the Philippines at the time of hisdeath can claim tax credit for any estate taxpaid to a foreign country.

AMOUNT ALLOWABLE AS TAX CREDIT [Sec. 86(E), NIRC ]

General Rule:

The estate tax imposed by the Philippines shallbe credited with the amounts of any estate taximposed 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 thesame proportion of the tax against whichsuch credit is taken, which the decedent's netestate situated within such country taxableunder 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 taxagainst which such credit is taken, which thedecedent's net estate situated outside thePhilippines taxable under the NIRC bears tohis entire net estate. (OVERALL BASIS)

Illustration.

—Assume the following:

Net Estate – Philippines (reducedby all allowable deductions,except standard deduction)

P1,050,000

Country G Net Estate 300,000

Country H Net Estate 150,000Tax paid/incurred:PhilippinesCountry GCountry H

15,0005,0001,400

Net Estate – Philippines (reducedby all allowable deductions,except standard deduction)

P1,050,000

(ii) Net taxable estate is P500,000(1,050,000 + 300,000 + 150,000 – 1,000,000 standard deduction). ThePhilippine estate tax on P500,000 isP15,000

Solution – Limitation A (iii) To get tax credit per country under

Limitation A, this formula is followed:

(iv)

The result after applying the formulaabove is compared to the tax actually paidfor each foreign country.

(v) The lower of the two amounts for eachforeign country will be added to get thetotal tax credit allowed under LimitationA.

Amount Allowed

(whicheveris lower)

Country G (300/1500 x 15,000)

3,0003,000

Actually paid to Country G 5,000

Country H (150/1500 x 15,000)

1,5001,400

Actually paid to Country H 1,400

Tax credit allowed under Limitation A P 4,400




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Solution – Limitation B:

The result after applying the formula above iscompared to the tax actually paid in total toforeign countries.

The lower of the two amounts will be added toget the total tax credit allowed under LimitationB.

Amount Allowed(Lower)

450/1500 x 15,000 4,500

Total foreign income taxespaid

6,400

Tax credit allowed under Limitation A P 4,400

Compare the tax credit allowed underLimitation A and Limitation B. The lower of thetwo amounts is the final allowable tax credit. Inthis case, the amount computed underLimitation 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 formulain Limitation A.

The resulting amount will be compared to theactual tax paid to the foreign country. Thelower amount will be the final allowable taxcredit. [Source: Reyes, Income Tax Law and

Accounting]

EXEMPTION OF CERTAINACQUISITIONS ANDTRANSMISSIONS(1) Merger of usufruct in the owner of the naked

title(2) Transmission or delivery of the inheritance or

legacy by the fiduciary heir (1st heir) to thefideicomissary (2ndheir). Pendingtransmission of the property, the fiduciary isentitled to all the rights of a usufructuary,although the fideicomissary is entitled to allthe rights of a naked owner.

(3) Transmission from the first heir, legatee ordone in favour of another beneficiary, inaccordance with the desire of thepredecessor.

(4) All bequests, devises, legacies or transfers tosocial welfare, cultural and charitable

institutions, no part of the net income ofwhich inures to the benefit of any individual;provided, however, that not more than 30%of said bequest, devises, legacies or transfersshall be used by such institutions foradministration purposes.

FILING OF NOTICE OF DEATHA written Notice of Death shall be given to theCommissioner in 1) all cases of transfers subjectto tax or 2) where, though exempt from tax, thegross value of the estate exceeds P20,000.

The period for giving the Notice of Death shallbe:(1) Within two (2) months after the decedent’s

death.; or(2) Within two (2) months after the executor or

administrator qualified as such.

The persons responsible for giving the noticeare the executor, administrator, or any of thelegal heirs, as the case may be.

ESTATE TAX RETURN

The executor, administrator, or any of the legalheirs, as the case may be, shall file an estate taxreturn under oath in triplicate. If there is noexecutor or administrator appointed, qualified,and acting within the Philippines, any person inactual or constructive possession of anyproperty of the decedent may file this return.




PAGE 136

It is required in the following cases:(1) In all cases of transfers subject to estate tax;(2) If the gross value of the estate exceeds

P200,000 eve though the transfer isexempt from tax;

(3)

Where the estate consists of registered orregistrable property where a clearance fomthe BIR is required as a condition precedentfor the transfer of ownership thereof in thename of the transferee

CONTENTS [Sec. 90(A), NIRC ] The executor, or the administrator, or any of thelegal heirs, as the case may be, shall file areturn 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 anonresident, not a citizen of the Philippines,of that part of his gross estate situated in thePhilippines;

(2) The deductions allowed from gross estate indetermining the net taxable estate; and

(3) Such part of such information as may at thetime be ascertainable and suchsupplemental data as may be necessary toestablish the correct taxes.

(4) For estate tax returns showing a gross valueexceeding Two million pesos (P2,000,000) -there must be a statement duly certified to by

a Certified Public Accountant containing thefollowing:(a) Itemized assets of the decedent with their

corresponding gross value at the time ofhis death, or in the case of a nonresident,not a citizen of the Philippines, of thatpart of his gross estate situated in thePhilippines;

(b) Itemized deductions from gross estateallowed in Section 86; and

(c) The amount of tax due whether paid orstill due and outstanding.

WHEN FILED General Rule: Filed within six (6) months fromthe decedent's death. [Sec. 90(B), NIRC ]

Exception: The Commissioner shall haveauthority to grant, in meritorious cases, areasonable extension not exceeding thirty (30)days for filing the return [Sec. 90C ]

WHERE FILEDThe administrator or executor shall register theestate of the decedent and secure a new TINtherefor from the Revenue District Office wherethe decedent was domiciled at the time of his

death, in cases of a resident.

The return shall be filed and the correspondingestate tax be paid with any of the followinghaving jurisdiction over the place where thedecedent was domiciled at the time of hisdeath:(1) Accredited Agent Bank (AAB)(2) Revenue District Officer(3) Collection Officer(4) Duly Authorized Treasurer of the city or

municipality

Note: Prevailing collection rules and proceduresshall be followed.

The administrator or executor cannot use hispersonal TIN for the estate.

For non-resident decedent, whether a citizen ora foreign individual, the estate tax return shallbe filed with and the TIN of the estate shall besecured in the:(1) RDO where the executor or administrator is

registered if he is in the Philippines;

(2)

RDO having jurisdiction over the executor oradministrator’s legal residence if he is notregistered;

(3) Office of the Commissioner through RDOno. 39 – South Quezon City if the decedentdoes not have an executor or administratorin the Philippines.

Nonetheless, the Commissioner of InternalRevenue has the power to allow a differentvenue/place in the filing of tax returns [Sec.9(C), RR 2-2003].




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INTANGIBLE PROPERTIES WHICHARE CONSIDERED BY LAW ASSITUATED IN THE PHILIPPINES[See discussion on Estate Tax ]

RULE ON RECIPROCITY [see discussion onEstate Tax ] – This rule applies to thetransmission by gift of intangible personalproperty located or with a situs within thePhilippines of a nonresident alien.

DETERMINATION OF GROSSGIFT[Sec. 98, NIRC ] (1) Gifts of real property and personal property

wherever situated belonging to the donorwho is either a resident or citizen at the time

of the donation; and(2) Gifts of real and tangible personal propertysituated in the Philippines, and intangiblepersonal property with a situs in thePhilippines unless exempted on the basis ofreciprocity, belonging to the donor who is anon-resident alien at the time of thedonation

COMPOSITION OF GROSS GIFTGross gift shall pertain to all donations intervivos:

(1)

Whether the transfer is in trust or otherwise;(2) Whether the gift is direct or indirect;(3) Whether the property is real or personal,

tangible or intangible. [Sec. 98(B), NIRC ]

Resident or Citizen Non resident Alien

Real property in thePhilippines

Real Property in thePhilippines

Tangible or IntangiblePersonal Properties(Within or without thePhilippines)

Tangible or IntangiblePersonal Properties(Within the Philippines)Except: Reciprocity[Sec. 104]

VALUATION OF GIFTS MADE INPROPERTY

[Sec. 102, NIRC ] If the gift is a property, the valuation shall bethe fair market value at the time of donation.

If the gift is a real property, the rules ofvaluation under Sec. 88 (B), NIRC shall apply.Thus, the value of the property shall bewhichever is higher of:(1) The fair market value as determined by the

Commissioner; or

(2) The fair market value as shown in theschedule of values fixed by the Provincialand City Assessors.

If there is no zonal value, the taxable base is theFMV that appears in the latest tax declaration.(Sec. 88(B), NIRC)

If the gift consists of an improvement, the valueof improvement is the construction cost perbuilding permit and/or occupancy permit plus10% per year after year of construction, or theFMV per latest tax declaration.

TAX CREDIT FOR DONOR’S TAXESPAID IN A FOREIGN COUNTRY[Sec. 101 (C), NIRC ] (1) A situation may arise when the property

given as a gift is located in a foreign countryand the donor may be subject to donor’s tax

twice on the same property: first, by thePhilippine government and second, by theforeign government where the property issituated.

(2) The remedy of claiming a tax credit is,therefore, aimed at minimizing theburdensome effect of double taxation byallowing the taxpayer to deduct his foreigntax from his Philippine tax, subject to thelimitations provided by law.

WHO MAY CLAIM TAX CREDIT

Only a resident citizen, non-resident citizen andresident alien.

LIMITATIONS ON THE TAX CREDITNote: The computation of the donor’s tax creditis the same as the computation for estate taxcredit.




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EXEMPTIONS OF GIFTS FROMDONOR’S TAX [Sec. 101, NIRC ]

In the case of gifts made by a RESIDENT [Sec.101(A), NIRC ]: (1)

Dowries or gifts made on account ofmarriage and before its celebration or withinone year thereafter.(a) Must be given by parents to their

child/children (legitimate, illegitimate,adopted)

(b) Applicable only for the first P10,000.(2) Gifts to or for the use of:

(a) National Government or any entitycreated by any of its agencies which isnot conducted for profit, or

(b) Any political subdivision of the said

Government(3) Gifts in favor of an educational and/or

charitable, religious, cultural or socialwelfare corporation, institution, accreditednongovernment organization, trust orphilanthropic organization or researchinstitution or organization.

The donee shall be:(a) a non-stock entity,(b) paying no dividends,(c) governed by trustees who receive no

compensation, and

(d)

devoting all its income, whetherstudents’ fees or gifts, donations,subsidies or other forms ofphilanthropy, to the accomplishmentand promotion of the purposesenumerated in its Articles ofIncorporation.

A condition for the exemption is that nomore than 30% of the gifts shall be used bythe donee for administration purposes. InBIR Ruling no. 097-2013 (March 20, 2013),the condition shall be annotated at the backof the TCT/OCT, in case of donation of realproperty. Failure to comply with thiscondition will result in the application ofdonor’s tax.

In the case of gifts made by a NONRESIDENT[Sec. 101(B), NIRC ]: (1) Gifts made to or for the use of the

(a) National Government or any entitycreated by any of its agencies which is notconducted for profit, or

(b) Any political subdivision of the saidGovernment

(2) Gifts in favor of an educational and/orcharitable, religious, cultural or socialwelfare corporation, institution, accreditednon-government organization, trust orphilanthropic organization or researchinstitution or organization, provided notmore than 30% of said gifts will be used bysuch donee for administration purposes

Note: Donations made to entities exemptedunder special laws, e.g.:(1) Aquaculture Department of the Southeast

Asian Fisheries Development Center of thePhilippines

(2) Development Academy of the Philippines(3) Integrated Bar of the Philippines(4) International Rice Research Institute(5) National Museum(6) National Library(7) National Social Action Council

(8)

Ramon Magsaysay Foundation(9) Philippine Inventor’s Commission (10) Philippine American Cultural Foundation(11) Task Force on Human Settlement on the

donation of equipment, materials andservices

PERSONS LIABLEEvery person, whether natural or juridical,resident or non-resident, who transfers or causes

to transfer property by gift, whether in trust orotherwise, whether the gift is direct or indirect

and whether the property is real or personal,tangible or intangible. (Sec. 98, NIRC)

DONOR’S TAX RETURN [Sec. 103, NIRC ]Contents of the Donor’s Tax Return, which shallbe made under oath, in triplicate [Donor’s taxreturn, BIR Form no. 1800]:(1) Each gift made during the calendar year




PAGE 142

(i) Gift pertaining to the son(1) Net Taxable Gift:

P25,000 – 10,000 = P15,000(2) Tax Due:

None, since P15,000 is below theP100,000 threshold

(ii)

Gift pertaining to the daughter-in-law(1) Net Taxable Gift:

P25,000(2) Tax Due:

P25,000 x 30% = P7,500(b) Wife – same as above(c) Donations to donees not considered

strangers for tax purposes were madeon:

January 30, 2002 – P 2,000,000March 30, 2002 – P 1,000,000

August 15, 2002 – P 500,000

After thefirst

donation

After thesecond

donation

After the thirddonation

Net Taxable Gift

2,000,000 JanuaryDonation -P2,000,000

JanuaryDonation -P2,000,000

MarchDonation -1,000,000

MarchDonation -1,000,000

Total

P3,000,000

AugustDonation -500,000Total

P3,500,000

Corresponding Donor’s Tax refer to schedule)

124,000 P 204,000 P254,000

Tax Due / Payable

124,000 Donor’s TaxP 204,000

Donor’s TaxP 254,000

Less: TaxPreviouslyPaid124,000

Less: TaxPreviously paid(124k+80k)204,000

Tax Due

P80,000

Tax Due

P50,000

TAX RATES APPLICABLEThe applicable donor’s tax rate is dependentupon the relationship between the donor andthe 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

(1) a person who is not a brother, sister (whetherby whole or half-blood), spouse, ancestor orlineal descendant, or

(2) a person who is not a relative byconsanguinity in the collateral line within thefourth degree of relationship. [Sec. 99(B)]

Note: Donations made between businessorganizations and those made between an

individual and a business organization shall beconsidered as donations made to a stranger.[Sec. 10(B), RR 2-2003]

(2) If the donee is not a stranger to the donor, thetax for each calendar year shall be computedon the basis of the total net gifts madeduring the calendar year [Sec. 99(A), NIRC]:

Over But notOver

Tax Is Plus Of theExcessOver

0 100,000 Exempt

100,000 200,000 0 2% 100,000200,000 500,000 2,000 4% 200,000500,000 1M 14,000 6% 500,000

1M 3M 44,000 8% 1M3M 5M 204,000 10% 3M5M 10M 404,000 12% 5M10M 1,004,000 15% 10M

Note: A legally adopted child is entitled to allthe rights and obligations provided by law tolegitimate children, and therefore, a donation tohim shall not be considered as a donation madeto a stranger. [Sec 10B, RR 2-2003]




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VAT

CONCEPT

Sec. 4.105-2, RR 16-2005. NATURE AND

CHARACTERISTICS OF VAT. VAT is a tax onconsumption levied on the sale, barter,exchange or lease of goods or properties andservices in the Philippines and on importation ofgoods into the Philippines.x x x

(1) CIR v Benguet Corp., (2005): VAT is apercentage tax imposed at every stage ofthe 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 theimportation of goods, whether for businessor non-business purposes.

(2) VAT is a percentage tax imposed by lawdirectly not on the thing or service but onthe act (sale, barter, exchange, lease,importation, rendering service)

(3) The taxpayer (seller) determines his taxliability by computing the tax on the gross

selling price or gross receipt (output tax),and subtracting or crediting the earlier VATon the purchase or importation of goods or

on the purchase of service (input tax)against the tax due on his own sale.(4) It is also an excise tax, or a tax on the

privilege of engaging in the business ofselling goods or services, or in theimportation of goods but unlike excise, it isnot applied only to a few selected goods

(5) It is an ad valorem tax, which means thatthe amount is based on the gross sellingprice or gross value in money of goods andservices

CHARACTERISTICS/ ELEMENTSOF A VAT-TAXABLETRANSACTION(1) It is a tax on consumption levied on the sale,

barter, exchange or lease of goods orproperties and services in the Philippines andon importation of goods into the Philippines.[RR 16-2005]

(2) It is an indirect tax, the amount of which maybe shifted to or passed on the buyer,transferee, or lessee of the goods, propertiesor services. [Sec. 105, NIRC ]The seller may choose to shoulder theburden of the VAT in order to make his prices

competitive.

TRANSACTIONS SUBJECT TO VAT(1) Sale, barter, or exchange, lease of goods or

properties(2) Sale of services(3) Importation of goods

CONSTITUTIONALITY OF VAT

ABAKADA Guro Party List, et. al. v Ermita

(2005):

(1)

The validity of raising the VAT rate from 10%to 12% by the President was upheld by SC.(2) With respect to Sec. 8, amending Sec. 110

(A), which provides for 60-monthamortization of the input tax on capitalgoods purchased: It is not oppressive,

arbitrary, and confiscatory. The taxpayer isnot permanently deprived of his privilege tocredit the input tax. For whatever is thepurpose, it involves executive economicpolicy and legislative wisdom in which theCourt cannot intervene.

(3) The tax law is uniform: it provides a standardrate of 0% or 10% (or 12% now) on all goodsor services. The law does not make anydistinction as to the type of industry or trade that will bear the 70% limitation on thecreditable input tax, 5-year amortization ofinput tax on purchase of capital goods, or the5% final withholding tax by the government.

(4) It is equitable: The law is equipped with athreshold margin (P1.5M). Also, basic marineand agricultural products in their originalstate are still not subject to tax. Congressalso provided for mitigating measures to

cushion the impact of the imposition of thetax on those previously exempt. Excise taxeson petroleum products and natural gas werereduced. Percentage tax on domesticcarriers was removed. Power producers arenow exempt from paying franchise tax.




PAGE 144

(5) VAT, by its very nature, is regressive. BUT the

Constitution does not really prohibit the

imposition of indirect taxes (which isessentially regressive).

(6) What it simply provides is that Congressshall “evolve a progressive system of

taxation”.(7) In Tolentino v. Sec. of Finance (1995), the

Court said that direct taxes are to bepreferred, and as much as possible, indirecttaxes should be minimized… but not avoidedentirely because it is difficult, if notimpossible, to avoid them.

Tolentino v. Secretary of Finance (1995):

(1) Regressivity is not a negative standard forcourts to enforce.

What Congress is required by theConstitution to do is to “evolve a progressivesystem of taxation.”

This provision is placed in the Consti as moral

incentives to legislation, not as judicially

enforceable rights.

(2) The regressive effects are corrected by thezero rating of certain transactions andthrough the exemptions

IMPACT OF TAX(1)

The impact of taxation is on the statutorytaxpayer, the one from whom thegovernment collects.

(2) The impact of VAT is on the seller or importerupon whom the tax has been imposed. [Sec.105, NIRC ]

INCIDENCE OF TAX(1) The incidence of tax is on the one who bears

the burden of taxation.(2) The incidence of VAT is on the final

consumer.

Contex v CIR (2004): The Supreme Courtclarified the difference between the concepts ofimpact of tax (liability) and incidence of tax(burden). The seller remains directly and legallyliable for payment of the VAT but the burden isborne by the consumer or final purchaser.

TAX CREDIT METHOD

The tax credit method refers to the manner bywhich the value added tax of a taxpayer iscomputed. The input taxes shifted by the sellersto the buyer are credited against the buyer’soutput taxes when he sells the taxable goods,properties or services.

Under this method, the tax is computed bydetermining the difference between the outputtax on his sales and the input tax on thepurchases of goods, services, capital goods,supplies, and materials.

APPLICABILITY OF ECOZONES (1) CIR v. Seagate Technology (2005): The

ECOZONES shall be managed andoperated by the PEZA as separate customs

territory. (Sec. 8, RA 7916 “Special EconomicZone Act of 1995”) This means that in suchzone is created the legal fiction of foreignterritory. (Deoferio Jr. and Mamalateo, p. 227 )

(2) CIR v. Seagate Technology (2005):

Consequently, sales made by a person inthe customs territory to a PEZA-registeredentity are considered exports to a foreigncountry and thus, zero-rated. Conversely,sales by a PEZA-registered entity to aperson in the customs territory are deemed

imports from a foreign country.

TAX TREATMENT OF SALES TO & BYPEZA-REGISTERED ENTERPRISEWITHIN & WITHOUT THE ECOZONE[RMC 74-99] (1) Any sale of goods, property or services made

by a VAT registered supplier from the

Customs Territory* to any registered

enterprise operating in the ecozone, REGARDLESS of the class or type of thelatter’s PEZA registration, is actually

qualified and thus LEGALLY ENTITLED TOTHE 0% VAT.

“Customs Territory” shall mean the nationalterritory of the Philippines outside of theproclaimed boundaries of the ECOZONESexcept those areas specifically declared byother laws and/or presidential proclamationsto have the status of special economic zones




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and/or free ports. [Sec. 2(g), Rule 1, Part I, RA7916-IRR]

(2) 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 Territoryto a PEZA registered enterprise shall betreated EXEMPT FROM VAT, regardless ofwhether or not the PEZA registered buyer issubject to taxes under the NIRC or enjoyingthe 5% special tax regime.

(3) By a PEZA Registered Enterprise

(a) Sale of Goods by a PEZA registered

enterprise to a buyer from the Customs

Territory (ie domestic sales) – this caseshall be treated as a technicalIMPORTATION made by the buyer. Such

buyer shall be treated as an IMPORTERthereof and shall be imposed with the

corresponding VAT. (b) Sale of Services by a PEZA registered

enterprise to a buyer from the Customs

Territory – this is NOT embraced by the5% special tax regime, hence, such sellershall be SUBJECT TO 12% VAT.

(c) 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.(d) Sale of Services by ECOZONE enterprise,

to Another ECOZONE enterprise (Intra-

ECOZONE enterprise Sale of Service)

(i) if PEZA registered seller is subject to5% special tax regime - EXEMPT fromVAT

(ii) if PEZA registered seller is subject totaxes under NIRC (ie not subject to5% special tax regime) – subject to0% VAT pursuant to “cross borderdoctrine”

PERSONS LIABLE

Value-added Tax (VAT) is a percentage taximposed upon:(1) Any person who, in the course of trade or

business, sells, barters, exchanges, leasesgoods or properties, or renders services.

The term “person” refers to any individual,trust, estate, partnership, corporation, joint

venture, cooperative or association (Sec.4.105-1, RR 16-2005).

The transfer must be made in thePhilippines. If the title to the goods weretransferred outside the Philippines, then the

same is not subject to VAT.

Exception: When the annual sales do notexceed P1,919,500*, the taxpayer shall beliable instead to pay a percentage taxequivalent to 3% of his gross monthlysales/receipts.

To be subject to 3% percentage tax, thefollowing requisites must be satisfied:(1) The gross annual sales and/or receipts

do not exceed P1,919,500.00; AND (2) The taxpayer is not a VAT-registered

person.Note: The threshold amount has beenincreased from P1,500,000 toP1,919,500 [RR 16-2011].

In addition, marginal income earners are notsubject to business taxes because they arenot considered as engaged in trade orbusiness. A marginal income earner is anindividual deriving gross sales or receipts ofnot exceeding P100,000 during any 12-month period [Rev. Reg. 11-2000]

RULE OF REGULARITYAlso, the sale, barter, exchange, lease, orrendering of service must be in the course oftrade or business. The term “in the course oftrade or business” embraces the regularconduct or pursuit of a commercial or economicactivity. It also includes transactions that areincidental to the regular conduct or pursuit ofthe activity.

CS Garments, Inc. v CIR (2007): The term

incidental means something else as primary;something necessary, appertaining to, ordepending upon another, which is termed theprincipal. Hence, an isolated transaction is notnecessarily disqualified from being madeincidentally in the course of trade or business. Inthis case, the court imposed VAT on the sale ofmotor vehicle that was purchased and used in




PAGE 146

furtherance of petitioner’s business. The salefalls within the term “incidental.”

A person is deemed to act “in the course oftrade or business” regardless of whether or notit is a nonstock, nonprofit private organization

(irrespective of the disposition of its net incomeand whether or not it sells exclusively to itsmembers or their guests) or a governmententity.

In CIR v CA and Commonwealth Management

and Services Corp. (2000), the Supreme Courtclarified that VAT is a tax on the value added bythe performance of the service. It is immaterialwhether profit is derived from rendering theservice. The Court held that the absence of anyprofit is immaterial for as long as the entity

provides service for a fee, remuneration orconsideration, then the service rendered issubject to VAT.

However, the rule of regularity is not applied toservices rendered by nonresident foreignpersons. The same shall be considered asrendered in the course of trade or business foras long as they are rendered in the Philippines.

Membership fees and association duescollected by clubs organized and operatedexclusively for pleasure, recreation and other

non-profit purposes are subject to VAT (RMC35-2012).

Condominium corporations are subject to VATon association dues, membership fees and otherassessments and charges collected fromtenants and members (RMC 65-2012)

(2) Any person who imports goods.

The importation is not qualified by the term

“in the course of trade or business”. Hence,an importer, whether an individual orcorporation, remains liable for the paymentof VAT regardless of whether or not theimportation was made in the course of histrade or business.

VAT ON SALE OF GOODS ORPROPERTIESRate: 12% VAT beginning 1 February 2006 [RMCNo. 7-06 ]

Transactions: Every sale, barter or exchange, ortransactions “deemed sale” of taxable goods orproperties (RR 16-2005)

Basis: Gross selling price or gross value inmoney of the goods or properties sold, barteredor exchanged.

Who Pays: Paid by SELLER/TRANSFEROR.[Sec. 106, NIRC ]

GOODS OR PROPERTIES

– All tangibleand intangible objects which are capable ofpecuniary estimation, including:(1) Real properties held primarily for sale to

customers or held for lease in the ordinarycourse of trade or business;

(2) The right or the privilege to use patent,copyright, design, or model, plan, secretformula or process, goodwill, trademark,trade brand or other like property or right;

(3) The right or the privilege to use in thePhilippines of any industrial, commercial orscientific equipment;

(4) The right or the privilege to use motion

picture films, films tapes and discs;(5) Radio, television, satellite transmission and

cable television time. [Sec. 106, NIRC ]

REQUISITES OF TAXABILITY OF SALEOF GOODS OR PROPERTIESThe sale of goods (tangible or intangible) mustbe:(1) An actual or deemed sale of goods or

properties for a valuable consideration;(2) Undertaken in the course of trade or

business;

(3)

For the use or consumption in thePhilippines; and

(4) Not exempt from value added tax under theTax Code, special law, or internationalagreement




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GROSS SELLING PRICE (GSP) –

The totalamount of money or its equivalent which thepurchaser pays or is obligated to pay to theseller in consideration of the sale, barter orexchange of the goods or properties, excludingthe VAT. The excise tax, if any, on such goods or

properties shall form part of the gross sellingprice. (Sec. 106, NIRC)

FOR REAL PROPERTY, GSP MEANS THEHIGHER OF THE FF VALUES: [RR 16-2005] (1) The consideration stated in the sales

document, or(2) The fair market value (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 propertytax declaration)

(c) If GSP is based on the zonal value ormarket value of the property, the zonal ormarket value shall be deemedEXCLUSIVE of VAT.

(d) If the VAT is not billed separately, theselling price stated in the sales documentshall be deemed to be EXCLUSIVE ofVAT.

SALE OF REAL PROPERTY[RR 16-2005]

PERSON LIABLE:

gross sales/receipts >P1,919,500/year [ per RR 16-2011](1) Any person (natural or juridical) engaged in

sale or exchange of real properties(2) Real estate lessors(3) Non-resident lessors (property located in the

Philippines)(4) Non-stock, Non-profit organizations(5) Government agencies, instrumentalities,

GOCCs

TAXABLE:

(1)

On installment plan(2) Pre-selling by real estate dealers(3) Sale of residential lot >P1,919,500 ; or house

and lot/other residentialdwelling>P3,199,200 (RR 16-2011)

(4) Lease of residential units (rental per unit>12,800/month OR total rental from ALLunits>P1,919,500/year)

NOT TAXABLE:(1) Not primarily held for sale(2) Low cost or socialized housing(3) Residential lot < P1,919,500(4) House and lot/ other residential dwelling<

P3,199,200

(5)

Lease (rental per unit < 12,800/month andtotal rental from all units < P1,919,500/ year)

(6) Transmission to a trustee (Except when thetransmission is deemed a sale transaction)

Transmission of property to a trustee shallNOT be subject to VAT IF the property is tobe merely held in trust for the trustor and/orbeneficiary. However, IF the propertytransferred is originally intended for sale,lease or use in the ordinary course of trade orbusiness AND the transfer constitutes a

completed gift, the transfer is subject to VATas a deemed sale transaction. The transfer isa completed gift if the transferor divestshimself absolutely of control over theproperty, i.e., irrevocable transfer of corpusand/or irrevocable designation ofbeneficiary.

(7) Transfer to corporation in exchange of sharesof stocks [see Sec. 40, NIRC for Tax-freeexchange]

(8) Advance payment by the lessee(9) Security deposits for lease agreements

The real estate dealer shall be subject to VAT onthe installment payments, including interestand penalties, actually and/or constructivelyreceived by the seller.

ON INSTALLMENT PLAN[RR 16-2005] Scope [Sec. 4.106 – 3]

Installment Plan Deferred Payment

Initial payments in theyear of sale do notexceed 25% of thegross selling price

Initial payment in theyear of sale exceeds25% of the grossselling price

Taxable only on thepayment actually orconstructively received

Treated as cash saleand the entire sellingprice is taxable on themonth of sale




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INITIAL PAYMENTS – payment/paymentswhich the seller receives before or uponexecution of the instrument of sale andpayments which he expects or is scheduled toreceive in cash or property during the year whenthe sale or disposition of the real property was

made.(a) It includes down payment and all payments

actually or constructively received during theyear of sale.

(b) It does not include the amount of mortgageon the real property sold (except as to theexcess when such mortgage exceeds the costor other basis of the property to the seller)and notes or other evidence of indebtednessissued by the purchaser to the seller at thetime of the sale.

ZERO-RATED SALES OF GOODSOR PROPERTIES, ANDEFFECTIVELY ZERO-RATEDSALES OF GOODS ORPROPERTIESA zero-rated sale by a VAT-registered person isa taxable transaction for VAT purposes, butshall not result in any output tax. However,input tax on purchases of goods, properties orservices related to such zero-rated sale shall beavailable as tax credit or refund. (RR 16-2005)

Contex v CIR (2004): Under zero-rating, all VATis removed from the zero-rated goods, activity,or firm.

EXPORT SALES[Sec. 106(A)(2)(a), NIRC ](1) The sale and actual shipment of goods from

the Philippines to a Foreign country AND paidfor in acceptable foreign currency or itsequivalent in goods or services, ANDaccounted 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 beused in manufacturing, processing, packingor repacking in the Philippines of the saidbuyer's goods AND paid for in acceptableforeign currency AND accounted for in

accordance with the rules and regulations ofthe BSP

(3) Sale of raw materials or packaging materialsto Export-oriented enterprise whose export

sales exceed seventy percent (70%) of total

annual production.

(4) Any enterprise whose export sales exceed70% of the total annual production of thepreceding taxable year shall be consideredan export-oriented enterprise uponaccreditation under the rules & regulations ofExport Development Act, RA 7844 [RR 7-95]

(5) Sale of Gold to the Bangko Sentral ngPilipinas (BSP)

(6)

Those considered export sales under theOmnibus Investment Code of 1987, and otherspecial laws (ex. Bases Conversion &Development Act of 1992)

UNDER OMNIBUS INVESTMENT CODE:(1) Phil. port FOB value of export products

exported directly by a registered exportproducer; OR

(2) Net selling price of export products sold by aregistered export producer to another exportproducer, or to an export trader thatsubsequently exports the same (only when

actually exported by the latter).

CONSTRUCTIVE EXPORTS (without actual exportation):(1) sales to bonded manufacturing warehouses

of export-oriented manufacturers;(2) sales to export processing zones;(3) sales to registered export traders operating

bonded trading warehouses supplying rawmaterials in the manufacture of exportproducts;

(4) sales to diplomatic missions and other

agencies and/or instrumentalities grantedtax immunities, of locally manufactured,assembled or repacked products, whetherpaid for in foreign currency or not.




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Export sales of registered export traders shallinclude commission income, and thatexportation of goods on consignment shall not

be deemed export sales until the exportproducts consigned are in fact sold by theconsignee, and

Sales by a VAT-registered supplier to amanufacturer/producer whose products are100% exported are considered export sales. Acertification to this effect must be issued by theBoard of Investment which shall be good for 1year unless subsequently re-issued. [RR 16- 2005]

(7) The sale of goods, supplies, equipment andfuel to persons engaged in Internationalshipping or international air transport

operations. [added by RA 9337 ] (a) Limited to goods, supplies, equipmentand fuel pertaining to or attributable tothe transport of goods and passengersfrom a port in the Phil. directly to a foreign

port without docking or stopping at any

other port in the Phil. (b) If any portion of such fuel, goods, or

supplies is used for purposes other thanthat mentioned, such portion of fuel,goods, and supplies shall be subject toVAT. [RR 16-2005]

FOREIGN CURRENCYDENOMINATED SALE (FCDS)(1) 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 ormanufactured in the Philippines for delivery

to a resident in thePhilippines paid for inacceptable foreign currency AND accountedfor in accordance with the rules andregulations of the BSP. [Sec. 106(A)(2)(b),NIRC ]

(2)

Sales of locally manufactured or assembled

goods for household and personal use to

Filipinos abroad and other non-residents ofthe Philippines as well as returning OverseasFilipinos under the Internal Export Programof the government paid for in convertibleforeign currency AND accounted for inaccordance with the rules and regulations of

the BSP shall also be considered exportsales. [RR 16-2005]

EFFECTIVELY ZERO-RATED SALESAn effectively zero-rated sale of goods andproperties shall refer to the local sale of goods

and properties by a VAT-registered person to aperson or entity who was granted indirect taxexemption under special laws or internationalagreement. Transactions are considered as“constructive export” although not involvingactual export and are entitled to the benefit ofzero-rating. These transactions include:(1) Sale to export-oriented enterprises(2) Sale of goods, supplies, equipment and fuel

to persons engaged in internationalshipping or international air transportoperations

(3)

Foreign currency denominated sale(4) Sales to tax-exempt persons or entitiesOther cases of zero-rated sales, except forexport sales and foreign currency denominatedsale, shall require prior application with theappropriate BIR office for effective zero-rating.Without an approved application, thetransaction shall be considered exempt.

Examples:

(1) Sales to enterprises duly registered &accredited with the(a) Subic Bay Metropolitan Authority,(b)

Philippine Economic Zone Authority(PEZA),

(2) International agreements to which the Phil.is signatory, such as(a) Asian Development Bank (ADB),(b) International Rice Research Institute

(IRRI)

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 paragraph requiring priorapplication has now been deleted.




PAGE 150

CIR v. Seagate Technology (Philippines)

February 11, 2005:

(1) The BIR regulations additionally requiring anapproved prior application for effective zerorating cannot prevail over the clear VATnature of Seagate’s transactions (subject to

zero-rating, as an entity registered with thePEZA).

(2) An effectively zero-rated transaction doesnot and cannot become exempt simplybecause an application therefor was notmade or, if made, was denied.

TRANSACTIONS DEEMED SALE[Sec. 106 (B), NIRC ]

Rate: 12% VAT

Basis: Market value of the goods deemed sold asof the time of the occurrence of thetransactionsor as the Commissioner shallprescribe. In the case of retirement/cessation ofbusiness, the tax base shall be the acquisition

cost or the current market price of the goods orproperties, whichever is lower. In the case of asale where the gross selling price isunreasonably lower than the fair market value,the actual market value shall be the tax base.The gross selling price is unreasonably lower than the actual market value if it is lower bymore than 30% of the actual market value of thesame goods of the same quantity and qualitysold in the immediate locality on or nearest thedate of sale. [RR 16-2005]

TRANSFER, USE OR CONSUMPTIONNOT IN THE COURSE OF BUSINESSOF GOODS OR PROPERTIESORIGINALLY INTENDED FOR SALEOR FOR USE IN THE COURSE OFBUSINESS (e.g. when a VAT-registeredperson withdraws goods from his business for

his personal use. [RR 16-2005]

DISTRIBUTION OR TRANSFER TOSHAREHOLDERS, INVESTORS ORCREDITORS(1) Shareholders or investors as share in the

profits of the VAT-registered persons; or(2) Creditors in payment of debt;

Property dividends which constitute stocks intrade or properties primarily held for sale orlease declared out of retained earnings on orafter Jan. 1, 1996 and distributed by thecompany to its shareholders shall be subject toVAT based on the zonal value or FMV at the

time of the distribution, whichever is applicable.[RR 16-2005]

CONSIGNMENT OF GOODS IFACTUAL SALE IS NOT MADE WITHIN60 DAYS FOLLOWING THE DATESUCH GOODS WERE CONSIGNEDConsigned goods returned by the consigneewithin the 60-day period are not deemed sold.[RR 16-2005]

RETIREMENT FROM OR CESSATIONOF BUSINESS, WITH RESPECT TOINVENTORIES OF TAXABLE GOODSEXISTING AS OF SUCH RETIREMENTOR CESSATIONWith respect to ALL goods on hand, whethercapital goods, stock-in-trade, supplies ormaterials, as of the date of such retirement orcessation, 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 proprietorshipincorporates, or the proprietor sells his entirebusiness) and dissolution of a partnership andcreation of a new partnership which takes overthe business. [RR 16-2005]

CHANGE OR CESSATION OFSTATUS AS VAT-REGISTEREDPERSON

[Sec.106(C), NIRC ] Rate: 12%

Basis: the acquisition cost or the current marketprice of the goods or properties, whichever isLOWER.




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VAT shall apply to goods disposed of or existing

as of a certain date if under the circumstances tobe prescribed in rules and regulations to bepromulgated by the Secretary of Finance, uponrecommendation of the Commissioner, the

status of a person as a VAT-registered person

changes or is terminated.

UNDER RR 16-2005 SEC. 4.106 (B): Subject to VAT - applicable to goods/properties

originally intended for sale or use in businessand capital goods which are existing as of theoccurrence of the following:

Change of business activity from VAT taxable

status to VAT-exempt status

Example: A VAT-registered person engaged in ataxable activity like wholesaler or retailer who

decides to discontinue such activity andengages instead in life insurance business or inany other business not subject to VAT.

Approval of request for cancellation of a

registration due to reversion to exempt status

Approval of request for cancellation ofregistration due to desire to revert to exemptstatus after lapse of 3 consecutive years fromthe time of registration by a person whovoluntarily registered despite being exemptunder Sec. 109 (2)

Approval of request for cancellation of

registration of one who commenced businesswith the expectation of gross sales/receiptsexceeding P1,919,500 [ per RR 16-2011] but who

failed to exceed this amount during the first 12

months of operation

Not Subject to VAT – goods or propertiesexisting as of the occurrence of the following:

Change of control of a corporation by theacquisition of the controlling interest of such

corporation by another stockholder (individualor corporate) or group of stockholders.

Note: Exchange of goods or properties includingthe real estate properties used in business orheld for sale or for lease by the transferor, forshares of stocks, whether resulting in corporatecontrol or not, is SUBJECT TO VAT [RR 10-11]

Change in the trade or corporate name of thebusiness

Merger or consolidation of corporations. Theunused input tax of the dissolved corporation,as of the date of merger or consolidation, shall

be absorbed by the surviving or newcorporation.

VAT ON IMPORTATION OFGOODSRate: 12%Basis: total value used by the Bureau ofCustoms in determining tariff and customsduties, plus customs duties, excise taxes, if any,and other charges (such as postage,commission).

Where the customs duties are determined onthe basis of the quantity or volume of the goods,the value-added tax shall be based on thelanded cost plus excise taxes, if any.

Landed Cost = invoice amount + customs duties+ freight + insurance + other charges + excisetax (if any)

Who Pays: IMPORTER prior to the release ofsuch goods from customs custody [Sec. 107 (A),NIRC ]

Importer = any person who brings goods intothe Philippines, whether or not made in thecourse of his trade or business, including non-exempt persons or entities who acquire tax-freeimported goods from exempt persons, entitiesor agencies [RR 16-2005]

TRANSFER OF GOODS BY TAXEXEMPT PERSONS[Sec. 107 (B), NIRC ] (1) If importer is tax-exempt, the subsequent

purchasers, transferees or recipients of suchimported goods shall be considered asimporters who shall be liable for the tax onimportation.

(2) The tax due on such importation shallconstitute a lien on the goods superior to allcharges or liens on the goods, irrespective ofthe possessor thereof [as amended by RA9337 ].




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VAT ON SALE OF SERVICE ANDUSE OR LEASE OF PROPERTIESRate: 12%

Basis: Gross receipts derived from the sale orexchange of services, including the use or lease

of properties.

Gross Receipts: the total amount of money or itsequivalent representing the contract price,compensation, service fee, rental or royalty,including the amount charged for materialssupplied with the services and deposits andadvanced payments actually or constructivelyreceived during the taxable quarter for theservices performed or to be performed foranother person, excluding VAT. [Sec. 108 (A),NIRC ]

“Constructive receipt” occurs when the moneyconsideration or its equivalent is placed at thecontrol of the person who rendered the servicewithout 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 acceptancethereof by the seller as payment for servicesrendered

(3) transfer of the amounts retained by thecontractee to the account of the contractor.

[RR 16-2005]

REQUISITES FOR TAXABILITY(1) The service must be performed or is to be

performed in the course of trade or businessin the Philippines;

(2) For a valuable consideration actually orconstructively received; and

(3) The service is not exempt under the TaxCode, special law or international agreement

(4) Person selling or rendering service is liable toVAT

LEASE OF PROPERTIES:Subject to the tax imposed irrespective of the place where the contract of lease or licensingagreement was executed if the property is leasedor used in the Philippines.

MEANING OF “SALE/EXCHANGE OFSERVICES”

- the performance of all kind ofservices in the Philippines for others for a fee,remuneration or consideration, whether in kindor in cash, including those performed orrendered by the following: (unless otherwise

indicated, from RR 16-2005) (1) Construction and service contractors (2) Stock, real estate, commercial, customs and

immigration brokers (3) Lessors of property, whether personal or real

In a lease contract, the advance payment bythe 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 thelessee to the lessor - NOT subject to VAT BUT if the security deposit is applied torental, it shall be subject to VAT at thetime of its application

(d) Pre-paid rental - subject to VAT whenreceived, irrespective of the accountingmethod employed by the lessor

(4) Persons engaged in warehousing services (5) Lessors or distributors of cinematographic

films (6) 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 rawsugar

(7) Proprietors, operators, or keepers of hotels,motels, rest houses, pension houses, inns,resorts, theaters, and movie houses

(8) Proprietors or operators of restaurants,refreshment parlors, cafes and other eating

places, including clubs and caterers(9) Dealers in securities

“Gross receipts” means gross selling priceless cost of the securities sold. RR 7-95:

Pre-need companies are considered dealersin securities.

(10) Lending investors

All persons OTHER than banks, non-bankfinancial intermediaries, finance companiesand other financial intermediaries NOTperforming quasi-banking functions whomake a practice of lending money forthemselves or others at interest




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(11) Transportation contractors on theirtransport of goods or cargoes, includingpersons who transport goods or cargoes forhire and other domestic common carriers byland relative to their transport of goods orcargoes

(12)

Common carriers by air and sea relative totheir transport of passengers, goods orcargoes from one place in the Philippines toanother place in the PhilippinesOn transportation: All receipts from service,hire, or operating lease of transportationequipment not subject to the percentage tax

on domestic common carriers and keepersof garages shall be subject to VAT.

Commoncarrier

Transporting Kind ofcarrier

Tax Liability

By land Persons Domestic 3% percentagetax (Sec. 117,NIRC)

Goods/ cargo Domestic 12% VAT (Sec.108, NIRC)

By sea/airWhethertransportingpersons orgoods/ cargo

Domestic Domestic trip -

12% VAT

International trip– zero-rated VAT

International Doing businessin thePhilippines - 3%percentage tax(Sec. 118, NIRC)International trip- zero-rated VAT(Sec. 108 (B)(6),NIRC)

(13) Sales of electricity by generation,transmission, and/or distributioncompanies

(a) EXCEPT sale of power or fuelgenerated through renewablesources of energy, such as, but notlimited to, biomass, solar, windhydropower, geothermal, oceanenergy, and other emerging energy

sources using technologies such asfuel cells and hydrogen fuels, whichshall be subject to 0% rate of VAT(zero-rated).

(b) The universal charge passed on andcollected by distribution companiesand electric cooperatives shall beexcluded from the computation ofgross receipts.

(14) Franchise grantees of electric utilities,telephone and telegraph, radio and/ortelevision broadcasting and all otherfranchise grantees (including PAGCOR andits licensees/franchisees)

(a) EXCEPT franchise grantees of radio

and/or television broadcastingwhose annual gross receipts of thepreceding year do not exceed TenMillion Pesos (P10,000,000.00)(which shall be subject to 3%franchise tax under Sec. 119, subjectto optional registration), andfranchise grantees of gas and waterutilities (under Sec. 109, subject to2% franchise tax)

(b) With respect to franchise granteesof telephone and telegraph services,

amounts received for overseasdispatch, message, or conversationoriginating from the Philippines aresubject to the percentage tax underSec. 120 and hence exempt fromVAT

(15) Non-life insurance companies (except theircrop insurances), including surety, fidelity,indemnity and bonding companies; and(a) Insurance and reinsurance commissions,

as opposed to premiums, whether life ornon-life, are subject to VAT.

(b) Non-life insurance premiums are subject

to VAT.(c) Life insurance premiums are NOT subject

to VAT, for they are subject topercentage tax.

(16) Similar services regardless of whether or notthe performance thereof calls for theexercise or use of the physical or mentalfaculties

(17) The lease or the use of or the right orprivilege to use any copyright, patent,design or model, plan secret formula or

process, goodwill, trademark, trade brandor other like property or right

(18) The lease of the use of, or the right to use ofany industrial, commercial or scientificequipment

(19) The supply of scientific, technical, industrialor commercial knowledge or information




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(20) The supply of any assistance that isancillary and subsidiary to and is furnishedas a means of enabling the application orenjoyment of any such property, or right asis mentioned in #18 or any such knowledgeor information as is mentioned in #19

(21)

The supply of services by a nonresidentperson or his employee in connection withthe use of property or rights belonging to, orthe installation or operation of any brand,machinery or other apparatus purchasedfrom such nonresident person

(22) The supply of technical advice, assistance orservices rendered in connection withtechnical management or administration ofany scientific, industrial or commercialundertaking, venture, project or scheme

(23) The lease of motion picture films, films,

tapes and discs(24) The lease or the use of or the right to useradio, television, satellite transmission andcable television time

ZERO-RATED SALE OFSERVICES[Sec. 108 (B), NIRC ] A zero-rated sale by a VAT-registered person isa taxable transaction for VAT purposes, butshall not result in any output tax.

Input tax on purchases of goods, properties orservices related to such zero-rated sale shall beavailable as tax credit or refund. (RR 16-2005)

(1) Processing, manufacturing or repackinggoods for other persons doing business

outside the Philippines which goods are

subsequently exported, where the servicesare paid for in acceptable foreign currencyAND accounted for in accordance with therules 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 a nonresident person not

engaged in business who is outside thePhilippines when the services are performed,the consideration for which is paid for inacceptable foreign currency AND accountedfor in accordance with the rules andregulations of the BSP

CIR v. Burmeister (2007): The servicesreferring to ‘processing, manufacturing,repacking’ and ‘services other than those in(1)’ both require (i) payment in foreigncurrency; (ii) inward remittance; (iii)accounted for by the BSP; AND (iv) that the

service recipient is doing business outside the

Philippines. If this is not the case, taxpayerscan circumvent just by stipulating paymentin foreign currency.

(3) Services rendered to persons or entitieswhose exemption under special laws or

international agreements to which thePhilippines is a signatory effectively subjectsthe 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 ofproperty for use thereof [as amended by RA9337 ];Provided, however, that the services referredto herein shall not pertain to those made tocommon carriers by air and sea relative totheir transport of passengers, goods orcargoes from one place in the Phil. toanother place in the Phil. (the same beingsubject to 12% VAT under Sec. 108)

(5) Services performed by subcontractors and/or

contractors in processing, converting, ormanufacturing goods for an enterprisewhose export sales exceed seventy percent(70%) of total annual production.

(6) Transport of passengers and cargo by air orsea vessels from the Philippines to a foreigncountry [as added by RA 9337 ] and;

(7) Sale of power or fuel generated through

renewable sources of energy such as, but notlimited to, biomass, solar, wind, hydropower,geothermal, ocean energy, and otheremerging energy sources using technologies

such as fuel cells and hydrogen fuels. [asadded 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 thesale of services related to the maintenance oroperation of plants generating said power.




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RR 4-2007 removed the distinction betweenautomatic and effectively zero-ratedtransactions found in prior Revenue Regulations[inc. RR 16-2005] with respect to priorapplication from the BIR.

VAT EXEMPT TRANSACTIONS

IN GENERAL(1) 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 isnot allowed any tax credit of VAT (input tax)on purchases.

(2) The person making the exempt sale ofgoods, properties or services shall not billany output tax to his customers. [RR 16- 2005]

(3)

But, the VAT-registered person may electthat the exemption not apply to its sale ofgoods or properties or services; provided thatthe election made shall be irrevocable for aperiod of three (3) years from the quarter theelection was made [Sec. 109(2), NIRC ].

EXEMPT TRANSACTION,ENUMERATED

(1) Sale/import of agricultural, marine foodproducts in original state; of livestock andpoultry(a)

Original state even if they have undergonethe simple processes of preparation orpreservation for the market, such asfreezing, drying, salting, broiling, roasting,smoking or stripping.

(b) Polished and/or husked rice, corn grits,raw cane sugar and molasses, ordinarysalt, AND COPRA shall be considered intheir original state

Livestock or poultry does not include fightingcocks, race horses, zoo animals and otheranimals generally considered as pets. [RR 16-

2005]Original state – including preservation usingadvanced technological means of packaging,such as shrink wrapping in plastics, vacuumpacking, tetra-pack, and other similarpackaging methods. [RR 16-2005](2) Sale/ import of fertilizers; seeds, seedlings

and fingerlings; fish, prawn, livestock andpoultry feeds

(3) Import of personal and household effects ofPhil resident returning from abroad andnonresident citizens coming to resettle in thePhilippines

(4) Import of professional instruments andimplements, wearing apparel, domestic

animals, and personal household effectsbelonging to persons coming to settle in thePhilippines, for their own use and not forsale, barter or exchange

(5) Services subject to percentage tax(6) Services by agricultural contract growers and

milling for others of palay into rice, corn intogrits and sugar cane into raw sugar

(7) Medical, dental, hospital and veterinaryservices except those rendered byprofessionals:Laboratory services are exempted. If the

hospital or clinic operates a pharmacy ordrug store, the sale of drugs and medicine issubject to VAT. [RR 16-2005]

(8) Educational services rendered by privateeducational institutions, duly accredited byDEPED, CHED, TESDA, and those renderedby government educational institutions;“Educational services” does not includeseminars, in-service training, review classesand other similar services rendered bypersons who are not accredited by theDepED, CHED, and/or TESDA. [RR 16- 2005]

(9)

Services rendered by individualspursuant to an employer-employeerelationship

(10) Services rendered by regional or areaheadquarters established in thePhilippines by multinationalcorporations which act as supervisory,communications and coordinatingcenters for their affiliates, subsidiariesor branches in the Asia-Pacific Regionand do not earn or derive income fromthe Philippines

(11)

Transactions which are exempt underinternational agreements to which thePhilippines is a signatory or underspecial laws, except those under PD No.529 [Petroleum ExplorationConcessionaires under the Petroleum Actof 1949]




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(12) Sales by agricultural cooperatives dulyregistered with the CooperativeDevelopment Authority to theirmembers as well as sale of theirproduce to non-members. Exemptionincludes importation of direct farm

inputs, machineries and equipment,including spare parts thereof, to beused directly and exclusively in theproduction and/or processing of theirproduce.

Sale by agricultural cooperatives to non-members can only be exempted from VAT ifthe producer of the agricultural productssold is the cooperative itself. If thecooperative is not the producer (e.g.,trader), then only those sales to itsmembers shall be exempted from VAT. [RR

16-2005] (13) Gross receipts from lending activities bycredit or multi-purpose cooperativesduly registered with the CooperativeDevelopment Authority

(14) Sales by non-agricultural, non- electricand non-credit cooperatives dulyregistered with the CooperativeDevelopment Authority are exempt BUTtheir importation of machineries andequipment, including spare partsthereof, to be used by them areSUBJECT to VAT.

(15)

Export sales by persons who are notVAT-registered

(16) Sale of real properties – the ff. sales areexempt:

(a) Sale of real properties NOT primarilyheld for sale to customers or held forlease in the ordinary course of trade orbusiness.However, even if the real property is notprimarily held for sale to customers orheld for lease in the ordinary course oftrade or business but the same is used in

the trade or business of the seller, thesale thereof shall be subject to VATbeing a transaction incidental to thetaxpayer’s main business. [RR 4-2007 ]

(b) Sale of real properties utilized for low-

cost housing as defined by RA No. 7279,otherwise known as the "UrbanDevelopment and Housing Act of 1992"

and other related laws, such as RA No.7835 and RA No. 8763.“Low-cost housing" refers to housingprojects intended for homeless low-income family beneficiaries, undertakenby the Government or private developers,

which may either be a subdivision or acondominium registered and licensed bythe Housing and Land Use RegulatoryBoard/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, andother laws, such as RA No. 7835 and RANo. 8763.

(c) Sale of real properties utilized forsocialized housing as defined under RA

No. 7279, and other related laws, such asRA 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 housing" refers to housingprograms and projects covering housesand lots or home lots only undertaken bythe Government or the private sector forthe underprivileged and homeless citizens which shall include sites and servicesdevelopment, long-term financing,

liberated terms on interest payments,and such other benefits in accordancewith the provisions of RA No. 7279andRA No. 7835 and RA No. 8763."Socialized housing" shall also refer toprojects intended for theunderprivileged 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. (d) Sale of residential lot valued at

P1,919,500 and below, or house & lotand other residential dwellings valued atP3,199,200 and below




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(i) If two or more adjacent residential lots are sold or disposed in favor of onebuyer, for the purpose of utilizing thelots as one residential lot, the saleshall be exempt from VAT only if theaggregate value of the lots does not

exceed P1,919,500. [RR 13-2012 ](ii) Adjacent residential lots, although

covered by separate titles and/orseparate tax declarations, when soldor disposed to one and the samebuyer, whether covered by one orseparate Deed of Conveyance, shallbe presumed as a sale of oneresidential lot. [RR 16-2005] Sale, transfer or disposal within a 12-month period of 2/more adjacentresidential lots, house and lots or

other residential dwellings to onebuyer, whether from the same or fromdifferent sellers shall be consideredone single transaction. Hence, thesale of the adjacent lots shall besubject to VAT if the aggregate valueexceeds P1,919,500 for residential lotsand P3,199,200 for residential houselots or residential dwellings,notwithstanding that the value of theindividual properties do not exceedthe VAT exemption thresholds.Sale/purchase of parking lots shall

not be considered a sale of residentiallot/dwelling. Hence, it shall besubject to VAT regardless of its sellingprice. [RR 13-2012 ]

(17) Lease of residential units with amonthly rental per unit not exceedingP12,800, 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 P12,800 but theaggregate of such rentals of the lessor

during the year do not exceed One MillionFive Hundred Pesos P1,919,500 shalllikewise be exempt from VAT, however, thesame shall be subjected to three percent(3%) percentage tax.

In cases where a lessor has several

residential units for lease, some are leasedout for a monthly rental per unit of notexceeding P12,800 while others are leasedout for more than P12,800 per unit, his taxliability will be as follows:

(a)

The gross receipts from rentals notexceeding P12,800 per month per unitshall be exempt from VAT regardless ofthe aggregate annual gross receipts.

(b) The gross receipts from rentalsexceeding P12,800 per month per unitshall be subject to VAT IF the aggregateannual gross receipts from said unitsonly (not including the gross receiptsfrom units leased for not more thanP12,800 ) exceeds P1,919,500 .Otherwise, the gross receipts will be

subject to the 3% tax imposed underSection 116 of the Tax Code.The term 'residential units' shall refer toapartments and houses & lots used forresidential purposes, and buildings orparts or units thereof used solely asdwelling places (e.g., dormitories, roomsand bed spaces) except motels, motelrooms, hotels and hotel rooms.The term 'unit' shall mean anapartment unit in the case ofapartments, house in the case ofresidential houses; per person in the

case of dormitories, boarding housesand bed spaces; and per room in case ofrooms for rent. [RR 16-2005]

(18) Sale, importation, printing orpublication of books and anynewspaper, magazine review or bulletinwhich appears at regular intervals withfixed prices for subscription and saleand which is not devoted principally tothe publication of paid advertisements;

(19) Sale, importation or lease of passengeror cargo vessels and aircraft, including

engine, equipment and spare partsthereof for domestic or internationaltransport operations [added by RA9337 ] ;




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PURCHASE OF REAL PROPERTIESFOR WHICH A VAT HAS ACTUALLYBEEN PAID

PURCHASE OF SERVICES IN WHICH

VAT HAS ACTUALLY BEEN PAID

TRANSACTIONS DEEMED SALE

PRESUMPTIVE INPUT TAX

[Sec. 111(B), NIRC ] Persons or firms engaged in the processing ofsardines, mackerel and milk, and inmanufacturing refined sugar and cooking oiland packed noodle based instant meals, shallbe allowed a presumptive input tax, creditableagainst the output tax, equivalent to FOUR

PERCENT (4%) of the gross value in money oftheir purchases of primary agricultural productswhich are used as inputs to their production.

TRANSITIONAL INPUT TAX(1) 2% of the value of the beginning inventory on

hand or actual VAT paid on such, goods,materials and supplies, whichever isHIGHER, which amount shall be creditableagainst the output tax of VAT-registeredperson.

(2) The value allowed for income tax purposes

on inventories shall be the basis for thecomputation of the 2% transitional input tax,EXCLUDING goods that are exempt fromVAT under Sec. 109 of the Tax Code. (RR 16-2005)

(3) Fort Bonifacio Development Corp. v. CIR (2012): A real estate dealer is entitled toclaim transitional input VAT based on thevalue of the entire real property soldregardless of whether there was in factactual payment of VAT on the purchase ofthe real property. At the time the purchasewas made, there was still no VAT imposed.

Claiming of input VAT on motor vehiclessubject to the ff conditions: (1) Purchase ofvehicle must be substantiated with officialreceipts and other records; (2) Taxpayer has

to prove the direct connection of the motor

vehicle to the business; (3) Only one vehiclefor land transport is allowed for the use of anofficial/employee with value not exceedingP2.4 million; (4) No depreciation shall be

allowed for yachts, helicopters, airplanes orland vehicles over P2.4 million unless thevehicle is used in the company's transportoperations or lease of transport equipment.[RR 12-2012 ]

PERSONS WHO CAN AVAIL OFINPUT TAX CREDIT

CREDITABLE INPUT TAX[Sec. 110(A)(2), NIRC ] Input tax on domestic purchase or importationof goods or properties shall be creditable:(1) To the purchaser upon consummation of sale

and on importation of goods or properties;and

(2) To the importer upon payment of the VATprior to the release of the goods from thecustody of the Bureau of Customs.

(1) The input tax on goods purchased orimported in a calendar month for use intrade or business for which deduction for

depreciation is allowed under the Code, shallbe spread evenly over the month ofacquisition and the fifty-nine (59) succeedingmonths if the aggregate acquisition cost forsuch goods, excluding the VAT componentthereof, exceeds One million pesos(P1,000,000)

(2) However, if the estimated useful life of the

capital good is less than five (5) years, as usedfor depreciation purposes, then the inputVAT shall be spread over such a shorter

period (3) To the purchaser of services or the lessee or

licensee upon payment of the compensation,rental, royalty or fee.

TRANSITIONAL TAX

[Sec. 111(A), NIRC ] 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 (a) equivalent to TWO PERCENT (2%) of the

value of such inventory; OR(b)

the actual VAT paid on such goods, materialsand supplies, whichever is HIGHER, whichshall be creditable against the OUTPUT TAX.




PAGE 160

PRESUMPTIVE INPUT TAX

[Sec. 111(B), NIRC ] Persons or firms engaged in the processing of

sardines, mackerel and milk, and inmanufacturing refined sugar and cooking oil and

packed noodle based instant meals, shall be

allowed a presumptive input tax, creditableagainst the output tax, equivalent to 4% of thegross value in money of their purchases ofprimary agricultural products which are used asinputs to their production.

Processing shall mean pasteurization, canningand activities which through physical orchemical process alter the exterior texture orform or inner substance of a product in suchmanner as to prepare it for special use to whichit could not have been put in its original form or

condition. [RR 16-05]

DETERMINATION OFOUTPUT/INPUT TAX; VATPAYABLE; EXCESS INPUT TAXCREDITS

DETERMINATION OF OUTPUT TAXFor the sale of goods, properties, and servicesand use or lease of properties, the output taxshall be computed by multiplying the total

amount indicated in the invoice or receipt by12%.

For the sale of real property where the zonalvalue/market value applies, the output tax shallbe computed by multiplying the zonal value ormarket value by 12%.

For importation, the output tax is equivalent tothe VAT due on such importation.

For transactions deemed sale, the output tax

shall be based on the market value of the goodsdeemed sold as of the time of the occurrence ofthe transactions except that in the case ofretirement from or cessation of business, the taxbase shall be the acquisition cost or the currentmarket price of the goods, whichever is lower.

If at the end of any taxable quarter, the outputtax exceeds the input tax, the excess shall bepaid by the VAT-registered person. [Sec. 110(B),NIRC ]

DETERMINATION OF INPUT TAX

CREDITABLE

[Sec. 110 , NIRC ] (1) The sum of the excess input tax carried over

from the preceding month or quarter and theinput tax creditable to a VAT-registeredperson during the taxable month or quartershall be reduced by the amount of claim forrefund or tax credit for value-added tax andother adjustments, such as purchase returnsor allowances and input tax attributable toexempt sale.

(2) The claim for tax credit referred to includes

not only those filed with the BIR but alsothose filed with other government agencies,such as the Board of Investments the Bureauof Customs.

ALLOCATION OF INPUT TAX ONMIXED TRANSACTIONSA VAT-registered person who is also engaged intransactions not subject to VAT shall be allowedto recognize input tax credit on transactionssubject to VAT as follows:

(1)

All the input taxes that can be directly

attributed to transactions subject to VAT maybe recognized for input tax creditInput taxes that can be directly attributableto VAT taxable sales of goods and services tothe Government or any of its politicalsubdivisions, instrumentalities or agencies,including GOCCs shall not be credited against output taxes arising from sales tonon-Government entities

(2) If any input tax cannot be directly attributed to either a VAT taxable or VAT-exempttransaction, the input tax shall be pro-rated to the VAT taxable and VAT-exempttransactions and ONLY the ratable portion

pertaining to transactions subject to VAT maybe recognized for input tax credit.




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Illustration: ERA Corporation has the followingsales during the month:

Sale to private entities subject to12% 100,000.00

Sale to private entities subject to

0% 100,000.00Sale of exempt goods 100,000.00Sale 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 onby its VAT suppliers):

Input tax on taxable goods (12%) 5,000.003,000.002,000.004,000.00

Input tax on zero-rated salesInput tax on sale of exempt goodsInput tax on sale to government

Input tax on depreciable capital goodnot attributable to any specific activity(monthly amortization for 60months) 20,000.00

Step 1: The creditable input tax for the monthshall be computed as follows:Input tax on sale subject to 12% P5,000.00Input tax on zero-rated sale3,000.00

Ratable portion of the input tax not directlyattributable to any activity, computed below

Total creditable input tax for the month:P18,000.00 (P5,000+P3,000+P10,000)

Step 2: The input tax attributable to sales to

government for the month shall be computedas follows:Input tax on sale to gov't. P4,000.00

Ratable portion of the input tax not directlyattributable to any activity, computed as follows:

Total input tax attributable to sales togovernment: P9,000.00 (P4,000 + P5,000)

These amounts are not available for input taxcredit but may be recognized as cost orexpense. That is because as far as sales togovernment are concerned, there is a VAT thatis finally withheld (at 5%).

Step 3: The input tax attributable to VAT-exempt sales for the month shall be computedas follows:Input tax on VAT-exempt sales P2,000.00

Ratable portion of the input tax not directlyattributable to any activity, computed below:

Total input tax attributable:P7,000.00VAT-exempt sales (P2,000+ P5,000)

These amounts are not available for input taxcredit but may be recognized as cost orexpense.




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DETERMINATION OF THE OUTPUTTAX AND VAT PAYABLE ANDCOMPUTATION OF VAT PAYABLE OREXCESS TAX CREDITS[Sec. 110 (B), NIRC ]

HOW OUTPUT TAX COMPUTED

[RR 16-05]

In a Sale of Goods/Properties

For Sellers of Services

WHERE VAT ERRONEOUSLY BILLED

Where the basis for computing the output tax iseither the gross selling price/gross receipts, butthe amount of VAT is erroneously billed in theinvoice, the total invoice amount shall bepresumed to be comprised of the gross sellingprice/gross receipts plus the correct amount ofVAT. Hence,

Accordingly, the input tax that can be claimed bythe buyer shall be the corrected amount of VATcomputed in accordance with the formula prescribed.

VAT Payable & Excess Input Tax

The VAT payable is the excess of output tax overallowable input tax.

If at the end of any taxable month or quarter:(a) the output tax exceeds the input tax, theexcess shall be paid by the VAT-registered

person

(b) the input tax exceeds the output tax, theexcess shall be carried over to the

succeeding quarter or quarters

(1) Any input tax attributable to zero-rated salesby a VAT-registered person may at his optionbe refunded or applied for a tax creditcertificate which may be used in the paymentof internal revenue taxes.

SUBSTANTIATION OF INPUTTAX CREDITS[RR 16-2005] (1) INPUT TAXES must be substantiated and

supported by the following documents, andmust be reported in the information returns required to be submitted to the Bureau:(a) For the importation of goods = Import

entry or other equivalent documentshowing actual payment of VAT on theimported goods.

(b) For the domestic purchase of goods and

properties = Invoice showing theinformation required under Secs. 113(Invoicing and Accounting Requirementsfor VAT-Registered Persons) and 237(Issuance of Receipts or Sales orCommercial Invoices) of the Tax Code.

(c) For the purchase of real property = public

instrument i.e., deed of absolute sale,deed of conditional sale,contract/agreement to sell, etc., togetherwith VAT invoice issued by the seller.

(d) For the purchase of services = official

receipt showing the information requiredunder Secs. 113 and 237 of the Tax Code.

A cash register machine tape issued to aregistered buyer shall constitute valid proof ofsubstantiation of tax credit only if it shows theinformation required under Secs. 113 and 237 ofthe Tax Code.(2) TRANSITIONAL INPUT TAX shall be

supported by an inventory of goods as shownin a detailed list to be submitted to the BIR.

(3) Input tax on DEEMED SALE

TRANSACTIONS shall be substantiated with

the invoice required.(4) INPUT TAX FROM PAYMENTS MADE TO

NON-RESIDENTS (such as for services,rentals and royalties) shall be supported by acopy of the Monthly Remittance Return of

Value Added Tax Withheld [BIR Form 1600]filed by the resident payor in behalf of thenon-resident evidencing remittance of VATdue which was withheld by the payor.




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(5) ADVANCE VAT ON SUGAR shall besupported by the Payment Order showingpayment of the advance VAT.

REFUND OR TAX CREDIT OF

EXCESS INPUT TAXWHO MAY CLAIM FORREFUND/APPLY FOR ISSUANCE OFTAX CREDIT CERTIFICATE (TCC)(1) Zero-Rated Sales [Sec. 112(A), NIRC ]

(a) Any VAT-registered person, whose salesare zero-rated or effectively zero-ratedmay apply for the issuance of a tax credit

certificate/refund of creditable input taxdue or paid attributable to such sales,EXCEPT transitional input tax, to the

extent that such input tax has not beenapplied against output tax, within two (2)years after the close of the taxable quarterwhen the sales were made. The input taxthat may be subject of the claim shallexclude the portion of input tax that hasbeen applied against the output tax.

(b) The acceptable foreign currency exchangeproceeds must have been duly accountedfor in accordance with the rules andregulations of the Bangko Sentral ngPilipinas (BSP) in the case of zero-ratedtransactions paid for in acceptable foreigncurrency and requiring that such beaccounted for in accordance with BSPrules & regulations [Secs. 106(A)(2)(a)(1)and (2), and Sec. 106(A)(2)(b) and Sec.108(B)(1) and (2), NIRC ].

(c) Where the taxpayer is engaged in zero-rated or effectively zero-rated sale andalso in taxable or exempt sale of goods ofproperties or services, and the amount ofcreditable input tax due or paid cannot bedirectly and entirely attributed to any oneof the transactions, it shall be allocated

proportionately on the basis of the volume

of sales.

(d) In the case of a person engaged in thetransport of passenger and cargo by air orsea vessels from the Philippines to aforeign country, the input taxes shall beallocated ratably between his zero-ratedsales and non-zero-rated sales (salessubject to regular rate, subject to final

VAT withholding and VAT-exempt sales).[RR 16-2005]Eastern Telecommunications Philippines,

Inc. v. CIR (2012): The absence of the word“zero-rated” on the invoices and receiptsof a taxpayer will result in the denial of

the claim for tax refund.(2) Cancellation of VAT Registration. [Sec. 112 (C),

NIRC ] (a) A person whose registration has been

cancelled due to retirement from orcessation of business, or due to changes inor cessation of status under Section106(C) of the Code may, within two (2)

years from the date of cancellation, apply

for the issuance of a tax credit certificate

for any unused input tax which may beused in payment of his other internal

revenue taxes.(b) He shall be entitled to a refund if he hasno internal revenue tax liabilities againstwhich the tax credit certificate may beutilized.

PERIOD TO FILE CLAIM/APPLY FORISSUANCE OF TAX CREDITCERTIFICATE [Sec. 112 (D), NIRC ] In proper cases, the Commissioner of InternalRevenue shall grant a tax credit

certificate/refund for creditable input taxeswithin one hundred twenty (120) days from the

date of submission of complete documents insupport of the application.

In case of full or partial denial of the claim fortax credit certificate/refund as decided by theCommissioner of Internal Revenue:(a) The taxpayer may appeal to the Court of Tax

Appeals (CTA) within thirty (30) days fromthe receipt of said denial, otherwise thedecision shall become final.

(b)

If no action on the claim for tax creditcertificate/refund has been taken by theCommissioner of Internal Revenue after theone hundred twenty (120) day period fromthe date of submission of the applicationwith complete documents, the taxpayer mayappeal to the CTA within 30 days from thelapse of the 120-day period. [RR 16-2005]




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MANNER OF GIVING REFUNDRevenue Memorandum Circular no. 57-2013(August 23, 2013): Unutilized creditable inputtaxes attributed to zero-rated sales can only berecovered through the application for refund ortax credit. There is no other mode of recovering

unapplied input taxes aside from an applicationfor refund or tax credit. The MemorandumCircular also instructed the disallowance ofunutilized creditable input taxes attributable toVAT zero-rated sales that is claimed as adeduction for income tax purposes.

Refunds shall be made upon warrants drawn bythe Commissioner or by his duly authorizedrepresentative without the necessity of beingcountersigned by the Chairman, Commission onAudit, the provisions of the Administrative Code

of 1987 notwithstanding: provided that refundsshall be subject to post audit by theCommission on Audit. [Sec. 112(D), NIRC ]

DESTINATION PRINCIPLE ORCROSS-BORDER DOCTRINE

DESTINATION PRINCIPLE (1) It is the basis for the jurisdictional reach of

the VAT.(2) CIR v. American Express International (2005):

As a general rule, goods and services aretaxed only in the country where they areconsumed. (Deoferio Jr. and Mamalateo. TheValue Added Tax in the Philippines, p. 43)

Corollarily, the Cross Border Doctrine mandatesthat no VAT shall be imposed to form part ofthe cost of the goods destined for consumptionoutside the territorial border of the taxingauthority.

Atlas Consolidated Mining & Dev. Corp. v. CIR

(2007): Hence, actual export of goods and

services from the Philippines to a foreigncountry must be free of VAT, while thosedestined for use or consumption within thePhilippines shall be imposed with 12% VAT.[Deoferio Jr. and Mamalateo, p. 422 ]

CIR v. American Express (2005): The court enumerated the exceptions to thedestination principle.

As a general rule, the value-added tax (VAT)system uses the destination principle.

However, our VAT law itself provides for a clearexception, under which the supply of serviceshall be zero-rated when the following

requirements are met:(1) the service is performed in the Philippines;(2) the service falls under any of the categories

provided in Section 102(b) of the Tax Code;and

(3) it is paid for in acceptable foreign currencythat is accounted for in accordance with theregulations of the Bangko Sentral ngPilipinas.

INVOICING REQUIREMENTS

INVOICING REQUIREMENTS INGENERALA 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 orexchange of services.

Only VAT-registered persons are required toprint their TIN followed by the word “VAT” intheir invoice or ORs. Said documents shall be

considered as a “VAT Invoice” or VAT officialreceipt. All purchases covered byinvoices/receipts other than VAT Invoice/VATOR shall not give rise to any input tax. [RR 16-05]

INFORMATION CONTAINED IN THE VATINVOICE OR VAT OFFICIAL RECEIPT

[RR 16-2005] (1) A statement that the seller is a VAT-

registered person, followed by his taxpayer'sidentification number (TIN);

(2)

The total amount which the purchaser paysor is obligated to pay to the seller with theindication that such amount includes theVAT:(a) The amount of the tax shall be shown as a

separate item in the invoice/receipt;




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(b) If the sale is exempt from VAT, the term"VAT-exempt sale" shall be written orprinted prominently on the invoice orreceipt;

(c) If the sale is subject to zero percent (0%)value-added tax, the term "zero-rated

sale" shall be written or printedprominently on the invoice or receipt;

(d) If the sale involves goods, properties orservices some of which are subject to andsome 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 ofthe value-added tax on each portion ofthe sale shall be shown on the invoice orreceipt. The seller has the option to issue

separate invoices or receipts for thetaxable, exempt, and zero-ratedcomponents of the sale.

(3) The date of transaction, quantity, unit costand description of the goods or properties ornature of the service; and

(4) In the case of sales in the amount of onethousand pesos (P1,000) or more where thesale or transfer is made to a VAT-registeredperson, the name, business style, if any,address and taxpayer identification number(TIN) of the purchaser, customer or client.

INVOICING AND RECORDINGDEEMED SALE TRANSACTIONS

Transaction Invoicing Requirement

Transfer, use orconsumption not inthe course of businessof goods or propertiesoriginally intended forsale or for use in thecourse of business

Memorandum entry inthe subsidiary sales journal to recordwithdrawal of goodsfor personal use

Distribution or transfertoshareholders/investors or creditors

Invoice, at the time ofthe transaction, whichshould include all theinfo prescribed above;data in the invoiceshall be duly recordedin the subsidiary sales journal

Transaction Invoicing Requirement

Consignment of goodsif actual sale is notmade within 60 days

Invoice, at the time ofthe transaction, whichshould include all the

info prescribed above;data in the invoiceshall be duly recordedin the subsidiary sales journal

Retirement from orcessation of businesswith respect to allgoods on hand

An inventory shall beprepared andsubmitted to the RDOwho has jurisdictionover the taxpayer’sprincipal place ofbusiness not later

than 30 days afterretirement orcessation frombusiness. An invoiceshall be prepared forthe entire inventory,which shall be thebasis of the entry intothe subsidiary sales journal. The invoiceneed not enumeratethe specific itemsappearing in theinventory regardingthe description of thegoods. If the businessis to be continued bythe new owners orsuccessors, the entireamount of output taxon the amountdeemed sold shall beallowed as inputtaxes.

CONSEQUENCES OF ISSUINGERRONEOUS VAT INVOICE OR VATOFFICIAL RECEIPT[Sec. 113 (D), NIRC ]




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ISSUANCE OF A VAT INVOICE OR VATRECEIPT BY A NON-VAT PERSON – If aperson who is not a VAT-registered person

issues an invoice or receipt showing his TaxpayerIdentification Number (TIN), followed by the

word VAT , the erroneous issuance shall result

to the ff:(a) The non-VAT person shall be liable to:

(i) percentage taxes applicable to histransactions;

(ii) VAT due on transactions under Section106 or 108 of the Code, without thebenefit of any input tax credit; and

(iii)a 50% surcharge under Section 248 (B) ofthe code;

(b) The VAT shall, if the other requisiteinformation required is shown on theinvoice/receipt, be recognized as an input tax

credit to the purchaser.

ISSUANCE OF A VAT INVOICE OR VATRECEIPT ON AN EXEMPT TRANSACTION BYA VAT-REGISTERED PERSON – If a VAT-registered person issues a VAT invoice or VATofficial receipt for a VAT-exempt transaction,but fails to display prominently on the invoice or

receipt the term VAT-exempt Sale , thetransaction shall become taxable and the issuershall be liable to pay VAT thereon. Thepurchaser shall be entitled to claim an input taxcredit on his purchase. [RR 16-05]

FILING OF RETURN ANDPAYMENT

VAT RETURNS [Sec. 114, NIRC ] (a) Filed by person liable to pay the VAT(b) Quarterly return of the amount of his gross

sales or receipts within twenty-five (25) days after the close of each taxable quarterprescribed for each taxpayer.

(c) The monthly VAT Declarations of taxpayers

whether large or non-large shall be filed andthe taxes paid not later than the 20th dayfollowing the end of each month.

Note: VAT paid on a monthly basis. Payments inthe monthly VAT declarations shall be credited in the quarterly VAT return to arrive at the netVAT payable or excess input tax/over-paymentas of the end of a quarter.

FINAL WITHHOLDING TAXAs a general rule, withholding tax does notapply on transactions subject to VAT. Theexceptions are:(1) Gross payments by the government shall be

subject to the 5% final withholding tax;

(2)

Gross payments by resident VAT-taxpayersto non-resident foreign persons of rentals,royalties, reinsurance premiums, and servicesdone in the Philippines—12% [Sec. 114(c),NIRC ]

* Beginning Nov. 1, 2005, when R.A. 9337became effective, all sales of goods, properties,or services to the government shall be subject tothe 5% final withholding tax. The governmentshall, before making payment on account ofeach purchase of goods and/or services taxed at

10% or 12% VAT (Sec. 106 and 108) deduct andwithhold a final VAT due at the rate of 5% of thegross payment thereof. [Mamalateo, Reviewer onTaxation, 2008]

RR. 16-2005. Administrative and PenalProvisions.(1) Suspension of business operations. In

addition to other administrative and penalsanctions provided for in the Tax Code andimplementing regulations, the Commissionerof 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 ofthe following violations:(a) Failure to issue receipts and invoices.(b) Failure to file VAT return as required

under the provisions of Sec. 114 of theTax Code.

(c) Understatement of taxable sales orreceipts by 30% or more of his correcttaxable sales or receipt for the taxablequarter.

(d) Failure of any person to register asrequired under the provisions of Sec.236 of the Tax Code.

(2) Surcharge, interest and other penalties. Theinterest on unpaid amount of tax, civilpenalties and criminal penalties imposed inTitle XI of the Tax Code shall also apply toviolations of the provisions of Title IV of theTax Code (VAT).




PAGE 167

WITHHOLDING OF FINAL VATON SALES TO GOVERNMENT [Sec.

114 (C), NIRC ] (a) The Government or any of its political

subdivisions, instrumentalities or agencies,

including GOCCs shall, before makingpayment on account of each purchase ofgoods and services which are subject to theVAT [Secs. 106 and 108, NIRC ], deduct and

withhold a final VAT due at the rate of fivepercent (5%) of the gross payment thereof.

(b) The payment for lease or use of properties orproperty rights to nonresident owners shallbe subject to 12% withholding tax at the timeof payment.(1) The payor or person in control of the

payment is considered as the withholdingagent.

(2)

The VAT withheld shall be remitted withinten (10) days following the end of themonth the withholding was made.

Note: This 5% final VAT withheld by thegovernment is an innovation of RA 9337.

RR. 16-2005. The 5% final VAT shall representthe net VAT payable of the seller. Theremaining 7% effectively accounts for thestandard input VAT, in lieu of the actual inputVAT 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.)(1) Should actual input VAT exceed 7% of the

gross payments, the excess may form part ofthe sellers’ expense or cost.

(2) On the other hand, if actual input VAT is lessthan 7% of gross payment, the differencemust be closed to expense or cost, in effectreducing it.

However, 12% final VAT shall be withheld withrespect 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.




PAGE 168

Tax Remedies under theNIRC

TAXPAYER’S REMEDIES

ASSESSMENT

CONCEPT OF ASSESSMENTAssess means to impose a tax; to charge with atax; to declare a tax to be payable; to apportiona tax to be paid or contributed, to fix a rate; tofix or settle a sum to be paid by way of tax; toset, fix or charge a certain sum to each taxpayer;to settle determine or fix the amount of tax tobe paid [84 C.J.S 74-750]

An assessment is the notice to the effect thatthe amount therein stated is due from ataxpayer as a tax with a demand for payment ofthe same within a stated period of time.[Commissioner v. CTA, 27 SCRA 1159]

Requisites for valid assessment:(1) The taxpayer shall be informed in writing of

the law and the facts on which theassessment is made [Sec. 228, NIRC ]

(2) An assessment contains not only acomputation of tax liabilities, but also ademand for payment within a prescribedperiod [CIR v. PASCOR]

(3) An assessment must be served on andreceived by the taxpayer [CIR v. PASCOR]

Constructive methods of incomedeterminationRely upon circumstantial evidence ofdetermining the correct income or transactionof a taxpayer (Indirect Method) (1) Expenditure Method It proceeds on the

theory that where the amount of moneywhich a taxpayer spends during a given year

exceeds his reported income, and thesource of such money is otherwiseunexplained, it may be inferred that suchexpenditures represent unreported income.

(2) Percentage Method This method is acomputation whereby determinations aremade by the use of percentages or ratiosconsidered typical of the business underinvestigation. By reference to similarbusiness or situations, percentage

computations are secured to determinesales, gross profit or even net profit.

(3) Unit and Value Method The determinationof gross receipts may be computed byapplying price and profit figures to theknown ascertainable quality of businessdone by taxpayer

Inventory method for income determination

(Net Worth Method)

Holland v US: In a typical net worth prosecution,the Government, having concluded that the

taxpayer's records are inadequate as a basis fordetermining income tax liability, attempts toestablish an "opening net worth" or total netvalue of the taxpayer's assets at the beginningof a given year. It then proves increases in thetaxpayer's net worth for each succeeding yearduring the period under examination, andcalculates the difference between the adjustednet values of the taxpayer's assets at thebeginning and end of each of the years involved.The taxpayer's nondeductible expenditures,including living expenses, are added to theseincreases, and if the resulting figure for any yearis substantially greater than the taxable incomereported by the taxpayer for that year, theGovernment claims the excess representsunreported taxable income.

Formula:Increase in Net worth

Add: Non-deductible ItemLess: Non-taxable income or receiptssubjected to final tax transfer taxes

Taxable Net IncomeLess: Personal and additional exemptions

NET INCOME SUBJECT TO TAX




PAGE 169

Jeopardy AssessmentA tax assessment made by an authorizedRevenue Officer (RO) without the benefit ofcomplete or partial audit, in light of the RO’sbelief that the assessment and collection of thedeficiency tax will be jeopardized by delay

caused by the taxpayer’s failure to: i) complywith audit and investigation requirements topresent his books of accounts and/or pertinentrecords or ii.) Substantiate all or any of thedeductions, exemptions or credits claimed in hisreturn.

It is usually issued when statutory prescriptiveperiods for the assessment or collection of taxesare about to lapse due principally to thetaxpayer’s fault.

Tax Delinquency v. Tax Deficiencya. Deficiency - amount still due and collectiblefrom a taxpayer upon audit or investigation. Adeficiency tax has to go through the process offiling the protest against the assessment by theby the taxpayer and denial of such protest bythe BIR. [Mamalateo, 2008]b. Delinquency - failure of the taxpayer to paythe tax due on the date fixed by law or indicatedin the assessment notice or letter of demand.

Powers of the Commissioner:(A) To make assessments and prescribe

additional requirements for tax administration

and enforcement [Sec. 6, NIRC]

(1)Examination of Returns and Determinationof Tax Due [Sec. 6(A), NIRC ]

(a) After a return has been filed, the CIRmay authorize the examination of anytaxpayer and the assessment of thecorrect amount of tax.

(b) Failure to file a return shall not preventthe CIR from authorizing theexamination.

(2) Best evidence obtainable [Sec 6(B), NIRC ]The CIR shall assess the proper tax on thebest evidence obtainable when:

(a) the taxpayer fails to submit therequired returns, statements reportsand other documents

(b) there is a reason to believe that anysuch report is false, incomplete orerroneous

(3) Conduct INVENTORY-TAKING,SURVEILLANCE and to PRESCRIBEpresumptive gross sales and receipts [Sec.6(C), NIRC ](a) Inventory-taking – at any time during

the taxable year, for the purpose of

determining the correct tax liabilities.(b) Surveillance – done if there is reason

to believe that the taxpayer is notdeclaring his correct income, sales orreceipts for tax purposes.

(c) Prescribe presumptive gross sales and

receipts if:(i) It is found that the taxpayer has

failed to issue receipts and invoices,or

(ii) When there is reason to believe thatthe books of accounts or other

records do not correctly reflect thedeclarations made by the taxpayer(4) TERMINATE Taxable Period [Sec. 6(D),

NIRC ]Terminating taxable period and orderingthe immediate payment of the tax for theterminated period and any remaining taxthat is unpaid, when the taxpayer is:(a) retiring from business subject to tax, or(b) intending to leave the Philippines or to

remove his property therefrom or tohide or conceal his property;

(c) performing any act tending to obstruct

the proceedings for the collection ofthe tax for the past or current quarteror year or to render the same totally orpartially ineffective unless suchproceedings are begun immediately

(5) PRESCRIBE Real Property Values [Sec.6(E), NIRC ](a) Dividing the Philippines into different

zones or areas, and determining theFMV of real properties in each zone orarea, upon consultation withcompetent appraisers from private and

public sectors.(b) For the purpose of computing any

internal revenue tax, the value of theproperty shall be WHICHEVER ISHIGHER OF:(i) The FMV as determined by the

Commissioner, or




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(ii) The FMV as shown in the scheduleof values of the provincial and cityassessors

(6) INQUIRE into Bank Deposit Accounts[Sec. 6(F), NIRC ]Notwithstanding any contrary provision of

R.A. 1405 (Bank Secrecy Law) and othergeneral or special laws, the Commissioneris authorized to inquire into bank depositsof:(a) A decedent to determine his gross

estate, and(b) Any taxpayer who has filed an

application for compromise of tax

liability by reason of financialincapacity: the taxpayer must waive in

writing his privilege under R.A. 1405and other relevant laws, before the

Commissioner may inquire into hisbank accounts.(7) ACCREDIT and REGISTER Tax Agents

[Sec 6(G), NIRC ]Accrediting and registering tax agents (maybe individuals or general professionalpartnerships) based on the following criteria:

(a) Professional competence(b) Integrity(c) Moral fitness

(8) PRESCRIBE additional PROCEDURALOR DOCUMENTARY requirements [Sec.6(H), NIRC ]

In relation to the manner of compliance ofany requirement in connection with thesubmission or preparation of financialstatements accompanying the taxreturns.

(B) To obtain information and to summon,

examine, and take testimony of persons [Sec. 5,

NIRC]

(1) EXAMINE RETURNS and DETERMINETAX DUE [Sec 5, NIRC ]Authorizing the examination of any

taxpayer and the assessment of thecorrect amount of tax, WON a return hasbeen filed by such taxpayer.

Note: Any return filed with theCommissioner shall not be withdrawn,BUT the taxpayer may MODIFY, CHANGEor AMEND such return within three (3)

years from the date of filing, provided that

no notice for audit or investigation of suchreturn has been actually served on thetaxpayer.

(2) ACCESS Letter [Sec. 5(B), NIRC ](a) 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 orofficer of the national and localgovernments, government agencies orinstrumentalities, including BSP andGOCCs,

(b) Any information such as, but notlimited to, costs and volumes of

production, receipts or sales and gross

incomes of taxpayers, and the namesaddresses, and financial statements of

corporations, mutual fund companies,insurance companies etc.

Note: This is known as the Third Party

Information Rule.

(C) INTERPRET Tax LAWS and to DECIDE TaxCASES [Sec. 4, NIRC ; RMC 44-01]

(1) Shall be under the exclusive and original jurisdiction of the Commissioner, subjectto review by the Secretary of Finance.

(2) A ruling by the BIR Commissioner shall

be presumed VALID unless modified,reversed or superseded by the Secretaryof Finance.

(3) A taxpayer who receives an adverse rulingfrom the Commissioner may, within thirty

(30) days from the date of receipt of suchruling, seek its review by the Secretary ofFinance, either by himself/itself or thoughhis/its duly authorized representative.

(4) A reversal or modification of the BIRruling shall terminate its effectivity uponthe receipt by the taxpayer or the BIR ofwritten notice of reversal or modification,whichever came earlier.

Note: DOF Order 7-02 added that theSecretary of Finance may review the rulingsMOTU PROPRIO.




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The penalty shall be fifty percent (50%) of thetax or of the deficiency tax, in the followingcases:(1) WILLFUL NEGLECT to FILE THE RETURN

within the period prescribed(2) A FALSE OR FRAUDULENT RETURN is

wilfully made

Prima-facie evidence of false or fraudulent

return: (i) substantial under declaration of taxablesales, receipts or income (failure to report sales,receipts or income in an amount exceeding 30%of that declared per return); or(ii) substantial overstatement of deductions (aclaim of deduction in an amount exceeding 30%of actual deductions)

Section 5 of RR 12-99 is hereby amended bymodifying Section 5.5 thereof which provides formodes of procedures in computing for the taxand/or applicable surcharge. In cases of latepayment of a deficiency tax assessed, thetaxpayer shall be liable for the delinquency

interest (no longer civil penalties under RR 12-

99) provided under Section 249 (C)(3) of the1997 National Internal Revenue Code, asamended. (RR 18-2013)

(b) Interest (Sec 249, NIRC)

20% per annum on any unpaid amount of tax,

from the date prescribed for payment until theamount is fully paid.

Deficiency Interest

–

the interest due on anyamount of tax due or installment thereof whichis not paid on or before the date prescribed forits payment [Mamalateo, 2008]

Delinquency Interest- the interest required to bepaid in case of failure to pay: tax due on anyreturn required to be filed, or tax due for whichno return is required, or a deficiency tax, or any

surcharge or interest thereon on the due dateappearing in the notice and demand of theCommissioner, there shall be assessed andcollected on the unpaid amount, interest at therate prescribed until the amount is fully paid,which interest shall form part of the tax

• The delinquency interest is in addition to theinterest in the FAN as a result of failure to paythe deficiency tax assessed within the timeprescribed for its payment. [First Lepanto TaishoInsurance Corp. v. CIR (2013)]

(c) Compromise penalties

Compromise penalty v. Compromise

Compromise penalty - an amount of money paidby a taxpayer to compromise a tax violation thathe has committed, which may be the subject ofcriminal prosecution. The basis of the amountpaid is the gross sales or receipts during theyear or the tax due.

Compromise - an amount of money paid by thetaxpayer to settle his civil liability for tax

assessed by the government. The basis of theamount paid is the basic tax assessed.[Mamalateo, 2008]

Assessment Process [Sec. 228, NIRC; RR 12-99]First Step: Tax AuditIn a tax audit, revenue officers examine thebooks of account and other accounting recordsof taxpayers to determine the correct taxliability. This is through the issuance of a Letterof Authority.

Letter of Authority: An official document that

empowers a Revenue Officer to examine and

scrutinize a taxpayer’s books of accounts andother accounting records, in order to determinethe taxpayer’s correct internal revenue taxliabilities.

Cases which need not be covered by a valid LA:(1) Cases involving civil/criminal tax fraud which

fall under the jurisdiction of the tax frauddivision of the Enforcement Services, and

(2) Policy cases under audit by the special teamsin national offices

Section 3 of RR 12-99 is hereby amended bydeleting Section 3.1.1 thereof which provides forthe preparation of a Notice of InformalConference, thereby renumbering otherprovisions thereof, and prescribing otherprovisions for the assessment of tax liabilities[RR No. 18-2013]




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Second Step: Issuance of PreliminaryAssessment Notice (PAN) [Sec. 228, NIRC;RR18-2013]

If after review and evaluation by theCommissioner or his duly authorized

representative , it is determined that there exists sufficient basis to assess the taxpayer for anydeficiency tax or taxes, the said Office shallissue to the taxpayer the PAN for the proposedassessment.

The PAN shall show in detail the facts and thelaw, rules and regulations, or jurisprudence onwhich the proposed assessment is based.

Third Step: Reply to PANTaxpayer is given time to respond: 15 days from

date of receipt of PAN (1) If he/she fails to respond: taxpayer isconsidered in default; a formal letter ofdemand and assessment notice shall beissued to the taxpayer

(2) The regulations use the term “reply” todistinguish the written objection(s) against aFAN issued by the BIR, where the genericterm “protest” or the specific term “requestfor reconsideration” or “request forreinvestigation” is utilized.

The PAN shall not be required in any of the ff

cases, in which case, issuance of the FormalAssessment Notice (FAN) shall be sufficient:(1) The finding for any deficiency tax is the result

of MATHEMATICAL ERROR in thecomputation of the tax as appearing on theface of the return; or

(2) A DISCREPANCY has been determinedbetween the TAX WITHHELD and theamount ACTUALLY REMITTED by thewithholding agent; or

(3) A taxpayer who opted to claim a refund or taxcredit of excess creditable withholding tax for

a taxable period was determined to have

carried over and automatically applied the

same amount claimed against the estimatedtax liabilities for the taxable quarter orquarters of the succeeding taxable year ; or

(4) The EXCISE TAX due on excisable articleshas not been paid; or

(5) An article locally purchased or imported byan exempt person, such as, but not limitedto, vehicles, capital equipment, machineriesand spare parts, has been sold, traded ortransferred to a non-exempt person. (Sec.228, NIRC)

In the above-cited cases, a FLD/FAN shall beissued outright.

Fourth Step: Issuance of formal letter ofdemand and final assessment notice(a) A Final Assessment Notice (FAN) is a

declaration of deficiency taxes issued to ataxpayer who:(i) fails to respond to a pre-assessment

notice within the prescribed period oftime, or

(ii)

whose reply to the PAN was found to bewithout merit.(b) Sec 228: The taxpayer shall be informed in

writing of the law and the facts on which theassessment is made; otherwise theassessment shall be void

(c) An assessment contains not only acomputation of tax liabilities, but also ademand for payment within a prescribedperiod.

Fifth Step: Disputed AssessmentThe taxpayer or his duly authorized

representative may protest administrativelyagainst the formal letter of demand andassessment notice within thirty days (30) fromdate of receipt.

Sixth Step: Administrative decision on adisputed assessmentThe power to decide disputed assessments,refunds of internal revenue taxes, fees or othercharges, penalties imposed in relation thereto,or other matters is vested in the Commissioner,subject to the exclusive appellate jurisdiction of

the Court of Tax Appeals.




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Protesting Assessment [Sec 228, NIRC; RR 12-99] (a) Protest of assessment by taxpayer

(i) Made within thirty (30) days from receiptof the assessment.

(ii) Protest is either a request for

reconsideration or a request forreinvestigation, or both

(iii) A protest is considered validly made if itsatisfies the following conditions:(a) it is made in writing, and addressed

to the Commissioner of InternalRevenue,

(b) it contains the information requiredby the rule,

(c) It states the FACTS, applicable LAW,RULES and REGULATIONS orJURISPRUDENCE on which his

protest is based, otherwise theprotest shall be considered void andwithout force and effect and

(d) It is filed within the period prescribed by law

(b) Submission of documents within 60 days

from filing of protest

Within sixty (60) days from filing of the protest,all relevant supporting documents must besubmitted, otherwise the assessment shallbecome final. [Sec. 228]

(c) Effect of failure to protest: the assessmentshall become final, executory and demandable.

(d)Period provided for protest to be acted upon:

Protest should be acted upon within 180 daysfrom submission of documents

Rendition of Decision by Commissioner

CIR’s actions deemed equivalent to denial ofprotest:(a) Filing of collection suit against taxpayer [CIR

v. Union Shipping (1990)]

(b) Issuing a warrant of distraint and levy[Commissioner v. Algue (1988)]

(c) Where there is a request for reconsideration,final demand letter from BIR [CIR v. IsabelaCultural Corp (2007)]

(d) Notice of delinquency [CIR v. Ayala Securities(1976)]

(e) Inaction by Commissioner - If the protest isnot acted upon within one hundred eighty(180) days from submission of documents,the inaction by the Commissioner isconsidered as a denial of protest.

Remedies of Taxpayer to Action by

Commissioner

(a) In case of denial of protest

If the Commissioner DENIES THE PROTEST filedby the taxpayer, the latter may appeal to theCTA within 30 days from receipt of the decisiondenying the protest [Sec. 228, NIRC ]

(i) The 30-day period starts when thetaxpayer receives the decision of theCommissioner denying the protest.

(ii) The decision of the Commissioner mustcategorically state that his action on the

disputed assessment is final, otherwiseperiod to appeal will not commence torun. [ Advertising Associates v. CA (1984)]

A Motion for Reconsideration on the CIR’sdenial of the protest or administrative appealshall not toll the 30-day period to appeal to theCTA [RR 18-2013]

Note: A Division of the CTA shall hear theappeal. [Sec. 11, RA 1125 as amended by RA 9282(2004)]

(b) In case of inaction by Commissioner within

180 days from submission of documents

If the Commissioner did NOT ACT UPON THEPROTEST within 180 days from the time thedocuments were submitted, the taxpayer mayeither:

(i) Appeal to the CTA within thirty days fromthe lapse of the 180-day period OR

(ii) Wait until the Commissioner decidesbefore he elevates the case to the CTA.

RCBC v. CIR (2007): In case the Commissioner

failed to act on the disputed assessment withinthe 180-day period from date of submission ofdocuments, a taxpayer can either:(1) file a petition for review with the Court of Tax

Appeals within 30 days after the expirationof the 180-day period; OR

(2) await the final decision of the Commissioneron the disputed assessments and appeal such final decision to the Court of Tax




PAGE 175

Appeals within 30 days after receipt of acopy of such decision.

However, these options are mutually exclusive,and resort to one bars the application of theother.

Remedy if the taxpayer is not satisfied with theCTA Division’s ruling: FIRST, he may file a motion for reconsiderationbefore the same Division of the CTA withinfifteen (15) days from notice thereof. [Sec. 11, RA1125 as amended by RA 9282 (2004)]

THEN, a party adversely affected by a resolutionof a Division of the CTA on a motion forreconsideration may file a petition for reviewwith the CTA en banc. [Sec. 18, RA 1125 asamended by RA 9282 (2004)]

Remedy if the taxpayer is not satisfied with thedecision of the CTA en banc :A party adversely affected by a decision or rulingof 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)]

(c) Effect of failure to appeal

If the taxpayer fails to file an appeal, theassessment shall become final, executory anddemandable.

COLLECTION

REQUISITESWhen the government may avail of theremedies of collection:General Rule: When the assessment shall havebecome final, executory and demandable.

Exception: In case of false or fraudulent returnwith intent to evade tax or of failure to file areturn, a proceeding in court for collection maybe filed without assessment within 10 years fromdiscovery of falsity, fraud or omission. [Sec. 222(a), NIRC ]

Injunction not availableNo court may grant injunction to restrain thecollection of any national internal revenue tax,fee or charge. (Sec. 218, NIRC)

Exception:

When the all of the following conditions concur:(1) It is an appeal to the CTA from a decision of

the CIR, or Commissioner of Customs or theRTC, provincial, city or municipal treasurer orthe Secretary of Finance, the case may be,AND

(2) In the opinion of the Court of Tax Appeals,the collection may jeopardize the interest ofthe Government and/or the taxpayer. [Sec. 11,R.A. 1125 as amended by R.A. 9282]

Requisite before availing of injunction

(1) Taxpayer has to deposit the amount claimed;OR(2) File an injunction bond with the Court for not

more double the amount [R.A. 1125]

Prescriptive periods

Where returnfiled was NOT

false orfraudulent:

Where noreturn filed, orthe return was

false orfraudulent:

Collection

with prior

assessment

should bemade within 5

years fromthe date ofassessmentof the tax.[Sec. 203 inrelation toSec. 222,NIRC ]

by distraint orlevy, or by judicial

proceedings

should bemade within 5

years from thedate ofassessment[based on Sec. 222(c), NIRC ]

by distraint orlevy, or by judicialproceedings




PAGE 176

Where returnfiled was NOT

false orfraudulent:

Where noreturn filed, orthe return was

false orfraudulent:

Collection

without prior

assessment

should be

made within 3

years fromthe date offiling ofreturn or datereturn is due,whichever isLATER [basedon Sec. 203,NIRC ]

by judicial

proceedings

should be

made within

ten years afterthe discoveryof the falsity,fraud oromission tofile a return.

by judicialproceedings

Waiver of prescriptive period

If tax was assessed within the different periodagreed upon by the Commissioner and thetaxpayer, it may be collected by distraint or levyor by a proceeding in court within the periodagreed upon in writing before the expiration ofthe 5-yr period. [Sec. 222d, NIRC ]

REMEDIES OF THE GOVERNMENT INCOLLECTION

Administrative

(1) Distraint of Personal Property includinggarnishment deposit

(2) Summary remedy of levy on real property(3) Forfeiture to the government for want of

bidder(4) Further Distraint or Levy(5) Tax Lien(6) Compromise and Abatement(7) Penalties and Fines

Judicial

(1)

Civil(2) Criminal

Distraint of Personal PropertyDistraint – remedy enforced on the goods,chattels, or effects, and other personal propertyof whatever character including stocks andother securities, debts, credits, bank accounts,and interest in and rights to personal property

[Sec. 205(a), NIRC ]

Kinds of Distraint:

(1) Constructive Distraint(2) Actual Distraint

Constructive Distraint – may be placed by theCommissioner on any taxpayer to safeguard theinterest of the Government [Sec. 206, NIRC ].Delinquency of the taxpayer is not necessary.

Grounds for Constructive Distraint:

When in the opinion of the Commissioner,(1) the taxpayer is retiring from any businesssubject to tax; or

(2) the taxpayer is intending to leave thePhilippines; or

(3) the taxpayer is intending to remove hisproperty from the Philippines or to hide orconceal his property; or

(4) the taxpayer is planning to perform any acttending to obstruct the proceedings forcollecting the tax due or which may be duefrom him (Sec. 206, NIRC)

How constructive distraint is effected:

(1) Signing of receipt by the taxpayer

By requiring the taxpayer or any personhaving possession or control of such propertyto sign a receipt covering the propertydistrained and obligate himself to preservethe same intact and unaltered and not todispose of the same in any manner whatever,without the express authority of theCommissioner

(2) If the taxpayer refuses to sign the receipt:signing of receipt by revenue officer in thepresence of two witnesses




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In case the taxpayer or the person having thepossession and control of the propertyrefuses or fails to sign the receipt, therevenue officer effecting the constructivedistraint shall proceed to prepare a list ofsuch property and, in the presence of two (2)

witnesses, leave a copy thereof in thepremises where the property distrained islocated [Sec. 206, NIRC ]

Note: In constructive distraint, the property isnot actually confiscated or seized by therevenue officer.

Actual distraint - placed on a person who owesany delinquent tax or delinquent revenue [seeSec. 207, NIRC ]; involves actual seizure of theproperty

Garnishment– taking of personal properties,usually cash or sums of money, owned by adelinquent taxpayer which is in the possessionof a third party

Distraint of intangible properties [Sec. 208,NIRC ](1) Stocks and other securities: by serving a copy

of the warrants of distraint on the taxpayer,AND upon the president, manager,treasurer or other responsible officer of thecorporation, company or association which

issued the stocks or securities. (2) Debts and credits: by leaving with the person

owing the debts or having in his possessionor under his control such credits, or with hisagent, a copy of the warrant of distraint. Theperson owing the debts shall then pay theCommissioner instead of his creditor(taxpayer) on the strength of such warrant.

(3) Bank accounts: by serving a warrant ofgarnishment upon the taxpayer AND uponthe president, manager, treasurer or otherresponsible officer of the bank. The bank

shall then turn over to the Commissioner somuch of the bank accounts as may besufficient to satisfy the claim of theGovernment. (NOTE: distraint of bankaccounts is called GARNISHMENT)

Procedure for Actual Distraint

(A) Commencement of Distraint ProceedingsWho issues the warrant of distraint:

(1) Commissioner or his duly authorizedrepresentative – where the amountinvolved is more than P1M

(2) Revenue District Officer – where theamount involved is P1M or less [Sec. 207(A), NIRC ]

(B) Service of Warrant of DistraintHow actual distraint is effected:The proper officer shall seize and distraint anygoods, chattels, or effects, and the personalproperty, including stocks and other securities,debts, credits, bank accounts and interests inand rights to personal property of the taxpayerin sufficient quantity to satisfy the tax, expenses

of distraint and the cost of the subsequent sale.[Sec. 207(A), NIRC ]

(C) Report on the DistraintA report shall be submitted by the distrainingofficer to the Revenue District Officer, and to theRevenue Regional Director.

(D) Power of the CIR or proper officer to lift theorder of distraintThe taxpayer may request that the warrant belifted. The commissioner may, in his discretion,allow the lifting of the order of distraint. He

may ask for a bond as a condition for thecancellation of the warrant. [Sec. 207(A), NIRC ]

(E) Notice of Sale of Distrained Properties(1) The Revenue District Officer or his duly

authorized representative (not the officerwho served the warrant), shall cause anotification of the public sale to be postedin not less than two (2) public places inthe municipality or city (one of which isthe Office of the Mayor) where thedistraint was made.

(2) The notice shall specify the time andplace of the sale. The time of sale shallnot be less than twenty (20) days afternotice to the owner and the publication orposting of such notice. [Sec. 209, NIRC ]




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(2) At the same time, written notice of thelevy shall be mailed to or served upon theRegister of Deeds of the province or citywhere the property is located and uponthe taxpayer (If he is absent from thePhilippines: to his agent or manager of

business in respect to which the liabilityarose or to the occupant of the property inquestion). [Sec. 207(B), NIRC ]

(C) Advertisement of the Sale(1) Within twenty (20) days after the levy, the

officer conducting the proceedings shallproceed to advertise for SALE the property or a portion as may be necessary to satisfythe claim and costs of sale. Suchadvertisement shall cover a period of atleast thirty (30) days. The notice shall be

posted at the main entrance of the city ormunicipal all AND in a public andconspicuous place in the barrio or districtwhere the real property lies. The noticemust also be published in a newspaper ofgeneral circulation in the place where theproperty is located, once a week for three(3) weeks.

(2) CONTENTS of notice: statement ofamount of taxes, and penalties due, timeand place of sale, name of taxpayer, shortdescription of property. [Sec. 213, NIRC ]

(D) SaleThe sale shall be held either at the mainentrance of the municipal or city hall or on thepremises to be sold. Property will be awardedto the highest bidder. In case the proceeds ofthe sale exceeds the claim and costs of sale, theexcess shall be turned over to the owner of theproperty. [Sec. 213, NIRC ]

(E) Forfeiture in Favor of the GovernmentIf there is no bidder for the real property OR ifthe highest bid is not sufficient to pay the taxes,

penalties and costs, the IR Officer conductingthe sale shall declare the property FORFEITEDto the GOVERNMENT in satisfaction of theclaim. [Sec. 215, NIRC ]

(F) Redemption of Property Sold(1) 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]

(2) Within one (1) year from the date of sale, thetaxpayer or anyone for him, may pay to theRevenue District Officer the total amount ofthe following: public taxes + penalties +

interest from the date of delinquency to thedate of sale + interest on said purchase priceat the rate of fifteen percent (15%) perannum from the date of sale to the date ofredemption. [Sec. 214, NIRC ]

Note: If the property was forfeited in favor ofthe government, the redemption price shallinclude only the taxes, penalties and interestplus costs of sale – no interest on purchaseprice since the Government did not“purchase” the property anyway, it was

forfeited)

Note: The taxpayer-owner shall not bedeprived of possession of the said propertyand shall be entitled to rents and otherincome until the expiration of the period forredemption [Sec. 214, NIRC ]

(G) Final Deed of PurchaserAfter the period of redemption, a final deed ofsale is issued in favor of the purchaser.

Forfeiture to Government for Want of BidderForfeiture implies a divestiture of propertywithout compensation in consequence of adefault or offense. The effect of forfeiture is totransfer the title of the specific thing from theowner to the government. [De Leon, NIRC Annotated, p. 412 ]

Instances when forfeiture is appropriate

(1) All chattels, machinery, and removablefixtures of any sort used in theunlicensed production of articles [Sec. 268, NIRC ]

(2)

Dies and other equipment used for theprinting or making of any internal revenuestamp, label or tag which is in imitation of orpurports to be a lawful stamp, label or tag.[Sec. 268, NIRC ]

(3) Liquor or tobacco shipped under a falsename or brand [Sec. 262, NIRC ]




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Remedy of enforcement of forfeitures

(1) Forfeiture of chattels and removable fixtures:enforced by the seizure, sale or destruction ofthe specific forfeited property.

(2) Forfeiture of real property: enforced by a judgment of condemnation and sale in a

legal action or proceeding civil or criminal asthe case may require [Sec. 224, NIRC ]

When property to be sold or destroyed

(1) Forfeited chattels and removable fixtures – sold in the same manner and under thesame conditions as the public notice and thetime and manner of sale as are prescribed forsales of personal property distrained for thenon-payment of taxes

(2) Distilled spirits, liquors, cigars, cigarettes,other manufactured products of tobacco and

all apparatus used in or about the illicitproduction of such articles – destroyed bythe order of the Commissioner when the saleor use would be injurious to public health prprejudicial to the enforcement of the law

(3) All other articles subject to excise taxmanufactured or removed in violation of theCode, dies for the printing or making ofinternal revenue stamps and labels – sold ordestroyed in the discretion of theCommissioner

(4) Forfeited property shall not be destroyeduntil at least 20 days after seizure. [Sec. 225,

NIRC ]

Resale of real estate taken for taxes (RR No. 22-2002) (1) All acquired/forfeited properties transferred

in the name of the Republic of thePhilippines, having passed the one-yearredemption period, shall be converted intocash from the date of acquisition orforfeiture.

(2) The sale of acquired/forfeited realproperties shall be by sealed bids in a public

auction to be witnessed by a representativeof the COA.

(3) The Notice of Sale of the acquired realproperties shall be published once a weekfor two (2) consecutive weeks in anewspaper of general circulation in thePhilippines which must be completed atleast 20 days prior to the date of suchpublic auction.

(4) Unless the Commissioner of InternalRevenue provides otherwise, the MinimumBid Price/Floor Price shall be the latest fairmarket value as determined by theCommissioner or the fair market valueshown in the latest tax declaration issued by

the provincial, city or municipal assessor,whichever is higher, pursuant to Sec. 6(E) ofthe Tax Code.

(5) Anyone could bid except foreign nationals,corporate or otherwise, and those qualifiedunder existing laws, rules and regulations,including employees of the Bureau ofInternal Revenue.

(6) Bidders shall be required to post a bond incash or manager’s check in an amountrepresenting 10% of the minimum bid priceat least one day before the scheduled public

auction.(7) Unless the Commissioner allows extensionof time to pay, in meritorious cases, thewinning bidder shall pay the full amount ofhis bid cash or manager’s check within twodays after receipt of notice of award.

(8) All taxes and expenses relative to theissuance of title shall be borne by thewinning bidder.

(9) The winning bidder shall be responsible athis own expense for the ejectment ofsquatters and/or occupants, if any, of theauctioned property.

(10)

Negotiated or private sale shall be resortedto as a consequence of failed public biddingfor two consecutive times.

(11) Negotiated or private sale shall in all casesbe approved by the Secretary of Finance.

(12) Public auction sale shall be approved by theCommissioner or his authorizedrepresentative.

(13) The Government reserves the right to rejector cancel any or all bids.

Disposition of funds recovered in legal

proceedings or obtained from forfeiture

All judgments and monies recovered andreceived for taxes, costs, forfeitures, fines andpenalties shall be paid to the Commissioner orhis authorized deputies as the taxes themselvesare required to be paid, and except as speciallyprovided, shall be accounted for and dealtwithin the same way. [Sec. 226, NIRC ]




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Further distraint or levyThe remedy by distraint of personal propertyand levy on realty may be repeated if necessaryuntil the full amount due, including allexpenses, is collected. [Sec. 217, NIRC ]

Tax lien

Tax liens

(1) When a taxpayer neglects or refuses to payhis internal revenue tax liability afterdemand, the amount so demanded shall be

a lien in favor of the government from the

time the assessment was made by the CIRuntil paid with interest, penalties, and coststhat may accrue in addition thereto uponALL PROPERTY AND RIGHTS TOPROPERTY BELONGING to the taxpayer.

(2)

HOWEVER, the lien shall not be valid againstany mortgagee, purchaser or judgmentcreditor until NOTICE of such lien shall befiled by the Commissioner in the Office of theRegister of Deeds of the province or citywhere the property of the taxpayer is situatedor located. [Sec. 219, NIRC ]

Seizure under forfeiture vs. Seizure to enforce a

tax lien

In the former all the proceeds derived from thesale of the thing forfeited are turned over to theCollector of Internal Revenue; in the latter, the

residue of such proceeds over and above what isrequired to pay the tax sought to be realized,including expenses, is returned to the owner ofthe property. [BPI v. Trinidad]

Compromise

Authority of the Commissioner to compromise

and abate taxes

Compromise- to reduce the amount of taxpayable

Grounds for a compromise:

The Commissioner may compromise thepayment of any internal revenue tax in thefollowing 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 theassessed tax. (FINANCIAL INCAPACITY)

Limits of the Commissioner’s power to

compromise:

(1) For cases of financial incapacity: a minimumcompromise rate equivalent to ten percent(10%) of the basic assessed tax

(2) For other cases: a minimum compromise

rate equivalent to forty percent (40%) of thebasic assessed tax

Note: When the basic tax involved exceeds OneMillion Pesos (P1,000,000), or where thesettlement offered is less than the prescribedminimum rates, the compromise must beapproved by the Evaluation Board (composed ofthe Commissioner and 4 deputy commissioners)

Abatement- to cancel the entire amount of taxpayable

When the Commissioner may abate or cancel a

tax liability:

(1) The tax or any portion thereof appears to beUNJUSTLY or EXCESSIVELY ASSESSED; or

(2) The ADMINISTRATION and COLLECTIONCOSTS do not justify the collection of theamount due. (e.g. when the costs ofcollection are greater than the amount of taxdue)

Civil and Criminal ActionsForm and Mode of Proceeding:

Civil and criminal action and proceedingsinstituted in behalf of the Government underthe authority of this Code or other law enforcedby the BIR:(1) shall be BROUGHT IN THE NAME OF THE

GOVERNMENT of the Philippines; and(2) shall be CONDUCTED BY LEGAL OFFICERS

OF THE BIR(3) shall be filed in court with the approval of the

Commissioner. [Sec. 220, NIRC ]

Criminal action as a collection remedy:

The judgment in the criminal case shall imposethe penalty; and order payment of the taxessubject of the criminal case as finally decided bythe Commissioner. [Sec. 205, NIRC ]




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Assessment not necessary before filing a

criminal charge for tax evasion

An assessment is not necessary before acriminal charge can be filed. The criminalcharge need only be proved by a prima facieshowing of a wilful attempt to file taxes, such as

failure to file a required tax return. [CIR v. PascorRealty, June 29, 1999]

Suit to recover tax based on false or fraudulent

returns

A proceeding in court for the collection of thetax assessed may be filed without assessmentat any time within ten (10) years after thediscovery of the falsity, fraud or omission.

Provided, that in a fraud assessment which hasbecome final and executor, the fact of fraudshall be judicially taken cognizance of in the civil

or criminal action for the collection thereof.[Sec. 222, NIRC ]

False Return v. Fraudulent Return

A false return is due to mistakes, carelessness orignorance and a fraudulent return is filed withintent to evade taxes.

The fraud contemplated by law is actual andnot constructive, and must amount tointentional wrongdoing with the sole object ofavoiding the tax. [ Aznar v. CTA (1974)]

REFUNDNATURE OF A CLAIM FOR REFUND:It partakes of the nature of an exemption and isstrictly construed against the claimant. Theburden of proof is on the taxpayer claiming therefund that he is entitled to the same. [CIR v.Tokyo Shipping (1995)]

GROUNDS FOR REFUND:(1) Tax erroneously or illegally assessed or

collected [Sec. 229, NIRC ](2) Penalty claimed to have collected without

authority [Sec. 229, NIRC ](3) Any sum alleged to have been excessively or

in any manner wrongfully collected [Sec. 229,NIRC ]

(4) Value of internal revenue Stamps when theyare returned in good condition by thepurchaser [Sec. 204, NIRC ]

(5) Unused stamps that have been renderedunfit for use (Commissioner may redeem,

change or refund their value upon proof ofdestruction) [Sec. 204, NIRC ]

Requirements for refund as laid down bycases:(1) Necessity of written claim for refund

(2)

Claim containing a categorical demand forreimbursement

(3) Filing of administrative claim for refund andthe suit/proceeding before the CTA within 2years from date of payment regardless of any

supervening cause

General Rule: The taxpayer must file a written

claim for refund stating a categorical demand

for reimbursement before the Commissionerwithin two years from the date of payment. [Sec. 229, NIRC ]

When it comes to recovery of unutilized inputVAT, Section 112, and not Section 229 of the1997 Tax Code, is the governing law. Second,prior to 8 June 2007, the applicable rule isneither Atlas nor Mirant, but Section 112(A). TheAtlas doctrine, which held that claims for refundor credit of input VAT must comply with thetwo-year prescriptive period under Section 229,should be effective only from its promulgationon 8 June 2007 until its abandonment on 12September 2008 in Mirant. [CIR v. San Roque]

Exceptions to requirement of a written claim:(1) When on the face of the return upon which

payment was made, such payment appearsclearly to have been erroneously paid (e.g.mathematical errors), the Commissioner mayrefund or credit the tax even without awritten claim therefore. [Sec. 229, NIRC ]

(2)

A return filed showing an overpayment shallbe considered as a written claim for credit orrefund. [Sec. 204(C), NIRC ]

Note: Under Sec. 229, there is no exception tothe 2-year prescriptive period.




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Legal Basis of Tax Refunds(a) Tax refunds are based on the principle of

quasi-contract or solutio indebiti and thepertinent laws governing this principle arefound in Art. 2142 and Art. 2154 of the NCC .When money is paid to another under the

influence of a mistake of fact, on themistaken supposition of the existence of aspecific fact, where it would not have beenknown that the fact was otherwise, it may berecovered. The ground upon which the rightof recovery rests is that money paid throughmisapprehension of facts belongs in equityand in good conscience to the person whopaid it.

(b) The government comes within the scope ofsolutio indebiti principle, where that:“enshrined in the basic legal principles is the

time honoured doctrine that no person shallunjustly enrich himself at the expense ofanother. It goes without saying that theGovernment is not exempt from theapplication of this doctrine.

Statutory Basis for Tax Refund

Scope of Claims for Refund [Sec. 204, NIRC ] The Commissioner may:(1) Credit or refund taxes erroneously or

illegally received or penalties imposedwithout authority;

(2)

Refund the value of internal revenue stampswhen they are returned in good condition bythe purchaser; and

(3) In the Commissioner’s discretion, redeem orchange unused stamps that have beenrendered unfit for use and refund their valueupon proof of destruction.

Necessity of Proof for Claim or Refund

(1) No credit or refund of taxes or penaltiesshall be allowed unless the taxpayer files inwriting with the Commissioner a claim for

credit or refund within two (2) years afterthe payment of the tax or penalty. [Sec. 204,NIRC ]

(2) A return filed showing an overpayment shallbe considered as a written claim for credit orrefund. [Sec. 204, NIRC ]

Burden of Proof for Claim of RefundTax refunds, like tax exemptions, are construedstrictly against the taxpayer and liberally infavor of the taxing authority. [United Airlines, Inc.v. CIR, G.R. No. 178788, Sept. 29, 2010]

Nature of erroneously paid tax/illegally assessed

collected

Taxes are erroneously paid when a taxpayer

pays under a mistake of fact, such as, he is notaware of an existing exemption in his favor atthe time that payment is made. Taxes areillegally collected when payments are made

under duress.

Tax refund vis-à-vis tax creditREFUND takes place when there is actualreimbursement while TAX CREDIT takes place

upon the issuance of a tax certificate or taxcredit memo, which can be applied against anysum that may be due and collected from thetaxpayer.

Essential requisites for claim of refund[Comm. v. CA and Citytrust, cited in United Airlines Inc. v. CIR, 2010]: The grant of a refund isfounded on the assumption that the tax return is

valid, that is, the facts stated therein are trueand correct. The deficiency assessment,although not yet final, created a doubt as to andconstitutes a challenge against the truth and

accuracy of the facts stated in said return which,by itself and without unquestionable evidence,cannot be the basis for the grant of therefund…To grant the refund withoutdetermination of the proper assessment and the

tax due would inevitably result in multiplicity ofproceedings or suits. If the deficiencyassessment should subsequently be upheld, theGovernment will be forced to institute anew aproceeding for the recovery of erroneouslyrefunded taxes which recourse must be filedwithin the prescriptive period of ten years after

discovery of the falsity, fraud or omission in thefalse or fraudulent return involved.

Who may claim/apply for tax refund/tax credit

The proper person to claim refund or tax creditis the person on whom the tax is imposed by the

statute.




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Taxpayer/withholding agents of non-resident

foreign corporation - the withholding agent isdirectly and independently liable for the correctamount of tax that should be withheld and fordeficiency assessments, surcharges andpenalties.

Prescriptive Period for Recovery of TaxErroneously or Illegally Collected

Two-year period when counted:

From the date that tax was paid.

How date of payment determined:

(1) If the income tax is withheld at source – payment is at the end of the taxable year.

(2) If the income is paid on a quarterly basis – payment is from the time of filing the final

adjustment return.

CIR vs. TMX Sales (January 16, 1992): When a taxis paid in installments, the prescriptive periodshould be counted from the date of finalpayment or the last installment. This ruleproceeds from the theory that there is nopayment until the entire tax liability iscompletely paid. Installments should be treatedas advances or portions of the annual tax due.

Other Consideration Affecting Tax Refunds

Remedy of the taxpayer upon denial or inaction

on the claim for refund:

(1) CIR denies claim - appeal to the CTA withinthirty (30) days from the receipt of theCommissioner’s decision and within twoyears from the date of payment.

(2) CIR does not act on the claim and the 2-year

period is about to lapse - file a claim beforethe CTA before the 2-year period lapses.Otherwise, he may no longer file a claimbefore the CTA in case the Commissionerrenders an adverse decision beyond the 2-

year period. (Revised Rules of the CTA, asamended)

Period for claiming refund once granted:

Within five years from the date such warrant orcheck was mailed or delivered, otherwise it shallbe forfeited in favor of the government and theamount thereof shall revert to the general fund.[Sec. 230, NIRC ]

Period for using the Tax Credit Certificate (TCC):

Tax credit certificates (TCCs) can be appliedagainst all internal revenue taxes, excludingwithholding tax. TCCs which remain unutilizedafter five years from the date of issue shall beconsidered as invalid, unless revalidated. If not

revalidated, the amount covered by the TCCshall revert to the general fund. [Sec. 230, NIRC ]

GOVERNMENT REMEDIES

ADMINISTRATIVE REMEDIES(1) Tax lien (supra)(2) Levy and sale of real property (supra)(3) Forfeiture of real property to the government

for want of bidder (supra)(4) Further distraint and levy (supra)(5) Suspension of business operation

The Commissioner or his authorizedrepresentative is empowered to suspend thebusiness operations and temporarily closethe business establishment of any person forany of the following violations:

(a) In the case of a VAT-registered Person. -(i) Failure to issue receipts or invoices; or(ii) Failure to file a value-added tax return

as required under Section 114; or(iii) Understatement of taxable sales or

receipts by thirty percent (30%) ormore of his correct taxable sales orreceipts for the taxable quarter.

(b) Failure of any Person to Register as

Required under Section 236. The temporary closure of theestablishment shall be for the duration ofnot less than five (5) days and shall belifted only upon compliance with whateverrequirements prescribed by theCommissioner in the closure order. [Sec.115, NIRC ]

(6) Non-availability of injunction to restrain

collection of tax

No court shall have the authority to grant aninjunction to restrain the collection of anynational internal revenue tax, fee or chargeimposed by the National Internal RevenueCode. [Sec. 218, NIRC ]




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JUDICIAL REMEDIES(1) Civil Action(2) Criminal Action

FORM AND MODE OF PROCEEDING(SUPRA)

Civil ActionTwo ways by which civil liability is enforced:

(1) by filing a civil case for the collection of sumof money with the proper regular court; and

(2) by filing an answer to the petition for reviewfiled by the taxpayer with the Court of TaxAppeals. [Mamalateo, 2008]

Criminal ActionAny person convicted of a crime under the Codeshall:

(1)

be liable for the payment of the tax, and(2) be subject to the penalties imposed under

the Code. [Sec. 253(A), NIRC ]

Payment of tax not defense:

Payment of the tax due after a case has beenfiled shall not constitute a valid defense in anyprosecution for violation of the provisions underthe Code. [Sec. 253(A), NIRC ]

Liability of person who aids or abets:

Any person who wilfully aids or abets in thecommission of a crime penalized under theCode or who causes the commission of any suchoffense by another shall be liable in the samemanner as the principal. [Sec. 253(B), NIRC ]

Offender Penalty

Not a citizen of thePhilippines

he shall be deportedimmediately after servingthe sentence

A public officer oremployee

the maximum penaltyprescribed for the offenseshall be imposed on himshall be dismissed frompublic office, andperpetually disqualifiedfrom holding any publicoffice, to vote, and toparticipate in any election

CPA his license shall beautomatically revoked orcancelled once he is

convictedCorporations,associations,partnerships etc.

imposed on the partner,president, generalmanager, branchmanager, treasurer,officer-in-charge andemployees responsible forthe violation (Sec. 253,NIRC)

Minimum amount of fine: The fines imposed for any violation of the Code

shall not be lower than the fines imposed hereinor twice the amount of taxes, interests andsurcharges due from the taxpayer, whichever ishigher. [Sec. 253, NIRC ]

Prescriptive period for criminal action:

All violations of any provision of the Code shall

prescribe after five (5) years. [Sec. 281, NIRC ]




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Criminal Offenses

Offense Who is liable Penalty

Willful attempt to evade ordefeat tax. [Sec. 254]

Any person who willfullyattempts in any manner to evade

or defeat any tax or the paymentthereof.

Fine: P30,000 - P100,000AND

Imprisonment: 2-4 yearsPlus other penaltiesFailure to File Return, SupplyCorrect and AccurateInformation, Pay Tax, Withholdand Remit Tax and RefundExcess Taxes Withheld onCompensation [Sec. 255]

Any person required to pay anytax, make a return, keep anyrecord, or supply correct andaccurate information

Fine: P10,000 or moreANDImprisonment:1-10 yearsPlus other penalties

Any person who attempts tomake it appear for any reasonthat he or another has in factfiled a return or statement, oractually files a return orstatement and subsequentlywithdraws the same return orstatement

Fine - P10,000 - P20,000ANDImprisonment: 1-3 yearsPlus other penalties

Making false entries, records, orreports, or using falsified or fakeaccountable forms [Sec. 257 ]

Any financial officer orIndependent CPA engaged toexamine and audit books ofaccounts of taxpayers under Sec. 232 (A) and any person under hisdirection.

Fine - P50,000 - P100,000ANDImprisonment: 2-6 years

Unlawful pursuit of business[Sec. 258]

Any person who carries on anybusiness for which in annualregistration fee is imposedwithout paying the tax as

required by law.

Fine: P5,000 - P20,000ANDImprisonment: 6 months-2 years

A person engaged in thebusiness of distilling, rectifying,repacking, compounding ormanufacturing any article subjectto excise tax.

Fine: P30,000 - P50,000 ANDImprisonment: 1-2 years

Illegal Collection of ForeignPayments [Sec. 259]

Any person who knowinglyundertakes the collection offoreign payments under Sec. 67 without a license or withoutcomplying with theimplementing rules and

regulations.

Fine: P20,000 - P50,000;ANDImprisonment: 1-2 years

Unlawful Possession of CigarettePaper in Bobbins or Rolls, Etc.[Sec. 260]

Any person, manufacturer orimporter of cigar or cigarettes

Fine: P20,000 - P100,000; ANDImprisonment - 6 years 1 day - 12years




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Unlawful Use of DenaturedAlcohol [Sec. 261]

Any person who for the purposeof manufacturing any beverage,uses denatured alcohol or

alcohol specially denatured to beused for motive power orwithdrawn under bond forindustrial uses or alcoholknowingly misrepresented to bedenatured to be unfit for oralintake or who knowingly sells oroffers for sale such preparationscontaining as an ingredient suchalcohol.

Any person who unlawfullyrecovers or attempt to recover bydistillation or other process anydenatured alcohol or whoknowingly sells or offers for sale,conceals or otherwise disposes ofalcohol as recovered orredistilled

Fine: P20,000 - P100,000; ANDImprisonment - 6 years 1 day - 12years

Shipment or Removal ofLiquor/Tobacco Products underFalse Name or Brand or as anImitation of any Existing orKnown Product Name or Brand[Sec. 262 ]

Any person who ships, transportsor removes

Fine: P20,000 – P 100,000;ANDImprisonment: 6 years 1 day - 12years

Unlawful Possession or Removalof Articles Subject to Excise TaxW/o Payment of the Tax [Sec. 263]

Any person who owns or is foundin possession of these articlesWhere:(1) Value of goods < P1,000

(2) Value of goods < P50,000but >P1000

(3) Value of goods < P150,000,

but >P50,000

(4) Value of goods > P150,000

Fine: P1,000 - P2,000ANDImprisonment: 60-100 days

Fine: P10,000-P20,000ANDImprisonment: 2-4 years

Fine: P30,000 - P60,000

ANDImprisonment: 4-6 years

Fine: P50,000 - P100,000ANDImprisonment: 10-12 years




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Failure or Refusal to IssueReceipts or Sales or CommercialInvoices, Violations Related to

the Printing of Such Receipts orInvoices and Other Violations[Sec. 264]

Any person who, being requiredunder Section 237 to issuereceipts or sales or commercial

invoices

Fine: P 1,000 - P50,000ANDImprisonment: 2- 4 years

Offenses Relating to Stamps[Sec. 265]

Fine: P20,000 - P50,000ANDImprisonment: 4-8 years

Failure to Obey Summons [Sec. 266 ]

Any person who being dulysummoned to appear to testify,or to appear and produce booksof accounts, records, memorandaor other papers, or to furnishinformation as required underthe pertinent provisions of thisCode.

Fine: P 5,000 - 10,000;ANDImprisonment:1-2 years

Declaration under Penalties ofPerjury [Sec. 267 ]

Any person who willfully files adeclaration, return or statementcontaining information which isnot true and correct as to everymaterial matter

Penalty for Perjury under theRevised Penal Code

Misdeclaration orMisrepresentation ofManufacturers Subject to ExciseTax [Sec. 268]

Any manufacturer subject toexcise tax

Summary cancellation orwithdrawal of the permit toengage in business as amanufacturer of articles subjectto excise tax

Use of Property in Unlicensed

Business or Use of Dies forPrinting False Stamps, Etc. [Sec. 268]

Any person who conducts an

unlicensed business or uses diesfor printing false stamps

Forfeiture of property used

Illegal Storage or Removal ofGoods [Sec. 268]

Any person subject to excise taxwho fails to store the goods inproper place, or removes goodswithout payment of excise tax

Forfeiture of goods

Penalty for Second andSubsequent Offenses [Sec. 274]

Maximum of the penaltyprescribed for the offense

Violation of Other Provisions ofthe Tax Code or Rules orRegulations in General [Sec. 275]

Any person who violates anyprovision of this Code or any ruleor regulation promulgated by the

Department of Finance for whichno specific penalty is provided bylaw

Fine: P1000 or lessORImprisonment: 6 months or less

OR Both




PAGE 189


Penalty for Selling, Transferring,Encumbering or in any waydisposing of property Placed

under Constructive Distraint[Sec. 276 ]

Any taxpayer, whose propertyhas been placed underconstructive distraint

Fine: at least P5,000 ANDat least twice the value of theproperty

ORImprisonment: 2 years 1 day - 4yearsOR Both

Failure to Surrender PropertyPlaced under Distraint and Levy[Sec. 277 ]

Any person having in hispossession or under his controlany property or rights toproperty, upon which a warrantof constructive distraint or actualdistraint and levy has beenissued

Fine: P 5,000 or moreORImprisonment: 6 months 1 day -2 years,OR Both

Procuring Unlawful Divulgenceof Trade Secrets [Sec. 278]

Any person procures an officer oremployee of the BIR to divulgeany confidential informationregarding the business, incomeor inheritance of any taxpayer,knowledge of which wasacquired by him in the dischargeof his official duties, and which itis unlawful for him to reveal, andany person who publishes orprints in any manner whatever,not provided by law, any income,profit, loss or expenditureappearing in any income tax

return

Fine: not more than P 2,000ORImprisonment: 6 months - 5yearsOR Both

Penalties Imposed on Public Officers [Sec. 269,NIRC ]The law imposes a fine of not less thanP50,000 nor more than P100,000 orimprisonment for not less than 10 years normore than fifteen years on every official, agentor employee of the BIR or of any agency oremployee of the Government charged with theenforcement of the Tax Code, who shall:(CONED- FRAP)

(1)

Extort or willfully oppress under color of law;(2) knowingly Demand other or greater sumsthan are authorized by law or receive any fee,compensation or reward, except as by lawprescribed, for the performance of any duty;

(3) willfully Neglect to give receipts, as by lawrequired, for any sums collected in theperformance of duty, or who willfully neglectto perform any of the duties enjoined by law;

(4) Conspire or collude with another or others todefraud the revenues or otherwise violate thelaw;

(5) willfully make Opportunity for any person todefraud the revenues, or who do or omit todo any act with intent to enable any otherperson to defraud the revenues;

(6) negligently or by design Permit the violationof the law by any other person;

(7) make or sign any False certificate or return in

any case where the law requires the makingby them of such entry, certificate or return;(8) having knowledge or information of a

violation of any provision of the Code or ofany fraud committed on the revenuescollectible by the BIR, fail to Report suchknowledge or information to their superiorofficer, or to report as otherwise required bylaw; or




PAGE 190

(9) without the authority of law, demand orAccept or attempt to collect, directly orindirectly, as payment or otherwise, any sumof money or other thing of value for thecompromise, adjustment or settlement ofany charge or complaint for any violation or

alleged violation of law.

Informer’s Reward [Sec. 282, NIRC ]To whom given:Persons instrumental in the discovery ofviolations of the NIRC and in discovery andseizure of smuggled goods.

Amount of reward:10% of the revenues, surcharges or feesrecovered and/or fine/penalty imposed, orP1,000,000, whichever is LOWER.

(a)

The same amount shall be given if theoffender offered to compromise and suchoffer has been accepted and collected by theCommissioner.

(b) If no revenue, surcharge or fees be actuallycollected, such person is not entitled to areward

(c) For discovery and seizure of SMUGGLEDGOODS: The cash reward is 10% of the FMVof the smuggled and confiscated goods, orP1,000,000, whichever is LOWER.

STATUTORY OFFENSES ANDPENALTIES

CIVIL PENALTIES(1) Surcharge(2) Interest

SURCHARGESurcharge - penalty imposed in addition to thetax required to be paid [Sec. 248(A), NIRC ]

Rates of Surcharge (25% or 50%)

(1)

25% of the amount due in the followingcases:(a) Failure to file any return and pay the tax

due on the date prescribed; or(b) Filing a return with an internal revenue

officer other than those with whom thereturn is required to be filed unless theCommissioner authorizes otherwise; or

(c) Failure to pay the deficiency tax within the

time prescribed for its payment in thenotice of assessment; or

(d) Failure to pay the full or part of theamount of tax due on or before the dateprescribed for its payment [Sec. 246 (A),NIRC ]

(2) 50% of the tax or of the deficiency tax in thefollowing cases:(a) Willful neglect to file the return within

the period prescribed; or(b) A false or fraudulent return is willfully

made [Sec. 248(B), NIRC ]

Prima facie evidence of a false or fraudulent

return: Substantial underdeclaration of taxablesales, receipts or income, or a substantialoverstatement of deductions. Failure to report

sales, receipts or income in an amountexceeding thirty percent (30%) of that declaredper return, and a claim of deductions in anamount exceeding (30%) of actual deductions,shall render the taxpayer liable for substantialunderdeclaration or for overstatement. [Sec. 248(B), NIRC ]

INTERESTIn General20% per annum on the unpaid amount of tax,interest at the rate of twenty percent (20%) perannum from the date prescribed for payment

until the amount is fully paid. [Sec. 249(A),NIRC ]

Deficiency Interest20% per annum on any deficiency in the tax duefrom the date prescribed for its payment untilthe full payment thereof. [Sec. 249(B), NIRC ]

Delinquency interest20% per annum on the unpaid amount in caseof failure to pay:(a) The amount of the tax due on any return

required to be filed; or(b) The amount of the tax due for which no

return is required; or(c) A deficiency tax, or any surcharge or interest

thereon on the due date appearing in theletter of demand and assessment notice[Sec. 249(C), NIRC ]




PAGE 191

Interest on extended payment20% per annum on the tax or deficiency tax orany part thereof unpaid from the date of noticeand demand until it is paid if any personrequired to pay the tax is:(a) Qualified and elects to pay the tax on

installment but fails to pay the tax or anyinstallment or any part of such amount orinstallment or before the date prescribed forits payment; or

(b) Where the Commissioner has authorized anextension of time within which to pay a tax ora deficiency tax or any part thereof [ 249(D),NIRC ]

COMPROMISE ANDABATEMENT OF TAXES(see discussion under Remedies of the Taxpayer )

CASES WHICH MAY BECOMPROMISED: [ Sec. 2, R.R. 30-2002](1) Delinquent accounts(2) Cases under administrative protest after

issuance of the Final Assessment Notice tothe taxpayer which are still pending in theRegional Offices, Revenue District Offices,Legal Service, Large Taxpayer Service (LTS),Collection Service, Enforcement Service andother offices in the National Office

(3) Civil tax cases being disputed before thecourts

(4) Collection cases filed in courts(5) Criminal violations, other than those already

filed in court or those involving criminal taxfraud

CASES WHICH CANNOT BECOMPROMISED: [Sec. 2, R.R. 30-2002](1) Withholding tax cases, unless the applicant-

taxpayer invokes provisions of law that castdoubt on the taxpayer's obligation towithhold

(2) Criminal tax fraud cases confirmed as suchby the CIR or his duly authorizedrepresentative

(3) Criminal violations already filed in court(4) Delinquent accounts with duly approved

schedule of installment payments(5) Cases where final reports of reinvestigation

ore reconsideration have been issuedresulting to reduction in the originalassessment and the taxpayer is agreeable tosuch decision by signing the required

agreement form for the purpose. On theother hand, other protested cases shall behandled by the Regional Evaluation Board(REB) or the National Evaluation Board(NEB) on a case to case basis

(6) Cases which become final and executoryafter final judgment of a court, wherecompromise is requested on the ground ofdoubtful validity of the assessment; and

(7) Estate tax cases where compromise isrequested on the ground of financialincapacity of the taxpayer




PAGE 192

START

Commissioner orRegional Director

Issues Letter of

Authority (LA)

RO sends notice

of informalconference

Revenue Officer (RO)conducts Audit w/in 120

days. If 120 days lapse

LA is revalidated,

Taxpayer

responds w/in 15days

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 30days from receipt of

assessment. Submitsupporting papers wi/in

60 days from protest

Protest made w/in30 days?

Supporting paperssubmitted w/in 60

days?

Commissioner decides on

protest within 180 days

YES to

both

Assessment becomes

Final, Warrant of Distraint& Levy Issued

Commissionerdecides w/n

180 days?

Appeal to the Court of Tax

Appeals w/in 30 days after

lapse of 180 days OR wait fora decision by the BIR

(Lascona Land oil vs. CIR)

Appeal to the Court of Tax

appeals within 30 days OR file

motion for reconsiderationwithin 30 days. MR tolls 30

day period to appeal to CTA

Decisionfavorable 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

ASSESSMENTENDS

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




PAGE 193

START

Flowchart II: Procedures for Distraint and Levy-NIRC

Yes

Commissioner seizes sufficientpersonal 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 anydelinquent 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 goodsdistrained?

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 proceedsof 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




PAGE 194

Organization andFunction of the BIR

RULE-MAKING AUTHORITY OF

THE SECRETARY OF FINANCE

AUTHORITY OF SECRETARY OFFINANCE TO PROMULGATE RULESAND REGULATIONS [Sec. 244, NIRC ]

The Secretary of Finance, uponrecommendation of the Commissioner, shallpromulgate all needful rules and regulations foreffective enforcement of the provisions of theCode.

SPECIFIC PROVISIONS TO BECONTAINED IN RULES ANDREGULATIONS [Sec. 245, NIRC ] (1) The time and manner in which Revenue

Regional Director shall canvass theirrespective Revenue Regions for the purposeof discovering persons and property liable tonational internal revenue taxes, and themanner in which their lists and records oftaxable persons and taxable objects shall bemade and kept;

(2) The forms of labels, brands or marks to berequired on goods subject to an excise tax,and the manner in which the labelling,branding or marking shall be effected;

(3) The conditions under which and the mannerin which goods intended for export, which ifnot exported would be subject to an excisetax, shall be labelled, branded or marked;

(4) The conditions to be observed by revenueofficers respecting the institutions andconduct of legal actions and proceedings;

(5) The conditions under which goods intendedfor storage in bonded warehouses shall beconveyed thither, their manner of storageand the method of keeping the entries andrecords in connection therewith, also thebooks to be kept by Revenue Inspectors andthe reports to be made by them in

connection with their supervision of suchhouses;

(6) The conditions under which denaturedalcohol may be removed and dealt in, thecharacter and quantity of the denaturing

material to be used, the manner in which theprocess of denaturing shall be effected, so asto render the alcohol suitably denatured andunfit for oral intake, the bonds to be given,the books and records to be kept, the entriesto be made therein, the reports to be madeto the Commissioner, and the signs to bedisplayed in the business ort by the personfor whom such denaturing is done or bywhom, such alcohol is dealt in;

(7) The manner in which revenue shall be

collected and paid, the instrument,document or object to which revenue stampsshall be affixed, the mode of cancellation ofthe same, the manner in which the properbooks, records, invoices and other papersshall be kept and entries therein made by theperson subject to the tax, as well as themanner in which licenses and stamps shallbe gathered up and returned after servingtheir purposes;

(8)The conditions to be observed by revenueofficers respecting the enforcement of Title III

imposing a tax on estate of a decedent, andother transfers mortis causa, as well as ongifts and such other rules and regulationswhich the Commissioner may considersuitable for the enforcement of the said TitleIII;

(9) The manner in which tax returns,information and reports shall be preparedand reported and the tax collected and paid,as well as the conditions under whichevidence of payment shall be furnished the

taxpayer, and the preparation andpublication of tax statistics;

(10) The manner in which internal revenue taxes,such as income tax, including withholdingtax, estate and donor's taxes, value-addedtax, other percentage taxes, excise taxes anddocumentary stamp taxes shall be paidthrough the collection officers of the Bureau




PAGE 196

(b) Failure to file a value-added tax return asrequired under Section 114; or

(c) Understatement of taxable sales orreceipts by thirty percent (30%) or more ofhis correct taxable sales or receipts for thetaxable quarter.

(2) FAILURE OF ANY PERSON TO REGISTERAS REQUIRED UNDER SECTION 236. -The temporary closure of the establishmentshall be for the duration of not less than five(5) days and shall be lifted only uponcompliance with whatever requirementsprescribed by the Commissioner in theclosure order.

LOCAL GOVERNMENT CODE OF 1991,AS AMENDED

LOCAL GOVERNMENT TAXATION

Fundamental principles (UEPIP)(1) Taxation shall be Uniform in each local

government unit;(2) Taxes, fees, charges and other impositions

shall: (EPUC)(a) be Equitable and based as far as

practicable on the taxpayer's ability topay;

(b) be levied and collected only for Public

purposes;(c) not be Unjust, excessive, oppressive, orconfiscatory;

(d) not be Contrary to law, public policy,national economic policy, or in therestraint of trade;

(3) The collection of local taxes, fees, chargesand other impositions shall not be let to anyPrivate person;

(4) The revenue collected shall Inure solely tothe benefit of, the local government unitlevying the tax, fee, charge or otherimposition unless otherwise specifically

provided herein; and,(5) Each local government unit shall, as far as

practicable, evolve a Progressive system oftaxation. [SEC. 130, LGC ]

Nature and Source of Taxing Power(1) Grant of local taxing power under the Local

Government Code

(a) Each LGU shall exercise its power to(i) create its own sources of revenue

(ii) levy taxes, fees, and charges.

(b)

Both are subject to the provisions in theLGC and consistent with local autonomy

(c) Taxes, fees and charges levied accrueexclusively to the local government units.[Sec. 129, LGC ]

(2) Authority to prescribe penalties for tax

violations

The sanggunian may impose(a) a surcharge not exceeding twenty-five

percent (25%) of the amount of taxes, feesor charges not paid on time and

(b)

an interest at the rate not exceeding two

percent (2%) per month of the unpaidtaxes, fees or charges includingsurcharges, until such amount is fully paidbut in no case shall the total interest onthe unpaid amount or portion thereofexceed thirty-six (36) months. [Sec. 168,LGC ]

(3) Authority to grant local tax exemptions

LGUs may, through ordinances dulyapproved, grant tax exemptions, incentivesor reliefs under such terms and conditions as

they may deem necessary. [Sec. 192, LGC ]

(4) Withdrawal of exemptions

Unless otherwise provided, tax exemptionsor incentives granted to, or presently enjoyedby all persons, whether natural or judicial,including government-owned or controlledcorporations, except local water districts,cooperatives duly registered under R.A. No.6938, non-stock and non-profit hospitalsand education institutions, are withdrawnupon the effectivity of the Code. [Sec. 193,

LGC ]

(5) Authority to adjust local tax rates

LGUs shall have the authority to adjust thetax rates as prescribed not oftener than once

every five (5) years, but in no case shall theadjustment exceed ten percent (10%) of therates fixed by the Code. [Sec. 191, LGC ]




PAGE 197

(6) Residual taxing power of local governments

LGU may exercise the power to levy taxes orcharges on ANY base or subject

Required:Not otherwise specifically enumerated in the

LGC or taxed under NIRC or other applicablelaws(1) Not unjust, excessive, oppressive,

confiscatory or contrary to declarednational policy

(2) Pursuant to an ordinance enacted withpublic hearing conducted for the purpose.[Sec. 186, LGC ]

(7) Authority to issue local tax ordinances

The power to impose a tax, fee, or charge, orto generate revenue under this Code shall be

exercised by the sanggunian of the localgovernment unit concerned through anappropriate ordinance. [Sec. 132, LGC ]

Local Taxing Authority(1) Power to create revenues exercised thru

LGUs

(a) Each LGU shall exercise its power tocreate its power to create its ownsources of revenue and to levy taxes,fees and charges. [Sec. 128, LGC ]

(b) Exercised by the Sanggunian concernedthrough an appropriate ordinance. [Sec.

132, LGC ](c) Ordinances may be vetoed by local chief

executives of the LGUs, except thePunong Barangay, on the ground that itis ultra vires or prejudicial to publicwelfare. His reasons shall be stated inwriting. [Sec. 55 (a) and (b), LGC ]

(2) Procedure for approval and effectivity of tax

ordinances

(a) A public hearing must be conducted priorto the enactment of a tax ordinance. [Sec.

187, LGC ]

(b) Within ten (10) days after the approval ofthe ordinance, certified true copies of alltax ordinances or revenue measures shallbe published in full for three (3)consecutive days in a newspaper of localcirculation. In provinces, cities and

municipalities where there are nonewspapers of local circulation, it must beposted in at least two (2) conspicuous andpublicly accessible places. [Sec. 188, LGC ]

Scope of Taxing Power

LGU Scope of Taxing Power

Provinces

[Sec. 134,

LGC]

May levy only:(1) Transfer of Real Property

Ownership

(2)

Business of Printing andPublication(3) Franchise Tax(4) Tax on Sand, Gravel and

Other Quarry Resources(5) Professional Tax(6) Amusement Tax(7) Annual Fixed Tax for every

delivery truck or vanMunicipalities May levy taxes, fees and

charges not otherwise levied byprovinces [Sec. 142, LGC ]

Cities May levy taxes, fees andcharges which the province ormunicipality may impose [Sec.151, LGC ]

Barangays May levy only:(1) Taxes on stores or retailers(2) Service fees or charges(3) Barangay clearance(4) Other fees and charges [Sec.

152, LGC ]

But all LGUs may also impose reasonableservice fees, rates for operation of public

utilities, andtoll fees and charges. (See letter ebelow) [Sec. 153-155, LGC ]




PAGE 198

Specific taxing power of local government unit (LGUs)

Power Province Municipality City Barangay

Tax on Transfer of Real Property (135) (151)

Tax on Business of Printing andPublication

(136)

Franchise tax (137) Tax on sand, gravel and otherquarry resources

(138)

Professional tax (139) Amusement tax (140) Annual Fixed Tax For EveryDelivery Truck or Van ofManufacturers or Producers,Wholesalers of, Dealers, orRetailers in, Certain Products

(141)

Tax on Business (143) Fees and charges onregulation/licensing of businessand occupation

(147)

Fees for Sealing and Licensing ofWeights and Measures

(148)

Fishery Rentals, Fees andCharges

(149)

Community Tax Tax on Gross Sales or Receipts ofSmall-Scale Stores/Retailers

(152a)

Service Fees on the use of

Barangay-owned properties (152b)

Barangay Clearance (152c)Other Fees and Charges (oncommercial breeding of fightingcocks, cockfights, cockpits; placesof recreation which chargeadmission fees; outside ads)

(152d)

Service Fees and Charges (153) Public Utility Charges (154) Toll Fees or Charges (155)

Real Property Tax

(within Metro Manila)




PAGE 199

Taxing powers of provinces

Tax Imposed Rate/Amount Base Exemptions Others

(1) Tax on Transfer of

Real Property.Imposed on the sale,donation, barter, orany other mode oftransfer of ownershipor title to real property[Sec 135, LGC ]

Not more

than 50% of1%

Total

acquisition priceor fair marketvalue, whicheveris higher

Sale, transfer, or

other disposition ofreal propertypursuant to R.A.6657(ComprehensiveAgrarian ReformLaw)

Evidence of payment

of tax is to be requiredby Register of Deedsas a requisite toregistration; and bythe provincialassessor as acondition forcancellation of old taxdeclaration.

Tax must be paid 60days from the date of

execution of deed orfrom the date ofdecedent's death.

(2) Tax on Business ofPrinting andPublication [Sec 136,LGC ](a) Imposed on the

business of personsengaged inprinting, and/orpublication ofbooks, cards,posters, leaflets,handbills,certificates,receipts,pamphlets, andothers of similarnature

(b) Newly startedbusiness

Notexceeding50% of 1%

Notexceeding1/20 of 1%

Gross annualreceipts for theprecedingcalendar year

Capitalinvestment

Receipts fromprinting and/orpublishing of booksand other readingmaterialsprescribed by theDECS as schooltexts or references

In the succeedingcalendar year,regardless of whenbusiness startedoperating, tax shall bebased on grossreceipts for precedingcalendar year, or any

fraction thereof.




PAGE 201


(5) Professional Tax.Provinces may levyannual professional tax

on each personengaged in the exerciseof a professionrequiring governmentexamination [Sec 139,LGC ]

Such amountas theSangguniang

Panlalawiganmaydetermine, inno case toexceedP300.00

Suchreasonableclassification by

theSangguniangPanlalawigan

Professionalsexclusivelyemployed by the

government

To be paid to theprovince where theprofession is

practiced, or where aprincipal office ismaintained.

A person who pays forprofessional tax maypractice his professionanywhere in thecountry without beingsubjected to similartaxes.

Employers shallrequire payment ofprofessional tax as acondition foremployment.

Payable annually, onor before Jan 31.

(6) Amusement Tax.Collected fromproprietors, lessees, oroperators of theaters,cinemas, concert halls,circuses, boxing stadia,and other places ofamusement [Sec 140,LGC ]

Not morethan 10%(amended byRA 9640,2009)

Gross receiptsfrom admissionfees

Holding of operas,concerts, dramas,recitals, painting,and art exhibitions,flower shows,musical programs,literary andoratoricalpresentations

Exception toexemption: Pop,rock, or similarconcerts

In case of theaters orcinemas, tax shall firstbe deducted andwithheld by theirproprietors, lesseesand operators

Proceeds to be sharedequally by theprovince andmunicipality whereamusement placesare located.




PAGE 202


(7) Annual Fixed Tax ForEvery Delivery Truck orVan of Manufacturers

or Producers,Wholesalers of,Dealers, or Retailers in,Certain Products.Imposed on vehiclesused for the delivery ofdistilled spirits,fermented liquors, softdrinks, cigars andcigarettes, and otherproducts as may bedetermined by the

sanggunian, to salesoutlets, or consumersin the province,whether directly orindirectly [Sec 141, LGC ]

Amount notexceedingP500

Every truck, van,vehicle

Manufacturers,producers,wholesalers, dealers

and retailers referredto in column 1 shall beexempt from tax onpeddlers

Taxing powers of cities(a) The City may levy taxes, fees, charges which

the province or municipality may impose.(b) Those levied and collected by highly

urbanized and independent component

cities shall accrue to them and distributed inaccordance with the provisions of LGC.

(c) Rates on levy made by the city may exceedthe maximum rates allowed for the provinceor municipality by not more than 50%

Exception: Rates of professional andamusement taxes. [Sec. 151, LGC ]




PAGE 203

Taxing powers of municipalities

Tax on various types of businesses [Sec. 143, LGC ]

Rate/Amount and Base Other Information

(1) Manufacturers, assemblers,repackers, processors, brewers,distillers, rectifiers, andcompounders of liquors, distilledspirits, and wines ormanufacturers of any article ofcommerce of whatever kind ornature

In accordance with the schedule inSection 143 (a), NIRC

(2) Wholesalers, distributors, ordealers in any article of commerceof whatever kind or nature

Schedule in Article 143 (b), NIRC

(3)

Exporters and on manufacturers,millers, producers, wholesalers,distributor, dealers or retailers ofessential commoditiesenumerated below: (RWC-CLAPS) (a) Rice and corn(b) Wheat and or cassava flour,

meat, dairy products, locallymanufactured, processed orpreserved food, sugar, salt, andother agricultural, marine, andfresh water products, whetherin original state or not

(c) Cooking oil and cooking gas(d) Cement(e) Laundry soap, detergents, and

medicine(f) Agricultural implements.

equipment and post-harvestfacilities, fertilizers, pesticides,insecticides, herbicides andother farm inputs;

(g) Poultry feeds and other animalfeeds;

(h)

School supplies

Not exceeding 1/2 of ratesprescribed in the schedule in Sec 143,NIRC

(4) Retailers Gross sales or receipts for thepreceding calendar year of:(a) 400k or less: 2% per annum(b) more than 400k: 1% per annum

Barangays have theexclusive power to taxgross receipts amountingto:(a) 50k or less: in cities(b) 30k or less: in

municipalities [Sec. 143(d), Sec. 152, LGC ]




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Rate/Amount and Base Other Information

(5) Contractors and otherindependent contractors

In accordance with the schedule inSec. 143 (e)

(6) Banks and other financial

institutions

Not exceeding fifty percent 50% of

1% on the gross receipts of thepreceding calendar year frominterest, commissions and discountsfrom lending activities, income fromfinancial leasing, dividends, rentalson property and profit fromexchange or sale of property,insurance premium.

(7) Peddlers engaged in the sale ofany merchandise or article ofcommerce

Not exceeding P50.00 per peddlerannually.

(8) Any business which the

sanggunian concerned may deemproper to tax

Catch-all provision.

If on any business subjectto excise, value-added orpercentage tax is subject totax not exceeding twopercent (2%) of gross salesor receipts of the precedingcalendar year

Ceiling on business tax impossible on

municipalities within Metro Manila

Such municipalities may not 50% more than themaximum rates prescribed in Sec 143. [Sec. 144,LGC ]

Tax on retirement on business

Upon termination of a business subject to taxunder Sec. 143 a sworn statement of its grosssales or receipts for the current year shall besubmitted. If the tax paid is less than the taxdue, the difference shall be paid before thebusiness is considered officially retired. [Sec.145, LGC ]

Rules on payment of business tax

(1) Taxes in Sec. 143 shall be paid for everyseparate or distinct establishment or placewhere business subject to tax is conducted.

(2) One line of business is not exempted bybeing conducted with some other businessesfor which such tax has been paid

(3) The tax on a business must be paid by theperson conducting it.

(4)

If a person operates 2 or more businessesmentioned in Sec. 143 which are taxed;computation shall be based on:(a) combined total gross sales/receipts IF

subject to the SAME tax rate(b) separate reports on gross sales/receipts

IF subject to DIFFERENT tax rates

Yamane vs. Lepanto Condo Corp. (Oct. 23, 1995):

Condominium corporations are not business

entities, and are thus not subject to localbusiness tax. Even though the corporation is

empowered to levy assessments or dues fromthe unit owners, these amounts are notintended for the incurrence of profit by thecorporation, but to shoulder the multitude ofnecessary expenses for maintenance of thecondominium.




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Ericsson Telecoms vs. City of Pasig. (Nov 2007):Business tax must be based on gross receipts, itbeing different from gross revenue. The right to

receive income, and not the actual receiptdetermines when to include the amount in gross

income.

Fees and charges for regulation & licensing

General: As a condition to the conduct ofbusiness or profession, the municipality mayimpose reasonable fees and charges not yetimposed by the province, commensurate withthe cost of regulation, inspection and licensing.[Sec.147, LGC ]

Exception: Professional tax in Sec. 139

Specific: (1) Municipality has power to impose reasonable

rates for sealing and licensing of weights andmeasures [Sec. 148, LGC ]

(2) The Municipality has exclusive authority togrant fishery privileges in municipal waters.The sangguniang bayan may:(a) Grant fishery privileges to erect fish

corrals, oysters, mussels or other aquaticbeds or bangus fry areas, within adefinite zone of the municipal waters, as

(b) Grant marginal fishermen the privilege

to gather, take or catch bangus fry,prawn fry or kawag-kawag or fry of otherspecies and fish from the municipalwaters by nets, traps or other fishinggears free of rental, fee, charge orimposition.

(c) Issue licenses for the operation of fishingvessels of three (3) tons or less

(3) The Sanggunian may penalize the use ofexplosives, noxious or poisonous substances,electricity, muro-ami, and other deleteriousmethods of fishing and prescribe a criminalpenalty therefor [Sec. 149, LGC ]

Situs of tax collected

According to Sec. 150 of the LGC, situs shall bedetermined by the ff. RULES:

RULE 1: In case of personsmaintaining/operating a branch or sales outletmaking the sale or transaction, the tax shall berecorded in said branch or sales outlet and paidto the municipality/city where the branch orsales outlet is located.

RULE 2: Where there is NO branch or salesoutlet in the city/municipality where the sale ismade, sale shall be recorded in the principaloffice and the tax shall be paid to suchcity/municipality.

RULE 3: In the case of manufacturers,contractors, producers, and exporters havingfactories, project offices, plants, andplantations, proceeds shall be allocated asfollows:

(1)

30% of sales recorded in the principal officeshall be made taxable by thecity/municipality where the principal office islocated

(2) 70% shall be taxable by the city/municipalitywhere the factory, project office, plant, orplantation is located

Illustration of Rules 1 to 3:

A company has a principal office inMandaluyong, while its sales office and factoryare in Sta Rosa:(1) sales made in Sta Rosa, will be recorded in

Sta Rosa(2) sales made in Los Baños, Calamba or

Cabuyao (i.e. delivered to customers locatedin those places), will be recorded inMandaluyong

(3) aside from sales made in Sta Rosa, Sta Rosaalso gets 70% of sales recorded inMandaluyong, pursuant to Rule 3

RULE 4: In case the plantation is located in aplace other than the place where the factory islocated, the 70% in Rule 3 will be divided as

follows:(1) 60% to the city/municipality where the

factory is located(2) 40% to the city/municipality where the

plantation is located




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RULE 5: In case of 2 or more factories, plantations, etc. in different localities, the 70%shall be prorated among the localities wherethe factories, plantations, etc. are located inproportion to their respective volume ofproduction.

Illustration:

A company has a principal office in Valenzuelaand has its factory in Bulacan. It also hasbranches selling merchandise in Muntinlupa,Bacolod, Cebu.(1) sales made in Muntinlupa, Bacolod and

Cebu will go to the said cities(2) sales in all other places which do not have a

sales branch shall be distributed as follows:30% to Valenzuela and 70% to Bulacan

Excise Tax: Allied Thread Co., Inc. v. City Mayor ofManila (1984)Tax is imposed on the performance of an act oroccupation, enjoyment of a privilege. The powerto levy such tax depends on the place in whichthe act is performed or the occupation isengaged in; not upon the location of the office.

Sales Tax: Shell Co., Inc. v. Municipality ofSipocot, Camarines Sur (1959)It is the place of the consummation of the sale,associated with the delivery of the things whichare the subject matter of the contract that

determines the situs of the contract forpurposes of taxation, and not merely the placeof the perfection of the contract.

Taxing powers of barangays

The following shall exclusively accrue to thebarangays:(1) Taxes on Stores or Retailers with Fixed

Business Establishments.(a) RATE: not greater than one percent (1%)(b) BASE:

(i) Cities: gross sales or receipts of the

preceding calendar year ofP50,000.00 or less

(ii) Municipalities: gross sales or receiptsof P30,000.00 or less

(2) Service Fees or Charges. For servicesrendered in connection with the regulationsor the use of barangay-owned properties orfacilities such as palay, copra, or tobaccodryers.

(3) Barangay Clearance. A city or municipality

cannot issue a permit for business without aclearance from the barangay concerned. Thesangguniang barangay may impose areasonable fee on the clearance.

(4) Other Charges Allowed.(a) charges on commercial breeding of

fighting cocks, cockfights andcockpits;

(b) charges on places of recreation whichcharge admission fees; and

(c) charges on billboards, signboards,neon signs, and outdoor

advertisements. [Sec. 152, LGC ]

Common revenue raising powers

(1) Service fees and chargesLGUs may impose and collect suchreasonable fees and charges for servicesrendered. [Sec. 153, LGC ]

(2) Public utility chargesLGUs may fix the rates for the operation ofpublic utilities owned, operated andmaintained by them within their jurisdiction.[Sec. 154, LGC ]

(3) Toll fees or charges(a) The sanggunian may prescribe the terms

and conditions and fix the rates for theimposition of toll fees or charges for theuse of any public road, pier, or wharf,waterway, bridge, ferry ortelecommunication system funded andconstructed by the local government unitconcerned.

(b) The sanggunian may also discontinue thecollection of the tolls when public safety

and welfare requires.(c) NO toll fees or charges shall be collected

from:(i) Officers and enlisted men of the AFP

and members of the PNP on mission(ii) Post office personnel delivering mail(iii) Physically-handicapped(iv) Disabled citizens who are sixty-five

(65) years or older. [Sec. 155, LGC ]




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Community taxWho may levy [Sec. 156,

LGC ]Cities or municipalities

Persons Liable [Sec. 157&158, LGC ]

(1) Individuals who are:(a) Inhabitants of the Philippines

(b)

Eighteen years of age or over(c) Either:

(i) Regularly employed on a wage or salary basis for at least 30consecutive working days during any calendar year

(ii) Engaged in business or occupation(iii) Owns real property with an aggregate assessed value of P1,000 or

more(iv) Is required by law to file an income tax return

(2) Juridical Persons(a) Every corporation no matter how created or organized,(b) Whether domestic or resident foreign,(c) Engaged in or doing business in the Philippines

Rates [Sec. 157 &158,LGC ]

(1)

Individuals(a) Annual community tax of P5.00 PLUS annual additional tax of P1.00per P1,000.00 of income regardless whether from business, exercise ofprofession or property

(b) Never to exceed P5000(c) Husband and wife shall pay a basic tax of P5.00 each PLUS additional

tax based on total property owned by them and the total gross receiptsor earnings derived therefrom

(2) Juridical Persons(a) Annual community tax ofP500.00 PLUS annual additional tax of not

more than P10,000.00 according to the ff. schedule:(i) P2.00 for every P5,000 worth of real property in the Philippines

owned during the preceding year based(ii)

P2.00 for every P5,000.00 of gross receipts derived from businessin the Philippines during the preceding year.

(b) Dividends received by a corporation from another corporation shall bedeemed part of the gross receipts or earnings for purposes of computingadditional tax.

Persons Exempt [Sec.159, LGC ]

(1) Diplomatic and consular representatives(2) Transient visitors who stay in the Philippines for not more than 3 months

Place of Payment [Sec.160, LGC ]

Where individual resides, or where the principal office of the juridical entity islocated.

Time of Payment [Sec161, LGC ]

Accrues on the 1st day of January of each year to be paid not later than the lastday of February of each year

Penalty If unpaid within the prescribed period, an interest of 24% shall be added per

annum from the due date until payment. [Sec. 161, LGC ]




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Presentation of Community Tax Certificate is

necessary when an individual subject to

community tax:

(1) Acknowledges any document before anotary public

(2) takes the oath of office upon election or

appointment to any position in thegovernment service

(3) receives any license, certificate, or permitfrom any public authority

(4) pays any tax or fee(5) receives any money from any public fund(6) transacts other official business(7) receives any salary or wage from any person

or commission

Presentation of certificate is NOT needed in theregistration of a voter. [Sec. 163, LGC ]

The city or municipal treasurer shall deputizethe barangay treasurers to collect, provided thelatter be bonded.

If: actually and directly collected by the city ormunicipal treasurer, community tax accruesentirely to the general fund.If: collected throughthe barangay treasurers, apportioned equally.[Sec. 164, LGC ]

Common limitations on the taxing powers ofLGUsUnless otherwise provided, the following cannotbe levied by the local governments: (IDEC-

GAPEP-GRR-ECN):(1) Income tax, except when levied on banks and

other financial institutions;(2) Documentary stamp tax;(3) Estate tax, inheritance, gifts, legacies and

other acquisitions mortis causa, except asotherwise provided;

(4) Customs duties, registration fees of vesseland wharfage on wharves, tonnage dues,and all other kinds of customs fees, charges

and dues except wharfage on wharvesconstructed and maintained by the LGUconcerned;

(5) Taxes, fees or charges on Goods carried intoor out of, or passing through, the territorial jurisdictions of local government units in theguise of charges for wharfage, tolls forbridges or otherwise, or other taxes, fees, orotherwise

(6) Taxes, fees or charges on Agricultural andaquatic products when sold by marginalfarmers or fishermen;

(7) Taxes on business enterprises certified to bythe Board of Investments as Pioneer or non-pioneer for a period of 6 and 4 years,

respectively from the date of registration;(8) Excise taxes on articles enumerated under

the NIRC, as amended, and taxes, fees orcharges on petroleum products;

(9) Percentage or VAT on sales, barters orexchanges or similar transactions on goodsor services except as otherwise providedherein;

(10) Taxes on the Gross receipts oftransportation contractors and personsengaged in the transportation ofpassengers or freight by hire and common

carriers by air, land or water, except asprovided in the 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 allkinds of licenses or permits for the drivingthereof, except tricycles;

(13) Taxes, fees, or other charges on Philippineproducts actually Exported, except asotherwise provided;

(14) Taxes, fees, or charges, on Countryside andBarangay Business Enterprises and

Cooperatives duly registered under theCooperative Code of the Philippines; and

(15) Taxes, fees or charges of any kind on theNational Government, its agencies andinstrumentalities, and local governmentunits. [Sec. 133, LGC ]

Collection of business tax(1) Tax period and manner of payment

(a) Based on calendar year, unless otherwiseprovided.

(b) May be paid annually or in quarterly

instalments. [Sec. 165, LGC ]

(2) Accrual of tax(a) Accrues on the first day of January of each

year(b) Except: New taxes, fees or charges, or

changes in the rates thereof which shallaccrue on the first day of the quarter nextfollowing the effectivity of the ordinance




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imposing such new levies or rates. [Sec.166, LGC ]

(3) Time of paymentWithin the 20 days of January or of eachsubsequent quarter. (i.e., Jan 20, Apr 20, July

20, and Oct 20). It may be extended by thesanggunian for justifiable reasons, withoutsurcharges or penalties. Extension cannotexceed 6 months. [Sec. 167, LGC ]

(4) Penalties on unpaid taxes, fees or charges(a) Surcharge not exceeding 25% on taxes,

fees or charges NOT paid on time; and(b) Interest not exceeding 2% per month of

the unpaid taxes, fees or chargesINCLUDING surcharges, until the amountis fully paid

(c)

In no case shall the total interest exceed36 months. [Sec. 168, LGC ]

(5) Authority of treasurer in collection andinspection of books(a) All local taxes, fees and charges shall be

collected by the local treasurer or theirduly authorized deputies [Sec. 170, LGC ]

(b) The local treasurer may, by himself orthrough his deputies duly authorized inwriting, examine the books, accounts, andother pertinent records of any personsubject to local taxes, fees and charges in

order to ascertain, assess and collect thecorrect amount of the tax, fee or charge.

(c) Examination must be done duringbusiness hours, only once for every taxperiod and shall be certified to by theexamining official. [Sec. 171, LGC ]

Taxpayer’s remedies (1) Periods of assessment and collection of local

taxes, fees or charges

(a) Assessment: Within 5 years from thedate they become due

(b)

In case of Fraud or Intent to Evade Tax:Within 10 years from discovery of fraudor intent to evade payment. [Sec. 194,LGC ]

(c) Collection: 5 years from the date ofassessment by administrative or judicialaction.

Instances When Running of Prescription

Periods is Suspended

(1) When the treasurer is legally preventedfrom making the assessment or collection

(2) When taxpayer requests forreinvestigation and executes a waiver in

writing before lapse of the period forassessment or collection.

(3) When the taxpayer is out of the country orotherwise cannot be located [Sec. 194 (d),LGC ]

(2) Protest of assessment

Within sixty (60) days from the receipt of thenotice of assessment, the taxpayer may file awritten protest with the local treasurercontesting the assessment; otherwise it shallbecome final and executory. [Sec. 195, LGC ]

(3) Claim for refund of tax credit for erroneously

or illegally collected tax, fee or charge

(a) Requires a written claim for refund orcredit to be filed with local treasurerbefore protest is entertained

(b) Must be brought within 2 years frompayment of tax or from the date thetaxpayer became entitled to refund orcredit [Sec. 196, LGC ]

Civil remedies by the LGU for collection of

revenues

(1)

Local government’s lien for delinquent taxes,

fees or charges

(a) Non-payment of a tax, fee or chargecreates a lien superior to all liens orencumbrances in favor of any otherperson, enforceable by administrative or judicial action

(b) The lien may only be extinguished uponfull payment of the delinquent local taxes,fees, and charges including relatedsurcharges and interests. [Sec. 173, LGC ]

(2)

Civil remedies, in general

(a) Administrative action(b) Judicial action

(3) Procedure for administrative action

(a) Distraint of personal property

Personal properties subject to distraint:goods, chattels or effects and other




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personal property of whatever character,including stocks and other securities,debts, credits, bank accounts, and interestin and rights to personal property

PROCEDURE: [Sec. 175, LGC ]

(1)

Seizure of personal property(2) Accounting of distrained goods(3) Publication of time and place of sale

and the articles distrained(4) Release of distrained property upon

payment prior to sale(5) Procedure of sale(6) Disposition of proceeds

(b) Levy of real property, procedureLevy upon real property and interest in orrights to real property

PROCEDURE [Sec. 176, LGC ](1) Preparation of a duly authenticated

certificate by the LGU Treasurereffecting the levy on the real property

(2) Service of written notice of levy to theassessor and Register of Deeds

(3) Annotation of the levy on the taxdeclaration and the certificate of title

(4) Advertisement and Sale [Sec. 178, LGC ]

(c) Further distraint or levyThe remedies by distraint or levy may be

repeated if necessary until the fullamount due, including all expenses, iscollected [Sec. 184, LGC ]

(d) Exemption of personal property fromdistraint or levy(ToB-CUPLA) (i) Tools and implements necessarily

used by the taxpayer in his trade oremployment

(ii) one horse, cow, carabao, or otherBeast of burden, such as the

delinquent taxpayer may select andnecessarily used by him in his ordinaryoccupation

(iii) his necessary Clothing, and that of allhis family

(iv) household furniture and Utensilsnecessary for housekeeping and usedfor that purpose by the delinquent

taxpayer, such as he may select, of avalue not exceeding P10,000

(v) Provisions, including crops, actuallyprovided for individual or family usesufficient for 4 months

(vi) the professional Libraries of doctors,

engineers, one fishing boat and net,not exceeding the total value ofP10,000 by the lawful use of which afisherman earns his livelihood

(vii) any material or Article forming part ofa house or improvement of any realproperty

(e) Penalty on local treasurer for failure toissue and execute warrant of distraint orlevyAutomatically dismissed from the service

after due notice and hearing [Sec. 177,LGC ]

(4) Procedure for judicial action

(a) The local government may institute anordinary civil action with regular courts ofproper jurisdiction for the collection ofdelinquent taxes, fees, charges or otherrevenues.

(b) The civil action shall be filed by the localtreasurer. [Sec. 183, LGC ]

Valley Trading Co. vs. CFI of Isabela, (1989);

Angeles City v. Angeles City Electric Corporation,

(2010):

LGC does not contain a provision prohibitingcourts from enjoining the collection of localtaxes. Such lapse may have allowed preliminaryinjunction under Rule 58, ROC where localtaxes are involved.

REAL PROPERTY TAXATION

Fundamental Principles(CAPUE)

(1)

Current fair market value is the basis forassessment

All real property, whether taxable or exempt,shall be appraised at the CURRENT ANDFAIR MARKET VALUE prevailing in thelocality where the property is situated. [Sec. 201, LGC ]




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(2) Actual use shall be the basis of classificationfor assessment

(a) Real property shall be classified, valuedand assessed on the basis of its actualuseregardless of where located, whoever

owns it, and whoever uses it.(b) Actual Use- refers to the purpose for

which the property is PRINCIPALLY orPREDOMINANTLY utilized by the personin possession thereof [Sec. 199(b), LGC]

(c) MCIAA v. Marcos (G.R. No. 120082, Sept.11, 1996 )- “Usage means direct, immediateand actual application of the property

(3) Private persons cannot be left to theappraisal, assessment, levy and collection ofreal property tax.

(4) Uniform classification within each localgovernment unit shall be observed.

(5) Equitable appraisal and assessment isrequired. [Sec. 197, LGC ]

Nature of Real Property Tax(1) It is a direct tax on the ownership or use of

real property(2) It is an ad valorem tax. Value is the tax base.(3) It is proportionate because the tax is

calculated on the basis of a certain

percentage of the value assessed.(4) It creates a single, indivisible obligation(5) It attaches on the property (i.e., a lien) and is

enforceable against it.(6) With respect to LGUs, it is levied thru a

delegated power

Imposition of Real Property Tax

Coverage

For a Province, or a City or Municipality withinMetro Manila

(1)

Land(2) Building(3) Machinery(4) Other improvements not specifically

exempted [Sec. 232, LGC ]

The rate shall be as follows:

(1) Province: not exceeding one percent (1%) ofthe assessed value of real property; and

(2) City or municipality within Metro Manila: notexceeding two percent (2%) of the assessedvalue of real property. [Sec. 233, LGC ]

Special Levy on Idle Lands

(1) A province, or city or municipality withinMetro Manila may levy an annual tax on idlelands at the rate not exceeding five percent(5%) of the assessed value of the property inaddition to the basic tax

(2) Lands covered(a) Agricultural Lands

More than one (1) hectare in area suitablefor cultivation, dairying, inland fishery,and other agricultural uses, one-half (1/2)

of which remain uncultivated orunimproved(b) Other than Agricultural

More than one thousand (1000) squaremeters in area one half (1/2) of whichremain unutilized or unimproved [Sec. 236and 237, LGC ]

(3) Exempt Idle LandsLands exempt by reason of force majeure,civil disturbance, natural calamity or anycause or circumstance which physically orlegally prevents improving, utilizing orcultivating the same. [Sec. 238, LGC ]

Special Levy for Public Works

(1) A tax ordinance shall describe withreasonable accuracy the nature, extent andlocation of the public works to beundertaken, the estimated cost, the metesand bounds by monuments and lines and thenumber of annual installments which shouldnot be less than five (5) nor more than ten(10) years.

(2) The sanggunian may fix different rates fordifferent parts or sections thereof, depending

on whether such land is more or lessbenefited by the proposed work. [Sec. 241,LGC ]




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Special Education Fund (SEF)

A province, or city or municipality within MetroManila may levy and collect an annual tax ofone percent (1%) on the assessed value of realproperty which shall be in addition to the basicreal property tax.

Exemption from real property tax (RCWCPE)

(1) Owned by the Republic of the Philippines orany of its political subdivisions except whenbeneficial use is granted for a considerationor to a taxable person.

(2) Charitable institutions, churches,parsonages, or convents appurtenantthereto, mosques, non-profit or religiouscemeteries, and all lands, buildings, andimprovements actually, directly andexclusively used for religious, charitable, or

educational purposes.(3) Machinery and equipment actually, directlyand exclusively used by local Water utilitiesand GOCCs engaged in the supply anddistribution of water and/or generation andtransmission of electric power.

(4) Real property owned by duly registeredCooperatives as provided for under RepublicAct No. 6938 (Cooperative Code of thePhilippines).

(5) Machinery and equipment used for Pollutioncontrol and Environmental protection. [Sec. 234, LGC ]

Provincial Assessor of Marinduque v. CA (G.R. No.

170532, Apr. 30, 2009)-A claim for exemptionunder Sec. 234(e) should be supported byevidence that the property sought to be exemptis actually, directly and exclusively used forpollution control and environmental protection.

Proof of Exemption

(1) Documentary evidence such as affidavits, by-laws, contract, articles of incorporation

(2) Given to local assessor

(3) Within 30 days from date of declaration(4) Failure to file, will be listed as in Assessment

Rolls as taxable

GOCCs

Philippine Ports Authority vs. City of Iloilo (G.R.

No. 109791, July 14, 2003): GOCCs are NOTcovered by the exemption since the exemptiononly refers to instrumentalities withoutpersonalities distinct from the government.

Mactan Airport v. MIAA cases Provisioninvolved

SC Ruling

Mactan Airport Authorityvs.Marcos(1996)

Sec 133 (o), LGC.LGUs notallowed tolevy… (o)taxes/fees/charges of any kindon the nationalgov’t, its

agencies,instrumentalities and LGUs.

Sec 234 (a), LGC.

Propertiesexempt fromRPT: (a) realpropertiesowned by theRepublic or anyof its political

subdivisions…

Airport Authorityis a GOCC, notexempt fromRPT. Legislaturein amending thelaw specificallydeleted GOCCSfrom the

enumeration inSec 234(a).

Manila Airport Authorityvs. CA(2006)

Sec 133 (o), LGC

Sec 234 (a),LGC)

MIAA falls underthe term“instrumentality” outside thescope of LGS’slocal taxingpowers underSec 133(o).

Charitable Institutions

LUNG CENTER of the PHILS vs. QUEZON CITY

(G.R. No. 144104, June 29, 2004): A charitableinstitution doesn't lose its character and itsexemption simply because it derives incomefrom paying patients so long as the moneyreceived is devoted to the charitable object itwas intended to achieve, and no money inuresto the benefit of persons managing theinstitution.




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Property leased to private entities is NOTexempt from RPT, as it is not actually, directlyand exclusively used for charitable purposes.Portions of the land occupied by the hospitaland portions used for its patients, whetherpaying or non-paying, are EXEMPT from real

property taxes.

Administration of Real Property Tax

(1) Declaration of Real Property

(a) Declaration by the Owner orAdministrator(i) Prepare a sworn statement declaring

the true value of the property whichshall be the current and fair marketvalue of the property.

(ii) It must contain a sufficient descriptionof the property to enable the assessor

or his deputy to identify the same forassessment purposes

(iii) The declaration must be filed with theassessor once every three (3) yearsduring the period from January 1 toJune 30. [Sec. 202, LGC ]

(b) Declaration by Any Person Acquiring RealProperty or Making ImprovementsThe sworn statement declaring the truevalue of the property must be filed to theprovincial, city or municipal assessorwithin sixty (60) days after the acquisition

or upon completion or occupancy of theimprovement, whichever comesealier.[Sec. 203, LGC ]

(c) Declaration by the Provincial or City orMunicipal AssessorWhen the person required to file thesworn declaration refuses or fails to makesich declaration, the provincial, city ormunicipal assessor shall declare theproperty in the name of the defaultingowner.

(d) Notice of Transfer of Real PropertyAny person who shall transfer realproperty ownership to another shall notifythe provincial, city or municipal assessorwithin sixty (60) days from the date ofsuch transfer.

The notification shall include: (i) Mode of transfer,(ii) Description of the property alienated,

and(iii) Name and address of the transferee

[Sec. 208, LGC ]

(2) Listing of Real Property in the Assessment

Rolls

(a) The local assessor must maintain anassessment roll wherein all real property,whether taxable or exempt, located withinthe territorial jurisdiction of the LGU, islisted.

(b) Real property in general— Shall be listed, valued and assessed in the

name of the owner or administrator, oranyone having legal interest in theproperty.

(c) For undivided real property— May be in the name of the estate or of theheirs and devisees, or in the name of oneor more co-owners

(d) Real property of a corporation,partnership or association— Same manner as an individual

(e)

Real property owned by the Republic ofthe Philippines, its instrumentalities,political subdivision, the beneficial usehas been granted to a taxable person—

In the name of the possessor, grantee orof the public entity if such property hasbeen acquired or held for resale or lease.[Sec. 205, LGC ]

(3) Appraisal and Valuation of Real Property

(a) Land

(i)

The assessor of the province, city ormunicipality or his deputy maysummon the owners or personshaving legal interest therein andwitnessses, administer oaths, andtake deposition concerning theproperty, its ownership, amountnature, and value. [Sec. 213, LGC ]




PAGE 214

(ii) Before any general revision ofproperty assessment is made, thereshall be prepared a schedule ofFMV by the provincial, city ormunicipal assessors; which shall bepublished in a newspaper of

general circulation or in theabsence thereof, shall be posted inthe provincial capitol, city ormunicipal hall and in two otherconspicuous public places therein.[Sec. 212, LGC ]

(iii) Classes of real property(a) Residential(b) Agricultural(c) Commercial(d) Industrial(e) Mineral

(f)

Timberland(g) Special – all lands, buildingsand other improvements actually,directly and exclusively used forhospitals, cultural, or scientificpurposes, and those owned andused by local water districts, andGOCCs rendering essential publicservices in the supply anddistribution of water and/orgeneration and transmission ofelectric power [Sec. 216, LGC ]

(b)

Machinery

Brand New The FMV is the acquisitioncostIf the machinery isimported, the acquisitioncost includes freight,insurance, bank and othercharges, brokerage,arrastre and handling,duties and taxes, plus costof inland transportation,handling, and installationcharges at the presentsite. [Sec. 224, LGC ]

All otherCases

FMV is determined bydividing the remainingeconomic life of themachinery by itsestimated economic lifeand multiplied by thereplacement/reproductioncost. [Sec. 224, LGC ]

Depreciation Allowance

Rate—not exceeding fivepercent (5%) of its originalcost or replacement cost,for each year of use

The remaining value shallbe fixed at not less than

twenty percent (20%) ofsuch original, replacementor reproduction cost for solong as the machinery isuseful and in operation.[Sec. 225, LGC ]

(4) Assessment of real property

(a) Assessment levels(i) "Assessment Level" is the percentage

applied to the fair market value todetermine the taxable value of theproperty [Sec. 199(g), LGC ]

(ii)

Assessment levels shall be fixed byordinances of the sanggunian at ratesnot exceeding those prescribed in Sec. 218

(b) General revisions of assessments andproperty classificationThe local assessor shall undertake ageneral revision of real propertyassessments every three (3) years. [Sec. 219, LGC ]

(c)

Date of effectivity of assessment orreassessment(i) All assessments or reassessments

made after the first (1st) day of Januaryof any year shall take effect on thefirst (1st) day of January of any year

(ii) Exceptions: reassessments due to 1)partial or total destruction; 2) majorchange in actual use; 3) great andsudden inflation or deflation of realproperty values; 4) gross illegality ofthe assessment when made; or 5) anyother abnormal cause shall be madewithin ninety (90) days from the dateof any cause and shall take effect atthe beginning of the quarter nextfollowing the reassessment. [Sec. 221,LGC ]




PAGE 215

(d) Assessment of property subject to backtaxesProperty declared for the first time:assessed for taxes for the period duringwhich it would have been liable but in nocase for more than ten (10) years prior to

the date of initial assessment [Sec. 222,LGC ]

(e) Notification of new or revised assessmentWhen real property is assessed for thefirst time or when an existing assessmentis increased or decreased, the localassessor shall within thirty (30) days givewritten notice of the new or revisedassessment to the person in whose namethe property is being declared.

Notice may be given personally or byregistered mail or through the assistanceof the punong barangay to the last knownaddress of the person to be served. [Sec. 223, LGC ]

(5) Collection of Real Property Tax

Date of AccrualReal property tax for any yearshall accrue on the first day ofJanuary. [Sec. 246, LGC ]

Notice forCollection

On or before the 31st ofJanuary or on any dateprescribed, the local treasurershall post the notice of thedates when the tax may bepaid without interest at aconspicuous and publiclyaccessible place at the city ormunicipal hall.

The notice shall also bepublished in a newspaper ofgeneral circulation in thelocality once a week for two(2) consecutive weeks. [Sec.

249, LGC ]

PrescriptivePeriods forCollection

Within five (5) years from thedate they become due

Within ten (10) years fromdiscovery of fraud, in casethere is fraud or intent toevade

Instances forSuspension of

Prescriptive

Period

(1) Local treasurer is legallyprevented to collect tax.

(2) The owner or propertyrequests forreinvestigation and writesa waiver before expiration

of period to collect.(3) The owner of property is

out of the country orcannot be located [Sec. 270, LGC ]

CollectingAuthority

The local treasurer.He may deputize thebarangay treasurer to collectall taxes upon filing of abond. [Sec. 247, LGC ]

Special rules on payment

(1)

Payment of real property tax in installments(a) Payment of real property tax and theadditional tax for the Special EducationFund, without interest, may be made infour (4) equal instalments:(i) 1st : March 31st (ii) 2nd : June 30th (iii) 3rd : September 30th (iv) 4th : December 31st

(b) This shall not apply to special levies whichshall be governed by ordinance of thesanggunian concerned.

(c) Payments of real property taxes shall firstbe applied to prior years delinquencies,interests and penalties, if any, and onlyafter the delinquencies are settled maytax payments be credited for the currentperiod. [Sec. 250, LGC ]

(2) Interests on unpaid real property taxIn case of failure to pay the basic realproperty tax or any other tax when due shallsubject the taxpayer to the payment ofinterest at the rate of two (2%) percent permonth on the unpaid amount or a fraction

thereof until the delinquent tax shall havebeen fully paid. But the total interest on theunpaid tax shall not exceed thirty-six (36)months. [Sec. 255, LGC ]




PAGE 216

(3) Condonation of real property tax(a) By SANGGUNIAN: in case of general

failure of crops or substantial decrease inthe price of agricultural or agri-basedproducts or calamity in any LGU [Sec. 276, LGC ]

(b)

By the PRESIDENT of the Philippines:when public interest so requires [Sec. 277, LGC ]

Remedies of LGUs for Collection of RealProperty Tax

Administrative

Local Government’s Lien

The basic real property tax shall constitute alien on the property subject to tax, superior to

all liens, charges or encumbrances in favour ofany person, irrespective of the owner orpossessor thereof, enforceable by administrativeor judicial action and may only be extinguishedupon payment of the tax and the relatedinterests and expenses. [Sec. 257, LGC ]

Levy

Upon the failure to pay the tax when due, thelocal treasurer shall issue a warrant levying thereal property subject to tax. The warrant shallinclude a duly authenticated certificate showingthe name of the owner or person having legal

interest therein, description of the property,amount of the tax due and interest thereon.(1) Warrant must be mailed or served to owner

or person having legal interest in theproperty

(2) Written notice of levy must be mailed orserved to the assessor and the Register ofDeeds where the property is located

(3) The Register of Deeds must annotate thelevy on the tax declaration and certificate oftitle [Sec. 258, LGC ]

Failure to issue or execute the warrant of levywithin one year from the time the tax becomesdelinquent or within thirty days from the date ofthe issuance thereof shall be dismissed fromservice [Sec. 259, LGC ]

Purchase by LGU for Want of Bidder

When Available

There is no bidder; orThe highest bid is for an amountinsufficient to pay the realproperty tax and the relatedinterest and costs of sale

Duty of theLocal

Treasurer

The local treasurer conductingthe sale shall purchase theproperty in behalf of the LGU tosatisfy the claim and within two(2) years thereafter shall make areport of his proceedings.

RedemptionPeriod

Within one (1) year from the dateof forfeiture

Judicial

The LGU may enforce the collection by civilaction in any court of competent jurisdiction.

Must be filed by local treasurer within five (5)to ten (10) years. [Sec. 266 in relation to Sec. 270, LGC ]

Taxpayer’s remedies

Administrative

(1) Protest

Appeal to the Local Board of Assessment

Appeals (LBAA)

Appeal must be filed within 60 days from thedate of receipt of the written notice ofassessment

(a) By filing a petition under oath in the formprescribed for the purpose(b) Copies of tax declarations and other

affidavits or documents must be submitted[Sec. 226, LGC ]

The LBAA shall decide the appeal within 120days from the date of receipt of such appeal(a) The LBAA shall have the power to summon

witnesses, administer oaths, conduct ocularinspection, take depositions, and issuesubpoena duces tecum and/or subpoena

(b) The LBAA must furnish the appellant a copyof the decision of the board. [Sec. 229, LGC ]

Fels Energy v. Province of Batangas (G.R. No.

168557, Feb. 16, 2007)- Under Section 226 ofR.A. No 7160, the last action of the localassessor on a particular assessment shall be thenotice of assessment; it is this last action whichgives the owner of the property the right to




PAGE 217

appeal to the LBAA. The procedure likewisedoes not permit the property owner the remedyof filing a motion for reconsideration before thelocal assessor.

Victorias Milling v. CTA (G.R. No. L-24213, Mar. 13,

1968)- The failure to appeal within the statutoryperiod renders the assessment final andunappealable.

Appeal to the Central Board of Assessment

Appeals (CBAA)

Appeal must be filed within 30 days from thereceipt of the decision of LBAA [Sec. 229, LGC ]

Effect of payment of tax

Appeal on assessments of real property shallNOT SUSPEND the collection of the

corresponding realty taxes on the propertyinvolved as assessed by the provincial or cityassessor without prejudice to the subsequentreadjustment depending upon the finaloutcome of the appeal. [Sec. 231, LGC ]

(2) Payment of real property under protest

File protest with local treasurer

No protest shall be entertained unless the tax isfirst paid. The protest must be in writing andfiled within 30 days from payment of the tax tothe local treasurer.

Meralco v. Nelia Barlis (G.R. No. 114231, May 18,

2001): The trial court has no jurisdiction to issuea writ of prohibition which seeks to set aside thewarrant of garnishment over petitioner’s bankdeposit in satisfaction of real property taxeswithout paying first under protest the taxassessed and without exhausting availableadministrative remedies.

The local treasurer shall decide the protestwithin 60 days from receipt.

Appeal to the LBAA

Appeal must be filed within 60 days from thedate of receipt of denial of protest or upon lapseof 60 days to decide(a) By filing a petition under oath in the form

prescribed for the purpose

(b) Copies of tax declarations and otheraffidavits or documents must be submitted[Sec. 226, LGC ]

The LBAA shall decided the appeal within 120days from the date of receipt of such appeal[Sec. 229, LGC ]

Appeal to the CBAA

Appeal must be filed within 30 days from thereceipt of the decision of LBAA [Sec. 229, LGC ]

Appeal to the CTA En Banc

Appeal must be filed through a petition forreview within 30 days from the receipt of thedecision of CBAA [Sec. 11, R.A. 1125 asamended]

Appeal to the SC

Appeal must be filed within fifteen (15) daysfrom receipt of decision of the CTA (Rule 45,Rules of Court)

Judicial

(1) Question on the legality of a tax ordinance

(a) Any question on the constitutionality orlegality of a tax ordinance may be raisedon appeal within thirty (30) days fromeffectivity to the Secretary of Justice whoshall render a decision within sixty (60)days from the date of receipt of the

appeal.(b) The appeal shall not have the effect of

suspending the effectivity of the taxordinance and the accrual and paymentof the tax.

(c) Within thirty (30) days after receipt of thedecision or the lapse of the sixty-dayperiod without the Secretary of Justiceacting upon the appeal, the aggrievedparty may file appropriate proceedingswith a court of competent jurisdiction.(Sec. 187, LGC)

(2)

Assailing the validity of a tax sale

No court shall entertain any action assailingthe validity of any sale at public auction untilthe taxpayer shall have deposited with thecourt the amount for which the real propertywas sold, together with interest of twopercent (2%) per month from the date of saleto the time of the institution of the action.[Sec. 267, LGC ]




PAGE 219

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 UnitLBAA- Local Board of Assessment Appeals

CBAA- Central Board of Assessment Appeals

CTA- Court of Tax Appeals

END




PAGE 220

START

Tax constitutes a lien on theproperty superior to all liens

& may only be extinguished

upon payment of the tax and

charges. (sec. 257)

Flowchart VII: Procedure for Levy for Purposes of Satisfying Real

Property Taxes-Local Gov’t Code

Time for payment

of real property

taxes expires

Warrant of Levy issuedby the Local Treasurer

(LT), which has the force

of legal execution in the

LGU concerned. (sec.

258)

Warrant is mailed

to or served upon

the delinquent

owner (sec. 258)

written notice of the levy &

the warrant is mailed/served

upon the assessor and the

Registrar of Deeds of the

LGU (sec. 258)

30 days from service of warrant, local

treasurer shall advertise sale of the

property by:

1. posting notice at main entrance of

LGU hall/bldg and in a conspicuous

place in the barangay where prope is

located AND

2. by publication once a week for 2

weeks (sec. 260) (Note: In cases of

levy for unpaid local taxes publication

is once a week for 3 weeks)

Before the date of sale,

the owner may stay the

proceedings by paying the

delinquent tax, interest &

the expenses of sale.

Sale is held:

1. at the main entranceof the LGU building, OR

2. on the property to be

sold, OR at

3. any other place

specified in the notice

Bidder pays & 30 daysafter the sale, the LT

shall report the sale to

the sanggunian

LT shall deliver to

purchaser certificate

of sale

Proceeds of sale in

excess of delinquent

tax, interest &expenses of sale

remitted to the owner

(sec. 260)

w/in 1 year from sale, owner may

redeem upon payment of the

1. delinquent tax,

2. interest due,

3. expenses of sale (from date of

delinquency to date of sale) and

4. add’l interest of 2% per month on

the purchase price from date of sale

to date of redemption. (sec. 261)

Delinquent owner retains

possession and right to the fruits

(sec. 261)

LT returns to the

purchaser/bidder the

price paid + interest

of 2% per month

(sec. 261)

If property is not

redeemed, the local

treasurer shall

execute a deed of

conveyance to thepurchaser (sec. 262)

LT shall purchase the property in behalf ofthe LGU (sec. 263) (Note: in cases of levy

for unpaid local taxes, LT may purchase if

there is no bidder or if the highest bid is

insufficient-sec. 181)

Registrar of Deeds shall transfer the

title of the forfeited property to the LGU

w/o need of a court order (sec. 263)

W/n 1 year from forfeiture, the

owner, may redeem the property by

paying to the local treasurer the full

amount of the tax and the related

interest and the costs of sale

otherwise the ownership shall be

vested on the local government unit

concerned. (sec. 263)

Sanggunian concerned

may, by ordinance sell

and dispose of the real

property acquired under

the preceding section at

public auction. (sec. 264)

Levy may be repeated

until the full amount due,

including all expenses, is

collected. (sec. 265)

No

Is there a

bidder?

Yes

END

For purposes of this flowchart owner means owner or administrator of real property or any

person having legal interest thereto




PAGE 221

TARIFF AND CUSTOMS CODE OF1978, AS AMENDED

TARIFF AND DUTIES, DEFINEDTariff

(a) Taxes or list of articles liable to duties

(b)

A list or schedule of articles on which a dutyis imposed upon the importation into thecountry, with the rates at which they areseverally taxed. And derivatively, the systemof imposing duties or taxes on theimportation of foreign merchandise

Custom duties

(a) Taxes on the importation or exportation ofcommodities

(b) Tariff or tax assessed upon the merchandiseimported from or exported to a foreign

country

(1) Export tariff – levied, assessed andcollected an export duty on the gross FOBvalue at the time of shipment based onthe prevailing rate on traditional exportproducts, such as certain wood products,mineral products, plant and vegetableproducts [Sec. 514, TCC ]

Note: export tariff had been abolishedexcept upon logs (Sec. 1, EO 26).

(2) Import tariff – articles, when importedfrom any foreign country, shall be subjectto duty upon each importation, eventhough previously exported from thePhilippines, except as otherwisespecifically provided under the Code orspecial laws [Sec. 100, TCC ]

GENERAL RULE: ALL IMPORTED ARTICLESARE SUBJECT TO DUTY. IMPORTATION BYTHE GOVERNMENT TAXABLE. (a) All articles, when imported from any foreign

country into the Philippines, shall be subjectto duty upon each importation, even thoughpreviously exported from the Philippines,except as otherwise specifically provided[Sec. 100, TCC ]

(b) Articles = goods, wares, merchandise and ingeneral anything that may be made subjectof importation or exportation [Sec. 3574,TCC ]

(c) U.S. Dollars, having ceased to be legaltender in the Philippines, fall within themeaning of the term merchandise [Bastida v,Commissioner of Customs, G.R. No. L-20411,October 24, 1970]

PURPOSE FOR IMPOSITIONFor the protection of consumers andmanufacturers, as well as Phil. products fromundue competition posed by foreign-madeproducts.

FLEXIBLE TARIFF CLAUSEConstitutional Basis: Sec. 28(2), Art. VI, 1987Constitution:

The Congress may, by law, authorize thePresident to fix with specified limits, and subject

to such limitations and restrictions, as it mayimpose, tariff rates, import and export quotas,tonnage and wharfage duties, and other dutiesor imposts within the framework of the nationaldevelopment program of the Government.

The flexible tariff clause refers to the authoritygiven to the President, upon therecommendation of NEDA, to adjust the tariffrates in the interest of national economy,general welfare and/or national security [Sec.401, TCC ]

The President is empowered to:

(1) increase, reduce or remove existing rates(increase in the rate cannot exceed 100% advalorem), including authority to modify theform of duty

(2) establish import quota or ban import of anycommodity

(3) impose an additional duty not exceeding10% ad valorem

Procedure:

(1) Tariff Commission shall conduct an

investigation and hold public hearingswherein interested parties shall be affordedreasonable opportunity to be present,produce evidence, and be heard. It shall alsohear the views and recommendations of anygovernment office, agency or instrumentalityconcerned.

(2) Commission shall be submit their findingsand recommendations to the NEDA within




PAGE 222

30 days after the termination of the publichearings

(3) NEDA recommends the same to thePresident

(4) Order issued by the President shall takeeffect 30 days after promulgation

Note: Only number 3 is required in cases ofimposition of additional duty not exceeding 10%ad valorem

REQUIREMENTS OF IMPORTATION(1) Beginning and ending of importation

(a) Importation begins when the carryingvessel or aircraft enters the jurisdiction ofthe Philippines with intention to unloadtherein [Sec. 1202, TCC ]

(b) Importation is deemed terminated upon

payment of duties, taxes and othercharges due upon the articles, or securedto be paid, at a port of entry AND thelegal permit for withdrawal shall havebeen granted, or in case said articles arefree of duties, taxes and other charges,until they have legally left the jurisdictionof the customs. [Sec. 1202, TCC ]

Note: The payment of the duties, taxes,fees and other charges must be in full.[Papa v. Mago, G.R. No. L-27360, February 28, 1968]

(2) Obligations of importer

(a) Cargo manifest

(1) Every vessel from FOREIGN PORTmust have on board a completeMANIFEST of all the cargo

(2) All the cargo intended to be landed ata port in the Philippines must bedescribed in separate manifests foreach port of call

(3) Shall include:(i) Port of departure

(ii)

Port of delivery(iii) Marks, numbers, quantity and

description of the packages(iv) Names of the consignees

CANNOT be changed or altered afterentry of vessel

EXCEPT:(1) amendment by the master,

consignee or agent(2) attached to the original manifestCANNOT amend the manifest after theinvoice and/or entry covering the

importation have been received andrecorded in the office of the appraiser

EXCEPT:(1) Obvious clerical error or any other

discrepancy is committed in thepreparation

(2) Without fraudulent intent(3) Discovery would not have been made

until after examination of theimportation is completed

Translated into the official language, ifwritten in another language

Master shall deliver and mail the cargomanifest to: (endorsed by boardingofficer)(a) Chairman(b) COA(c) Collector (Present original)

(b) Import entry

Imported articles must be entered in thecustomhouse at the port of entry within

fifteen days from date of discharge of thelast package from the vessel either (a) bythe importer, being holder of the bill oflading, (b) by any other holder of the billof lading in due course, (c) by a customsbroker acting under authority from aholder of the bill, or (d) by a person dulyempowered to act as agent or attorney-in-fact for such holder. The Collector maygrant an extension of not more thanfifteen days. [Sec. 1301, TCC ]

All imported articles, except importation

admitted free of duty, shall be subject to aformal or informal entry.

Kinds of Import Entry:

(1) Formal Entry(2) Informal Entry




PAGE 223

Content and Form of Import Entry:

Content [Sec. 1304]:(a) That the entry delivered to the

Collector contains a full account of thevalue or price articles, including

subject of the entry;(b) That the invoice and entry contain a

just and faithful account of the value orprice of said articles including andspecifying the value of all containers orcoverings, and that nothing has beenomitted, therefrom or concealedwhereby the government of theRepublic of the Philippines bedefrauded of any part of the dutieslawfully due on the articles;

(c) That, to the best of the declarant's

information and belief, all the invokeand bills of lading to the articles arethe only ones in existence relating tothe importation in question and thatthey are in the state in which they wereactually received by him;

(d) That, to the best of the declarant'sinformation and belief, the entries,invoices and bill of and the declarationthereon under penalties of falsificationof perjury are in all respects genuineand true, and were made by the personby whom the same purpose to have

been made.

Form:

(a) signed by the importer, consignee orholder of the bill, by or for whom theentry is effected [Sec. 1305]

(b) in the required number of copies insuch form as prescribed by regulations;and

(c) shall contain the names of theimporting vessel or aircraft, port ofdeparture and date of a the number

and mark of packages, or the quantity,if in bulk, the nature and correctcommodity description of the articlescontained therein, and its value as setforth in a proper invoice to bepresented in duplicate the entry [Sec.1306 ]

Articles to be cleared on informal entry [Sec. 1302 ]:(a) Articles of a commercial nature

intended for sale, barter or hire, thedutiable value of which is P2000 orless, and

(b)

Personal and household effects orarticles, regardless of value, importedin passenger's baggage mail, orotherwise, for personal use, may becleared on an informal entrywhenever duty, tax or other chargesare collectible.

The Collector may, upon instruction ofthe Secretary of Finance, when he deemsit necessary for the protection of therevenue, require a formal entry

regardless of value.

Types of Formal Entry [Sec. 1302 , asamended]:

A formal entry may be:(a) for immediate consumption, or(b) under irrevocable domestic letter of

credit, bank guarantee or bond for:(1) placing the article in customs

bonded warehouse;(2) Constructive warehousing and

immediate transportation to other

ports of the Philippines uponproper examination and appraisal;or

(3) Constructive warehousing andimmediate exportation.

Note: Import entries under irrevocabledomestic letter of credit, bank guaranteeor bond shall be subject to theprovisions of Title V, Book 11 of this Code.All importations entered under formalentry shall be covered by a letter of credit

or any other verifiable documentevidencing payment." [R.A. 9135, April27, 2001]

(c) Declaration of correct weight or value

Classification:

When article not specifically classified inthe Code, the interested party, importeror foreign exporter may submit a sample




PAGE 224

with full description of componentmaterials in a written request.

Value:

(a) Upon written application, Collectorshall furnish importer within 30 days

the latest information as to the DV ofarticles to be imported.

(b) Importer must present all pertinentpapers and documents, act in goodfaith and unable to obtaininformation due to unusual conditions

(c) Information given is not an appraisalnor is it binding upon the Collector’sright of appraisal.

The declaration, ascertainment orverification of the correct weight of the

cargo at the port of loading is the duty orobligation of the master, pilot, owner,officer or employee of the vessel. If heomits or disregards this duty and apunishable discrepancy between thedeclared weight and actual weight of thecargo exists, the inevitable conclusion isthat he is negligent or careless. Similarly,if in the exercise or performance of thisduty, he is negligent or careless resultingin the commission of excessivediscrepancy in the weight of the ship'scargo penalized under the law,

carelessness or incompetency is,nonetheless, imputable to him.

(d) Liability for payment of duties [Sec. 1204,TCC ]

Rule: the liability for duties, taxes, feesand other charges attaching onimportation constitutes a personal debtdue from the importer to thegovernment; it constitutes a lien uponthe articles imported which may be

enforced while such articles are incustody or subject to the control of thegovernment.

How to discharge: Discharged only bypayment in full of all duties, taxes, feesand other charges legally accruing

Exception: Relieved by laws orregulations

(e) Liquidation of duties

When made: Upon approval by the

Collector of the returns of the appraiserand reports of the weights, gauge orquantity [Sec. 1601, TCC ]

How: the liquidation shall be made onthe face of the entry showing theparticulars thereof, initiated by theliquidating clerk, approved by the chiefliquidator, and recorded in the record ofliquidations. [Sec. 1601, TCC ]

Additional Process: A daily record of all

entries liquidated shall be posted in thepublic corridor of the customhouse,stating the name of the vessel or aircraft,the port from which she arrived, the dateof her arrival, the name of the importer,and the serial number and date of theentry. A daily record must also be kept bythe Collector of all additional duties,taxes and other charges found uponliquidation, and notice shall promptly besent to the interested parties. [Sec. 1601,TCC]

Tentative and Final Liquidation

(1) Tentative Liquidation [Sec. 1602, TCC ]When liquidation shall be deemed tobe tentative:If to determine the exactamount due under the law in whole orin part some future action is required(only as to item/s affected)

Effect: shall to that extent be subjectto future and final readjustment andsettlement; entry in such case shall be

stamped "Tentative liquidation"

(2) Final Liquidation [Sec. 1603, TCC asamended by RA 9135]When liquidation is final andconclusive upon all the parties; Whenarticles have been entered an passedfree of duty or final adjustment ofduties made, after the expiration of




PAGE 225

THREE YEARS from the date of thefinal payment of duties.

Exceptions:(1) Fraud(2) Protest

(3)

Compliance audit pursuant to theprovisions of the Code

Note: Exception dies not apply in case ofTENTATIVE LIQUIDATION

Fractions in the Liquidation. — A fractionof a peso less than fifty centavos shallbe disregarded, and a fraction of a pesoamounting to fifty centavos or moreshall be considered as one peso. In caseof overpayment or underpayment of

duties, taxes, surcharges, wharfageand/or other charges paid on entries,where the amount involved is less thanfive pesos, no refund or collection shallbe made. [Sec. 1604, TCC ]

Other Notes:

Readjustment of Appraisal,Classification or Return [Sec. 1407, TCC ]

Prescriptive Period for Appraisal,Classification or Return

Rule: Appraisal, classification or returnas finally passed upon and approved ormodified by the Collector shall not bealtered or modified in any manner.

Exceptions (a) Within one year after payment of the

duties, upon statement of error inconformity with seventeen hundredand seven hereof, approved by theCollector

(b) Within fifteen days after such

payment upon request forreappraisal and/or reclassificationaddressed to the Commissioner bythe Collector, if the appraisal and/orclassification is deemed to be low

(c) Upon request for reappraisal and/orreclassification, in the form of atimely protest addressed to theCollector by the interested party if

the latter should be dissatisfied withthe appraisal or return

(d) Upon demand by the Commissionerof Customs after the completion ofcompliance audit pursuant to theprovisions of this Code." [R.A. 9135,

April 27, 21001]

(f) Keeping of records

(1) all importers are required to keep attheir principal place of business, in themanner prescribed by regulations tobe issued by the Commissioner ofCustoms and for a period of 3 yearsfrom the date of importation , allrecords of their importations and/orbooks of accounts, business andcomputer systems and all customs

commercial data including paymentrecords relevant to the verification ofthe accuracy of the transactions valuedeclared by the importer/customsbrokers on the import duty

(2) all brokers are required to keep at theirprincipal place of business for a periodof 3 years from date of importationcopies(a) custom officer authorized by BOC

may enter during office hours anypremises or place where the recordsare kept to conduct an audit

examination, inspection, verificationor investigation

(b) officer may make copies or takeextracts from any of suchdocuments

(c) certified copy may be evidenceadmissible in all courts as if original

IMPORTATION IN VIOLATION OF TCC

SmugglingIn order to prevent smuggling and to secure the

collection of the legal duties, taxes and othercharges, the customs service shall exercisesurveillance over the coast, beginning when avessel or aircraft enters Philippine territory andconcluding when the article imported thereinhas been legally passed through thecustomhouse. [Sec. 2202 ]




PAGE 226

Smuggling: Any person who shall fraudulentlyimport or bring into the Philippines, or assist inso doing, any article, contrary to law, or shallreceive, conceal, buy, sell, or in any mannerfacilitate the transportation, concealment, orsale of such article after importation, knowing

the same to have been imported contrary tolaw; includes the exportation of articles in amanner contrary to law. [Sec. 3519, TCC ]

Penalties for Unlawful Importation:

Person found guilty of smuggling shall bepunished by a fine of not less than six hundredpesos nor more than five thousand pesos andimprisonment for not less than six months normore than two years and, if the offender is analien, he shall be deported after serving thesentence.

When the defendant is shown to have or to havehad possession of the article in question, suchpossession shall be deemed sufficient evidenceto authorize conviction, unless the defendantshall explain the possession to the satisfactionof the court. [Sec. 3601, TCC ]

Other fraudulent practices(1) Various Practices against Customs Revenue:

Any person who makes or attempts to makeany entry of imported or exported article bymeans of any false or fraudulent invoice,

declaration, affidavit, letter, paper, or bymeans of any false statement, written orverbal, or by means of any false or fraudulentpractice whatsoever, or shall be guilty of anywillful act or omission by means of whereofthe Government might be deprived of thelawful duties, taxes and other charges, or anyportion thereof, accruing from the article orany portion thereof, embraced or referred toin such invoice, declaration, affidavit, letter,paper, or statement, or affected by such actor omission [Sec. 3602, TCC ]

(2)

Failure to Report Fraud: Any master, pilot incommand or other officer, owner or agent ofany vessel or aircraft trading with or withinthe Philippines and any employee of theBureau of Customs, who, having cognizanceof any fraud upon the customs revenue, shallfail to report all information relative theretoto the Collector, as required by law [Sec. 3603, TCC ]

(3) Concealment or Destruction of Evidence of

Fraud: Any person who willfully conceals ordestroys, any invoice, book or paper relatingto any article liable to duty, after aninspection thereof has been demanded bythe Collector of any Collection district, or at

any time conceals or destroys any suchinvoice, book or paper for the purpose ofsuppressing any evidence of fraud thereincontained [Sec. 3605, TCC ]

(4) Affixing Seals: Any person who shall willfullybreak or destroy any seal placed by acustoms official upon any car, or otherconveyance by land, sea or air, or anycompartment thereof [Sec. 3606, TCC ]

(5) Removal, Breakage, Alteration of Marks: Anyperson who alters, defaces or obliterates anydistinctive mark placed by a customs official

on any package of warehoused articles [Sec. 3607, TCC ] (6) Removing Goods from Customs Custody: Any

importer or owner of warehoused articles, orperson in his employ, who by contrivance,fraudulently opens the warehouse, or gainsaccess to the articles, except in the presenceof the proper official of the customs acting inthe execution of his duty [Sec. 3608, TCC ]

(7) Failure to Keep Importation Records and Give

Full Access to Customs Officers: Any personwho shall fraudulently remove warehousedarticles from any public or private warehouse

or shall fraudulently conceal such articles inany such warehouse, or shall aid or abet anysuch removal or concealment [Sec. 3609,TCC ]

CLASSIFICATION OF GOODS(1) Taxable importation

All articles, when imported from any foreigncountry into the Philippines, shall be subjectto duty upon each importation, even thoughpreviously exported from the Philippines,except as otherwise specifically provided for

in this Code or in other laws. [Sec. 100, TCC ]

(2) Prohibited importation [Sec. 101, TCC ] (POPP-

LAW-DING)

(a) Dynamite, gunpowder, ammunitions andother explosives, firearm and weapons ofwar, and detached parts thereof, exceptwhen authorized by law.




PAGE 227

(b) Written or printed article in any formcontaining:(1) any matter advocating or inciting

treason, rebellion, insurrection orsedition against the Government of thePhilippines

(2)

forcible resistance to any law of thePhilippines

(3) containing any threat to take the life ofor inflict bodily harm upon any personin the Philippines.

(c) Written or printed articles, photographs,engravings, lithographs, objects,paintings, drawings or otherrepresentation of an obscene or Immoralcharacter.

(d) Articles, instruments, drugs andsubstances designed, intended or

adapted for Preventing humanconception or producing unlawfulabortion, or any printed matter whichadvertises or describes or gives directly orindirectly information where, how or bywhom human conception is prevented orunlawful abortion produced.

(e) Roulette wheels, Gambling outfits, loadeddice, marked cards, machines, apparatusor mechanical devices used in gambling,or in the distribution of money, cigars,cigarettes or other articles when suchdistribution is dependent upon chance,

including jackpot and pinball machines orsimilar contrivances.

(f) Lottery and sweepstakes tickets,advertisements thereof and lists ofdrawings therein.

Except those authorized by the PhilippineGovernment

(g) Any article manufactured in whole or inpart of gold silver or other Precious metal,or alloys thereof, the stamps brands or

marks of which do not indicate the actualfineness or quality of said metals or alloys.

(h) Any Adulterated or misbranded article offood or any adulterated or misbrandeddrug in violation of the provisions of the"Food and Drugs Act."

(i) Marijuana, opium poppies, coca leaves, orany other Narcotics or synthetic drugswhich are or may hereafter be declared

habit forming by the President of thePhilippines, any compound,manufactured salt, derivative, orpreparation thereof,

Except when imported by the Government

of the Philippines or any person dulyauthorized by the Collector of InternalRevenue for medicinal purposes only.

(j) Opium pipes and parts thereof, ofwhatever material.

(k) All other articles the importation of whichis Prohibited by law.

(3) Conditionally-free importation [Sec. 105, TCC ]

The following articles shall be exempt from

the payment of import duties uponcompliance with the formalities prescribedin, or with, the regulations which shall bepromulgated by the Commissioner ofCustoms with the approval of the Secretaryof Finance:

(a) Aquatic products (e.g., fishes,crustaceans, mollusks, marine animals,seaweeds, fish oil, roe), caught orgathered by fishing vessels of Philippineregistry: Provided, That they are importedin such vessels or in crafts attached

thereto: And provided, further, That theyhave not been landed in any foreignterritory or, if so landed, they have beenlanded solely for transshipment withouthaving been advanced in condition;

(b) Equipment for use in the salvage ofvessels or aircrafts, not available locally,upon identification and the giving of abond in an amount equal to one and one-half times the ascertained duties, taxesand other charges thereon, conditioned

for the exportation thereof or payment ofthe corresponding duties, taxes and othercharges within six (6) months from thedate of acceptance of the import entry:Provided, That the Collector of Customsmay extend the time for exportation orpayment of duties, taxes and othercharges for a term not exceeding six (6)




PAGE 228

months from the expiration of the originalperiod;

(c) Cost of repairs, excluding the value of thearticle used, made in foreign countriesupon vessels or aircraft documented,

registered or licensed in the Philippines,upon proof satisfactory to the Collector ofCustoms (1) that adequate facilities forsuch repairs are not afforded in thePhilippines, or (2) that such vessels oraircrafts, while in the regular course of hervoyage or flight was compelled by stressof weather or other casualty to put into aforeign port to make such repairs in orderto secure the safety, seaworthiness orairworthiness of the vessel or aircraft toenable her to reach her port of

destination;

(d) Articles brought into the Philippines forrepair, processing or reconditioning to bere-exported upon completion of therepair, processing or reconditioning:Provided, That the Collector of Customsshall require the giving of a bond in anamount equal to one and one-half timesthe ascertained duties, taxes and othercharges thereon, conditioned for theexportation thereof or payment of thecorresponding duties, taxes and other

charges within six (6) months from thedate of acceptance of the import entry;

(e) Medals, badges, cups and other smallarticles bestowed as trophies or prizes, orthose received or accepted as honorarydistinction;

(f) Personal and household effects belongingto residents of the Philippines returningfrom abroad including jewelry, preciousstones and other articles of luxury which

were formally declared and listed beforedeparture and identified under oathbefore the Collector of Customs whenexported from the Philippines by suchreturning residents upon their departuretherefrom and during their stay abroad;personal and household effects includingwearing apparel, articles of personaladornment (except luxury items), toilet

articles, portable appliances andinstruments and similar personal effects,excluding vehicles, watercrafts, aircrafts,and animals purchased in foreigncountries by residents of the Philippineswhich were necessary, appropriate and

normally used for the comfort andconvenience in their journey and duringtheir stay abroad upon proof satisfactoryto the Collector of Customs that samehave been in their use abroad for morethan six (6) months and accompanyingthem on their return, or arriving within areasonable time which, barringunforeseen circumstances, in no caseshall exceed ninety (90) days before orafter the owners' return: Provided, Thatthe personal and household effects shall

neither be in commercial quantities norintended for barter, sale or hire and thatthe total dutiable value of which shall notexceed two thousand pesos (P2,000.00):Provided further, That the returningresidents have not previously received thebenefit under this section within one yearfrom and after the last exemptiongranted: Provided furthermore, That afifty (50) per cent ad valorem duty acrossthe board shall be levied and collected onthe personal and household effects(except luxury items) in excess of two

thousand pesos (P2,000.00): Andprovided, finally, That the personal andhousehold effects (except luxury items) ofa returning resident who has not stayedabroad for six (6) months shall be subjectto fifty (50)per cent ad valorem dutyacross the board, the total dutiable valueof which does not exceed two thousandpesos (P2,000.00); any excess shall besubject to the corresponding dutyprovided in this Code;

(g)

Wearing apparel, articles of personaladornment, toilet articles, portable toolsand instruments, theatrical costumes andsimilar effects accompanying travelers, ortourists. or arriving within a reasonabletime before and after their arrival in thePhilippines, which are necessary andappropriate for the wear and use of suchpersons according to the nature of the




PAGE 229

journey, their comfort and convenience:Provided, That this exemption shall notapply to articles intended for otherpersons or for barter, sale or hire:Provided, further, That the Collector ofCustoms may, in his discretion, require

either a written commitment or a bond inan amount equal to one and one-halftimes the ascertained duties, taxes andother charges conditioned for theexportation thereof or payment of thecorresponding duties, taxes and othercharges within three (3) months from thedate of acceptance of the import entry:And Provided finally, That the Collector ofCustoms may extend the time forexportation or payment of duties, taxesand other charges for a term not

exceeding three (3) months from theexpiration of the original period;

(g-1) Personal and household effects andvehicles belonging to foreign consultantsand experts hired by, and/or renderingservice to, the government, and their staffor personnel and families, accompanyingthem or arriving within a reasonable timebefore or after their arrival in thePhilippines, in quantities and of the kindnecessary and suitable to the profession,rank or position of the person importing

them, for their own use and not for barter,sale or hire provided that, the Collector ofCustoms may in his discretion requireeither a written commitment or a bond inan amount equal to one and one-halftimes the ascertained duties, taxes andother charges upon the articles classifiedunder this subsection; conditioned for theexportation thereof or payment of thecorresponding duties, taxes and othercharges within six (6) months after theexpiration of their term or contract; And

Provided, finally, That the Collector ofCustoms may extend the time forexportation or payment of duties, taxesand other charges for term not exceedingsix (6) months from the expiration of theoriginal period;

(h) Professional instruments andimplements, tools of trade, occupation or

employment, wearing apparel, domesticanimals, and personal and householdeffects belonging to persons coming tosettle in the Philippines or Filipinosand/or their families and descendantswho are now residents or citizens of other

countries, such parties hereinafterreferred to as Overseas Filipinos, inquantities and of the class suitable to theprofession, rank or position of the personsimporting them, for their own use and notfor barter or sale, accompanying suchpersons, or arriving within a reasonabletime, in the discretion of the Collector ofCustoms, before or after the arrival oftheir owners, which shall not be later thanFebruary 28, 1979 upon the production ofevidence satisfactory to the Collector of

Customs that such persons are actuallycoming to settle in the Philippines, thatchange of residence was bona fide andthat the privilege of free entry was nevergranted to them before or that suchperson qualifies under the provisions ofLetters of Instructions 105, 163 and 210,and that the articles are brought fromtheir former place of abode, shall beexempt from the payment of customsduties and taxes: Provided, That vehicles,vessels, aircrafts, machineries and othersimilar articles for use in manufacture,

shall not be classified hereunder;

(i) Articles used exclusively for publicentertainment, and for display in publicexpositions, or for exhibition orcompetition for prizes, and devices forprojecting pictures and parts andappurtenances thereof, uponidentification, examination, and appraisaland the giving of a bond in an amountequal to one and one-half times theascertained duties, taxes and other

charges thereon, conditioned forexportation thereof or payment of thecorresponding duties, taxes and othercharges within six (6) months from thedate of acceptance of the import entry;Provided, That the Collector of Customsmay extend the time for exportation orpayment of duties, taxes and othercharges for a term not exceeding six (6)




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months from the expiration of the originalperiod; and technical and scientific filmswhen imported by technical, cultural andscientific institutions, and not to beexhibited for profit: Provided, further, Thatif any of the said films is exhibited for

profit, the proceeds therefrom shall besubject to confiscation, in addition to thepenalty provided under Section Thirty-sixhundred and ten as amended, of thisCode;

(j) Articles brought by foreign film producersdirectly and exclusively used for making orrecording motion picture films on locationin the Philippines, upon theiridentification, examination and appraisaland the giving of a bond in an amount

equal to one and one-half times theascertained duties, taxes and othercharges thereon, conditioned forexportation thereof or payment of thecorresponding duties, taxes and othercharges within six (6) months from thedate of acceptance of the import entry,unless extended by the Collector ofCustoms for another six (6) months;photographic and cinematographic films,undeveloped, exposed outside thePhilippines by resident Filipino citizens orby producing companies of Philippine

registry where the principal actors andartists employed for the production areFilipinos, upon affidavit by the importerand identification that such exposed filmsare the same films previously exportedfrom the Philippines. As used in thisparagraph, the terms "actors" and"artists" include the persons operating thephotographic cameras or otherphotographic and sound recordingapparatus by which the film is made;

(k)

Importations for the official use of foreignembassies, legations, and other agenciesof foreign governments: Provided, Thatthose foreign countries accord likeprivileges to corresponding agencies ofthe Philippines;

Articles imported for the personal orfamily use of the members and attaches

of foreign embassies, legations, consularofficers and other representatives offoreign governments: Provided, That suchprivilege shall be accorded under specialagreements between the Philippines andthe countries which they represent: And

Provided, further, That the privilege maybe granted only upon specific instructionsof the Secretary of Finance in eachinstance which will be issued only uponrequest of the Department of ForeignAffairs;

(l) Imported articles donated to, or for theaccount of, any duly registered relieforganization, not operated for profit, forfree distribution among the needy, uponcertification by the Department of Social

Services and Development or theDepartment of Education, Culture andSports, as the case may be;

(m) Containers, holders and other similarreceptacles of any material including kraftpaper bags for locally manufacturedcement for export, including corrugatedboxes for bananas, mangoes, pineapplesand other fresh fruits for export, exceptother containers made of paper,paperboard and textile fabrics, which areof such character as to be readily

identifiable and/or reusable for shipmentor transportation of goods shall bedelivered to the importer thereof uponidentification, examination and appraisaland the giving of a bond in an amountequal to one and one-half times theascertained duties, taxes and othercharges within six (6) months from thedate of acceptance of the import entry;

(n) Supplies which are necessary for thereasonable requirements of the vessel or

aircraft in her voyage or flight outside thePhilippines, including articles transferredfrom a bonded warehouse in anycollection district to any vessel or aircraftengaged in foreign trade, for use orconsumption of the passengers or its crewon board such vessel or aircrafts as sea orair stores; or articles purchased abroad forsale on board a vessel or aircraft as saloon




PAGE 231

stores or air store supplies: Provided, Thatany surplus or excess of such vessel oraircraft supplies arriving from foreignports or airports shall be dutiable;

(o) Articles and salvage from vessels

recovered after a period of two (2) yearsfrom the date of filing the marine protestor the time when the vessel was wreckedor abandoned, or parts of a foreign vesselor her equipment, wrecked, abandoned inPhilippine waters or elsewhere: Provided,That articles and salvage recovered withinthe said period of two (2) years shall bedutiable;

(p) Coffins or urns containing humanremains, bones or ashes, used personal

and household effects (not merchandise)of the deceased person, except vehicles,the value of which does not exceed tenthousand pesos (P10,000.00), uponidentification as such;

(q) Samples of the kind, in such quantity andof such dimension or construction as torender them unsalable or of noappreciable commercial value; modelsnot adapted for practical use; andsamples of medicines, properly marked"sample-sale punishable by law," for the

purpose of introducing a new article in thePhilippine market and imported only oncein a quantity sufficient for such purpose bya person duly registered and identified tobe engaged in that trade: Provided, Thatimportations under this subsection shallbe previously authorized by the Secretaryof Finance: Provided, however, Thatimportation of sample medicine shall bepreviously authorized by the Secretary ofHealth that such samples are newmedicines not available in the Philippines:

Provided, finally, That samples notpreviously authorized and/or properlymarked in accordance with this sectionshall be levied the corresponding tariffduty.

Commercial samples, except those thatare not readily and easily identifiable (e.g.,precious and semi-precious stones, cut or

uncut, and jewelry set with preciousstones), the value of any singleimportation of which does not exceed tenthousand pesos (P10,000.00) upon thegiving of a bond in an amount equal totwice the ascertained duties, taxes and

other charges thereon, conditioned for theexportation of said samples within six (6)months from the date of the acceptanceof the import entry or in default thereof,the payment of the corresponding duties,taxes and other charges. If the value ofany single consignment of suchcommercial samples exceeds tenthousand pesos (P10,000.00),theimporter thereof may select any portion ofsame not exceeding in value of tenthousand pesos (P10,000.00) for entry

under the provision of this subsection, andthe excess of the consignment may beentered in bond, or for consumption, asthe importer may elect;

(r) Animals (except race horses), and plantsfor scientific, experimental, propagation,botanical, breeding, zoological andnational defense purposes: Provided, Thatno live trees, shoots, plants, moss, andbulbs, tubers and seeds for propagationpurposes may be imported under thissection, except by order of the

Government or other duly authorizedinstitutions: Provided, further, That thefree entry of animals for breedingpurposes shall be restricted to animals ofrecognized breed, duly registered in thebook of record established for that breed,certified as such by the Bureau of AnimalIndustry: Provided, furthermore, Thatcertificate of such record, and pedigree ofsuch animal duly authenticated by theproper custodian of such book of record,shall be produced and submitted to the

Collector of Customs, together withaffidavit of the owner or importer, thatsuch animal is the animal described insaid certificate of record and pedigree:And Provided, finally, That the animalsand plants are certified by the NationalEconomic and Development Authority asnecessary for economic development;




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(s) Economic, technical, vocational, scientific,philosophical, historical, and culturalbooks and/or publications: Provided, Thatthose which may have already beenimported but pending release by theBureau of Customs at the effectivity of

this Decree may still enjoy the privilegeherein provided upon certification by theDepartment of Education, Culture andSports that such imported books and/orpublications are for economic, technical,vocational, scientific, philosophical,historical or cultural purposes or that thesame are educational, scientific or culturalmaterials covered by the InternationalAgreement on Importation of EducationalScientific and Cultural Materials signed bythe President of the Philippines on August

2, 1952, or other agreements bindingupon the Philippines.

Educational, scientific and culturalmaterials covered by internationalagreements or commitments bindingupon the Philippine Government socertified by the Department of Education,Culture and Sports.

Bibles, missals, prayer books, Koran,Ahadith and other religious books ofsimilar nature and extracts therefrom,

hymnal and hymns for religious uses;

(t) Philippine articles previously exportedfrom the Philippines and returned withouthaving been advanced in value orimproved in condition by any process ofmanufacture or other means, and uponwhich no drawback or bounty has beenallowed, including instruments andimplements, tools of trade, machinery andequipment, used abroad by Filipinocitizens in the pursuit of their business,

occupation or profession; and foreignarticles previously imported whenreturned after having been exported andloaned for use temporarily abroad solelyfor exhibition, testing andexperimentation, for scientific oreducational purposes; and foreigncontainers previously imported whichhave been used in packing exported

Philippine articles and returned empty ifimported by or for the account of theperson or institution who exported themfrom the Philippines and not for sale,barter or hire subject to identification:Provided, That any Philippine article

falling under this subsection upon whichdrawback or bounty has been allowedshall, upon re-importation thereof, besubject to a duty under this subsectionequal to the amount of such drawback orbounty.

(u) Aircraft, equipment and machinery, spareparts commissary and catering supplies,aviation gas, fuel and oil, whether crudeor refined, and such other articles orsupplies imported by and for the use of

scheduled airlines operating underCongressional franchise: Provided, Thatsuch articles or supplies are not locallyavailable in reasonable quantity, qualityand price and are necessary or incidentalfor the proper operation of the scheduledairline importing the same;

(v) Machineries, equipment, tools forproduction, plants to convert mineral oresinto saleable form, spare parts, supplies,materials, accessories, explosives,chemicals, and transportation and

communication facilities imported by andfor the use of new mines and old mineswhich resume operations, when certifiedto as such by the Secretary of Agricultureand Natural Resources upon therecommendation of the Director of Mines,for a period ending five (5) years from thefirst date of actual commercial productionof saleable mineral products: Provided,That such articles are not locally availablein reasonable quantity, quality and priceand are necessary or incidental in the

proper operation of the mine; andaircrafts imported by agro-industrialcompanies to be used by them in theiragriculture and industrial operations oractivities, spare parts and accessoriesthereof;

(w) Spare parts of vessels or aircraft offoreign registry engaged in foreign trade




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(d) assists (value of goods and servicessupplied by the buyer free of charge or ata reduced price for use in connection withthe production and sale for export of thegood)

(e) royalties & license fees

(f)

value of any part of the proceeds ofsubsequent resale, disposal or use ofimported goods that accrue directly orindirectly to seller

(g) cost of transport(h) loading, unloading, handling(i) insurance

Dutiable Value (DV) must NOT include:

(a) charges for construction, erection,assembly maintenance or technicalassistance undertaken after importation

(b)

cost of transport after importation(c) duties and taxes of Phil(d) other permissible deduction under WTO

Valuation Agreement

ALL the following CONDITIONS must besatisfied so the Transaction Value shall bethe DV (CREPD):

(1) sale for Export to Phil(2) no restrictions as to the Disposition or

use of goods by buyer except:(a) those imposed by law or Phil

authorities

(b)

limit the geographical area wheregoods may be resold

(c) do not substantially affect the valueof the goods

(3) not be subject to some Condition orconsideration for which value cannotbe determined

(4) no part of the Proceeds of anysubsequent disposal shall accrue tothe seller

(5) buyer and seller are not Related or ifthey are, relationship did not affect the

price

DEEMED RELATED IF:(1) They are officers or directors of one

another’s business; (2) They are legally recognized

partners in business;(3) There exists in an er-ee relationship

between them;

(4) Any person directly or indirectlyowns, controls or holds 5% or moreof the outstanding voting stock orshares of bother seller and buyer;

(5) One of them directly or indirectlycontrols the other;

(6)

Both of them are directly orindirectly controlled by a 3rd person;

(7) Together they directly or indirectlycontrol a 3rd person; or

(8) Related by affinity or consanguinityup to 4th civil degree.

IF RELATED, USE OF TRANSACTIONVALUE (TV) ACCEPTABLE IF:(1) circumstances surrounding

transaction show that relationshipdid not influence the price

(2)

TV closely approximates:(a) TV of unrelated buyers ofidentical or similar goods

(b) Deductive value of identical orsimilar goods determinedaccording to method #4

(c) Computed value of identical orsimilar goods determinedaccording to method #5

(2) Transaction Value of Identical Goods

The DV shall be the transaction value ofidentical goods sold for export to the Philand exported at or about the same time as

the goods being valued. Identical goodsmust be same commercial level andsubstantially same quantity as the goodsbeing valued.

Identical goods

(a) Same in all respects (physical characteristics,quality and reputation)

(b) Produced in the same country as the goodsbeing valued

(c) Produced by producer of the goods beingvalued

Excludes: imported goods for whichengineering, development, artwork, designwork, plans and sketches is undertaken in thePhil and provided by the buyer to the producerfree of charge or at a reduced rate




PAGE 235

When no identical goods produced by the same

person:

Identical goods produced by different producerin the same country

If NO identical goods at same commercial level

and same quantity,(a) TV of identical goods at a different

commercial level and different quantity maybe utilized

(b) TV shall be adjusted upward or downward toaccount for the difference

(3) Transaction value of similar goods

The DV shall be the transaction value ofsimilar goods sold for export to the Phil andexported at or about the same time as thegoods being valued.

Similar goods must be same commerciallevel and substantially same quantity as thegoods being valued.

Similar goods

(a) like characteristics and like componentmaterials

(b) capable of performing same functions(c) commercially interchangeable(d) produced in same country(e) produced by same producer

Excludes: imported goods for whichengineering, development, artwork, designwork, plans and sketches is undertaken in thePhil and provided by the buyer to the producerfree of charge or at a reduced rate

When no similar goods produced by the sameperson:similar goods produced by different producer inthe same country

If NO similar goods at same commercial level

and same quantity,(a) TV of similar goods at a different commercial

level and different quantity may be utilized(b) TV shall be adjusted upward or downward to

account for the difference

(4) Deductive value

DV is determined on the basis of sales in thePhil of goods being valued of identical orsimilar imported goods less certain expensesresulting from importation and sale ofgoods.

Deductive Value is determined by making adeduction from the established price per unitfor 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

PRICELess: COMMISSIONS/ADDITIONSLess: COSTSLess: DUTIES and TAXES

DEDUCTIVE VALUE

The Sales must meet the followingCONDITIONS:(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 use sales at the earliestdate after importation (of the similar or

identical good) but before expiration of90 days

(4) if no sale meet the above conditions,importer may choose the use of sales ofgoods being valued after furtherprocessing

“At or about the same time”

45 days prior to and 45 days following theimportation

(5) Computed value

DV is determined on the basis of cost ofproduction + profit + general expensesreflected in sales from exporting country tothe Phil of goods of same class or kind

DV is calculated by:determining aggregate of relevant costs,charges and expenses or value of (1)




PAGE 236

materials and (2) production or processingcosts(a) Costs* (containers, packing, assists,

engineering, artwork, plans and sketchesundertaken in Phil and charged toproducer

(b)

profits and general expenses (c) cost of transport, insurance and charges to

the port or place of importation

*Note: these additional costs are added onlyif not included in the determination of theaggregate of relevant costs, charges andexpenses or value of materials andproduction.

(6) Fallback value

DV cannot be determined using any of the

above methods

Use other reasonable means consistent withprinciples and general provisions of GeneralAgreements on Tariffs and Trade (GATT)

(b) Specific [Sec. 202, TCC ] Rates are based on unit of weightnumber or measurement

Kinds of weight:

(a) Gross Weight - weight of same,together with the weight of all

containers, packages, holders andpackings, of any kind, in which saidarticles are contained, held or packedat the time of importation

(b) Legal Weight

–

weight at the time oftheir sale to the public in usual retailquantities

(c) Net Weight – only the actual weightat the time of importation excludingthe weight of the immediate and allother containers

(2) Special duties – additional import dutiesimposed on specific kinds of importedarticles (See Table of Special Duties)

REMEDIES

Government

Administrative/Extrajudicial

Search, seizure, forfeiture, arrest

(1)

Enforcement of Tax Lien

Tax Lien – attaches upon the articlesimported which may be enforced while suchare in custody or subject to the control of thegovernment [Sec. 1204]

Sec. 1508(a) When an importer has an outstanding

and demandable account with the Bureauof Customs,(1) Collector shall hold the delivery of the

article.

(2)

Upon notice, he may sell suchimportation or a portion of it to satisfythe obligation.

(b) Importer may settle his obligationanytime before the sale.

(2)

Seizure and Forfeiture [Sec. 2205]

Who may effect:

customs official; Fisheries Commissions;Philippine Coast Guard

Note: Person who is exercising such an authority

has the duty to make known his officialcharacter, upon being questioned at the time ofthe exercise. If his authority came from a specialauthorization, he has the duty to exhibit thewritten authority upon demand.

What:to make seizure of any vessel, aircraft, cargo,animal or any movable property when the sameis subject to forfeiture or liable for any fineunder the tariff and customs law

Where authority may be exercised:

at any place within the jurisdiction of the Bureauof Customs




PAGE 237

Other Rights/Authority of the Official effecting

the search and seizure:

(1) Authority to require assistance of any policeofficer if necessary [Sec. 2207 ]

(2) At any time, right to enter, pass through orsearch any inclosure or warehouse, or other

building, not being a dwelling house [Sec. 2208]

(3) Right to enter and search a dwelling house,upon warrant issued by the Judge of theCourt, or any responsible officer as may beauthorized [Sec. 2209]

(4) Right to Search Vessels or Aircrafts andPersons or Articles Conveyed [Sec. 2210]

(5) Right to Search Vehicles, Beasts and Personswhen he has reasonable cause to suspect thepresence therein of dutiable or prohibitedarticle introduced into the Philippines

contrary to law [Sec. 2211](6) Search of Persons Arriving From ForeignCountries [Sec. 2212 ] Administrative Proceedings [Secs 2301 – 2316 ]Procedure for Seizure:

(1) Collector shall issue a warrant for the

detention of the property

Cash bond

(a) if importer wishes to secure release of articlefor legitimate use

(b) amount fixed by Collector(c) appraised value of article and/or fine,

expenses, costs

Note: Article will NOT be released if:(1) prima facie evidence of fraud in the

importation(2) article is prohibited by law

(2) Report to Commissioner and Chairman ofCommission of Audit

(3) Written notice to owner or importerHe shall he given opportunity to be heard;

Notification to an unknown owner (a) posting for 15 days in the public

corridor of customhouse(b) publication in newspaper(c) other means Collector considers

desirable

(4) Collector shall make a list and particulardescription and classification of the seizedproperty, appraisal based on localwholesale values by(a) at least 2 appraising officials(b) absent such, 2 competent

disinterested citizens

If within 15 days from notification, noowner or agent is found or appears beforeCollector, then the property would beforfeited to Government and sold atauction

Settlement [Sec. 2307 ] While case is pending, Collector may acceptsettlement of any seizure case(a) Upon approval of Commissioner

(b)

Payment of fine ( 25% - 80% of the landedcost of the article)(c) In case of forfeiture, should pay the domestic

market value of the seized article

When Settlement NOT allowed:

(a) Fraud in importation(b) Importation prohibited by law(c) Release would be contrary to law

Compromise [Sec. 2316, TCC ] Commissioner may compromise any casesubject to approval by Secretary of Finance

Judicial

Requisites for filing of criminal/civil case [Sec, 2401, TCC ]:(1) Brought in the name of the government of

the Phil (2) Conducted by Customs officers

(3) With approval from the Commissioner

Rules on appeal including jurisdiction

The party aggrieved by a ruling of the

Commissioner in any matter brought before himupon protest or by his action or ruling in anycase of seizure may appeal to the Court of TaxAppeals, in the manner and within the periodprescribed by law and regulations.




PAGE 238

Unless an appeal is made to the Court of TaxAppeals in the manner and within the periodprescribed by laws and regulations, the actionor ruling of the Commissioner shall be final andconclusive. [Sec. 2402, TCC ]

Taxpayer

Protest

When made: at the time payment of the amountclaimed to be due is made within 15 daysthereafter [Sec. 2308]

Form:(a) Must be in writing(b) Must point out the particular decision or

ruling of the Collector of Customs to whichexception is taken or objection made

(c)

Must state the grounds relied upon for relief[Sec. 2310, TCC ]

Scope: Limited to the subject matter of a singleadjustment (refers to the entire content of oneliquidation including duties, fees, surchargesand fines) or other independent transaction

Other requirements:

(a) Payment of the amount due and thecorresponding docket fee shall be madebefore protest [Sec. 2308]

(b) Upon demand of Collector, the importer

shall furnish samples of the articles whichare the subject of the protest

Effect of Failure to Protest: render the action ofthe Collector final and conclusive except formanifest error

Review of Commissioner [Sec. 2313]:person aggrieved by the decision or Collector inany matter presented upon protest or by hisaction in any case of seizure may, within daysafter notification on writing by the Collector of

his actions or decisions, file a written notice tothe Collector with a copy furnished to theCommissioner of his intention to appeal theaction or decision of the Collector to theCommissioner

Automatic Review:

Happens in case a decision is made adverse tothe Government

Abandonment

Article is deemed abandoned when [Sec. 1801,TCC ]:(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 lastpackage from vessel or aircraft

(3) after filing entry, fails to claim hisimportation 15 days from date of posting ofthe notice to claim such importation

Effect [Sec. 1802, TCC ]:(a) deemed to have renounced his interest and

property rights(b) ipso facto deemed property of the

Government(c) If the abandoned articles are transferred to acustoms bonded warehouse, the operatorshall be liable for the payment of duties andtaxes in the case of loss of the storedabandoned imported articles [R.V. Marzan v.CA, GR No. 128064, March 4, 2004]

Liability of Official for Failure to Report

Abandonment

Any official or employee who:(a) had knowledge of the existence of

abandoned article

(b)

custody or charge of such article(c) fails to report within 24 hours from time

article deemed abandoned shall be punishedaccording to sec. 3604 (fine: P5000 – P50,000; imprisonment: 1 yr – 10 yrs,perpetual disqualification to hold publicoffice, vote and participate in election)

Abatement and Refund

When available:

(1) Abatement for Damage incurred during

Voyage [Sec. 1701](2) Abatement or Refund for the following:

(a) Missing Packages [Sec. 1702 ](b) Deficiency of Contents in Packages [Sec.

1703](c) Articles Lost or Destroyed after Arrival

[Sec. 1704](d) Dead or Injured Animals [Sec. 1705]




PAGE 239

(3) Refund in case of excess payments due to:(a) manifest clerical error made in invoice or

entry(b) error in return of weight, measure and

gauge (certified, under penalties offalsification or perjury, by examining

official)(c) error in the distribution of charges on

invoices (which does not involve anyquestion of law and certified, underpenalties of falsification or perjury, byexamining official) [Sec. 1707 ]

Conditions for refund of Excess Payments

(1) errors discovered before payment ORdiscovered within 1 year after the finalliquidation

(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

If the result of the refund would result to acorresponding refund of the internal revenue

taxes on the same importation, Collector shallcertify to Commissioner who shall cause thesaid excess to be paid, refunded or credited infavor of the importer




PAGE 240

START

Collector determines

probable cause(illegal importation)

Flowchart IX: Remedies from Seizure and Forfeiture Cases-Tariffs and

Customs Code

Collector conducts

hearing

Amount

involved less

than 5M?

Importer may secure

release of goods by

filing of cash bond

(Sec. 2301)

Collector’s

decision favorable

to taxpayer/

adverse to gov’t?

Taxpayer appealsto Customs

Commissioner 15

days from receipt

of notice

Does

Commissioner

decide w/n 30

days? Is

Commissioner’s

decision

favorable to

taxpayer/

adverse to

gov’t?

Appeal to the

Court of Tax

Appeals within 30

days from notice

of decision

Automatic Review* by

the Secretary of

Finance (SOF) (Sec.

2313, CMO 3-2002)

MR within 15 days

from receipt of

decision

Appeal to CTA en

banc 15 days from

receipt of decision

denying MR

Appeal to the

Supreme CourtEND

Yes

No

Yes

NoNo

Yes

Automatic review* by Customs

Commisioner (Sec. 2313)

Does

commissioner

decide w/in 30days?

Is

Commissioner’s

decision favorable

to taxpayer/adverse to gov’t?

No

Yes

Yes

Yes

No, amount is at least

5M

Does SOF

decide within

30 days?

Decision becomes

final &

unappealable

Is SOF’s

decision

favorable to

taxpayer/adverse

to gov’t?

NoYes

Inaction construed as

affirmation of

commissioner’s decision

(or of collector’s decision

in case of inaction by

commissioner)

No

END

Inaction construed as affirmation

of Collector’s decision

No

Appeal

to CTA

Inaction construed

as affirmation of

Collector’s

decision

Yes

Collector seizes goods

and reports it to the

Commissioner and to

COA. Owner is notified

of seizure

*Automatic review is intended to protect the interest of the Government. W/o auto review, the Commissioner and SoF would not know

about the decision laid down by the Collector favoring the taxpayer. Automatic review is necessary because nobody is expected to appeal

the decision of the Collector which is favorable to the taxpayer & adverse to the Government. (Yaokasin v. Commissioner 180 SCTA 591




PAGE 241

TABLE OF SPECIAL DUTIES: WHEN IMPOSED Anti-Dumping [Sec.

301, TCC as amendedby RA 8752 ]

Countervailing [Sec. 302 as amended by RA

8751]

Marking[Sec. 303]

Discriminatory[Sec. 304]

Safeguard (RA 8800)

Where a product orcommodity is importedin the Philippines at anexport price less thanthe normal value in theordinary course of

trade for the likeproduct or articledestines forconsumption in theexporting country ormaterially regardingestablishment of adomestic industryproducing the likeproduct (Sec. 3, RA8752)

Whenever any product,commodity or article ofcommerce is granteddirectly or indirectly bythe government in thecountry of origin or

exportation, any kindor form of specificsubsidy upon theproduction,manufacture orexportation of suchproduct, commodity orarticle, and theimportation of suchsubsidized product,has caused orthreatens to causematerial injury to adomestic industry orhas materiallyretarded the growth orprevents theestablishment of adomestic industry

If at the time ofimportation any article(or its container if thearticle cannot bemarked), is not markedin any official language

of the Philippines andin a conspicuous placeas legibly, indeliblyand permanently asthe nature of thearticle (or container).This is used to preventdeception ofconsumers.

Whenever thePresident finds thatthe public interest willbe served thereby,additional customsduty shall be imposed

upon articles wholly orin part the growth orproduct of, or importedin a vessel of, anyforeign countrywhenever he shall findas a fact that suchcountry —

(1) Imposes, directly orindirectly, upon anyPhil productunreasonable charge,exaction, regulation orlimitation which is notequally enforced uponthe like articles ofother foreigncountries; or(2) Discriminates infact against thecommerce of thePhilippines, as to placethe commerce of thePhilippines at adisadvantagecompared with thecommerce of anyforeign country.

(Sec 5) General

Safeguard Measure:Whenever there is apositive finaldetermination of theCommission that a

product is beingimported into thecountry in increasedquantities, whetherabsolute or relative tothe domesticproduction, as to be asubstantial cause ofserious injury or threatthereof to thedomestic industry;however, in the case ofnon-agriculturalproducts, the Secretaryof Agriculture shallfirst establish that theapplication of suchsafeguard measureswill be in the publicinterest

(Sec 21) Special

Safeguard Measure for

Agricultural Products:Imposed uponagricultural products,consistent with Phil

international treatyobligations, if its:a) Cumulative importvolume in a given yearexceeds its triggervolume subject to theconditions under Sec.23, RA 8800, or butnot currently; andb) Actual CIF importprice is less than itstrigger price subject toconditions under Sec.24, RA 8800




PAGE 242

TABLE OF SPECIAL DUTIES: IMPOSING AUTHORITY AND AMOUNT

Anti-Dumping [Sec. 301, TCC as amended

by RA 8752 ]

Countervailing [Sec. 302as amended by RA 8751]

Marking [Sec. 303]

Discriminatory[Sec. 304]

Safeguard (RA 8800)

(1) Secretary of Trade and Industry - non-agricultural products

(2) Secretary of Agriculture - agriculturalproducts

(3) Tariff Commission - decides whether or not to

impose anti-dumping/countervailing duty

Commissioner ofCustoms

President (through aproclamation)

For non-agriculturalproducts:Secretary of Trade andIndustryFor agricultural

products:Secretary ofAgriculture

Secretary of Agriculture

Anti-Dumping Duty= Normal Value -Export Price

Equivalent to the subsidy 5% ad valorem of thearticles

Not exceeding 100% advalorem upon the articles

tariff increase, eitherad valorem or specific,or both, to be paidthrough a cash bondset at a level sufficientto redress or preventinjury to the domesticindustry [Sec. 8, RA8800]

For a):

appropriately set to alevel not exceeding one-third of the applicableout-quota customs dutyon the agriculturalproduct underconsideration in the yearwhen it is imposedFor b), compute asfollows:(a) 0 - if price difference

is at most 10% of the

trigger price(b) 30% of the amount

by which the pricedifference exceeds10% of the triggerprice

(c) 50% - if it exceeds40% but less than60%

(d) 70% - if it exceeds60 but at most 75%

(e) 90% - if it exceeds75%




PAGE 243

Notes:

Exceptions to the Marking of Articles: [In thefollowing situations, the containers shall be theone subject to marking.](a) Article is incapable of being marked(b) Article cannot be marked prior to shipment

to the Philippines without injury(c) Article cannot be marked prior to shipment

to the Philippines, except at an expenseeconomically prohibitive of its importation

(d) Marking of a container of such article willreasonably indicate the origin of such article

(e) Article is a crude substance(f) Article is imported for use by the importer

and not intended for sale in its imported orany other form

(g) Article is to be processed in the Philippinesby the importer or for his account otherwise

than for the purpose of concealing the originof such article and in such manner that anymark contemplated by this section wouldnecessarily be obliterated, destroyed orpermanently concealed

(h) An ultimate purchaser, by reason of thecharacter of such article or by reason of thecircumstance of its importation, mustnecessarily know the country of origin of sucharticle even though it is not marked toindicate its origin

(i) Article was produced more than twenty yearsprior to its importation into the Philippines

(j) Article cannot be marked after importationexcept at an expense which is economicallyprohibitive, and the failure to mark the articlebefore importation was not due to anypurpose of the importer, producer, seller orshipper to avoid compliance with this section

JUDICIAL REMEDIES

JURISDICTION OF THE COURT OF TAXAPPEALS

Civil Tax Cases

Exclusive Original Jurisdiction

Tax collection cases involving final andexecutory assessments for taxes, fees, chargesand penalties, where the principal amount oftaxes and fees, exclusive of charges andpenalties, claimed is one million pesos or more.

Exclusive Appellate Jurisdiction

CTA Division

(1) Decisions and Inaction of the Commissionerof Internal Revenue in cases involvingdisputed assessments, refunds of internal

revenue taxes, fees or other charges,penalties in relation thereto, or other mattersarising under the National Internal Revenueor other laws administered by the Bureau ofInternal Revenue;

(a) Inaction of the Commissioner shall bedeemed a denial in which the taxpayermay appeal.

(b) Inaction does not necessarily constitute aformal decision and the taxpayer may optto await the final decision of the

Commissioner by constitute a formaldecision and the taxpayer may opt toawait the final decision of theCommissioner beyond the 180 days andmay appeal such final decision.

(c) For claim for refund, the taxpayer mustfile a petition for review with the CTA priorto the expiration of the two yearprescriptive period.

(2) Decisions, orders or resolutions of the RTC inlocal tax cases and in tax collection casesoriginally decided or resolved by them in

their ORIGINAL jurisdiction.

(3) Decisions of the Commissioner of Customs incases involving liability for customs duties,fees or other money charges, seizure,detention or release of property affected,fines, forfeitures or other penalties in relationthereto, or other matters arising under theCustoms Law or other laws administered bythe Bureau of Customs;

(4) Decisions of the Secretary of Finance on

customs cases elevated to him automaticallyfor review from decisions of theCommissioner of Customs which are adverseto the Government under Section 2315 of theTariff and Customs Code;




PAGE 244

(5) Decisions of the Secretary of Trade andIndustry, in the case of non-agriculturalproduct, commodity or article, and theSecretary of Agriculture in the case ofagricultural product, commodity or article,involving dumping and countervailing duties

under Section 301 and 302, respectively, ofthe Tariff and Customs Code, and safeguardmeasures under Republic Act No. 8800,where either party may appeal the decisionto impose or not to impose said duties. (Sec.7, RA No. 1125 as amended)

CTA en Banc

(1) Decisions or resolutions on motions forreconsideration or new trial of the Court inDivisions in the exercise of its exclusive

appellate jurisdiction over:

(a) Cases arising from administrativeagencies – Bureau of Internal Revenue,Bureau of Customs, Department ofFinance, Department of Trade andIndustry, Department of Agriculture;

(b) Local tax cases decided by the RegionalTrial Courts in the exercise of their original jurisdiction; and

(c) Tax collection cases decided by theRegional Trial Courts in the exercise oftheir original jurisdiction involving finaland executory assessments for taxes, fees,

charges and penalties, where theprincipal amount of taxes and penaltiesclaimed is less than one million pesos;

(2) Decisions, resolutions or orders of theRegional Trial Courts in local tax cases andin tax collection cases decided or resolved bythem in the exercise of their APPELLATE jurisdiction;

(3) Decisions, resolutions or orders on motionsfor reconsideration or new trial of the Court

in Division in the exercise of its exclusiveoriginal jurisdiction over tax collection cases;

(4) Decisions of the Central Board ofAssessment Appeals (CBAA) in the exerciseof its appellate jurisdiction over casesinvolving the assessment and taxation of realproperty originally decided by the provincialor city board of assessment appeals;

Criminal cases [Sec. 7, RA 1125 as amended]

Exclusive Original Jurisdiction

All criminal offenses arising from violations ofthe National Internal Revenue Code or Tariffand Customs Code and other laws administered

by the Bureau of Internal Revenue or the Bureauof Customs. Principal amount of taxes and fees,exclusive of charges and penalties, claimed ismore than or equal to One million pesos(P1,000,000.00).

The filing of the criminal action being deemedto necessarily carry with it the filing of the civilaction, and no right to reserve the filling of suchcivil action separately from the criminal actionwill be recognized.

Exclusive appellate jurisdiction in criminal cases

CTA Division

(1) Over appeals from the judgments,resolutions or orders of the Regional TrialCourts in tax cases originally decided bythem, in their respected territorial jurisdiction.

(2) Over petitions for review of the judgments,resolutions or orders of the Regional TrialCourts in the exercise of their appellate jurisdiction over tax cases originally decidedby the Metropolitan Trial Courts, Municipal

Trial Courts and Municipal Circuit TrialCourts in their respective jurisdiction.

CTA En Banc

(1) Decisions, resolutions or orders on motionsfor reconsideration or new trial of the Courtin Division in the exercise of its exclusiveoriginal jurisdiction over cases involvingcriminal offenses arising from violations ofthe National Internal Revenue Code or theTariff and Customs Code and other lawsadministered by the Bureau of Internal

Revenue or Bureau of Customs;(2) Decisions, resolutions or orders on motions

for reconsideration or new trial of the Courtin Division in the exercise of its exclusiveappellate jurisdiction over criminal offensesmentioned in the preceding subparagraph;and




PAGE 246

Exception: Where the collection of theamount of the taxpayer’s liability, sought bymeans of a demand for payment, by levy,distraint or sale of any property of thetaxpayer, or by whatever means, as provided

under existing laws, may jeopardize theinterest of the Government or the taxpayer,an interested party may file a motion for thesuspension of the collection of the taxliability

(a) Injunction not available to restraincollection

No court shall have authority to grant aninjunction to restrain the collection of anynational internal revenue tax, fee orcharge imposed by the Code. [Sec. 217,

NIRC ]

Note: The Local Government Code doesnot have a provision prohibiting injunctionin the collection of tax.

(2) Taking of evidence

(i) The Court may receive evidence in thefollowing cases:(a) In all cases falling within the original

jurisdiction of the Court in Divisionpursuant to Section 3, Rule 4 of theseRules; and

(b) In appeals in both civil and criminalcases where the Court grants a new trialpursuant to Section 2, Rule 53 andSection 12, Rule 124 of the Rules ofCourt. [Sec. 2, Rule 12, A.M. No. 05-11-07]

(ii) Taking of evidence by:(a) Justice—

The Court may, motu proprio or uponproper motion, direct that a case, or anyissue therein, be assigned to one of itsmembers for the taking of evidence,

when the determination of a question offact arises at any stage of theproceedings, or when the taking of anaccount is necessary, or when thedetermination of an issue of factrequires the examination of a longaccount. The hearing before such justiceshall proceed in all respects as though

the same had been made before theCourt.

Upon the completion of such hearing,the justice concerned shall promptlysubmit to the Court a written report

thereon, stating therein his findings andconclusions. Thereafter, the Court shallrender its decision on the case,adopting, modifying, or rejecting thereport in whole or in part, or, the Courtmay, in its discretion, recommit it to the justice with instructions, or receivefurther evidence. [Sec. 12, RA No. 1125,as amended; also Sec. 3, Rule 12, A.M.No. 05-11-07]

(b) Court Official –

In default or ex parte hearings, or in anycase where the parties agree in writing,the Court may delegate the reception ofevidence to the Clerk of Court, theDivision Clerks of Court, their assistantswho are members of the Philippine bar,or any Court attorney. The reception ofdocumentary evidence by a Courtofficial shall be for the sole purpose ofmarking, comparison with the original,and identification by witnesses of suchdocumentary evidence. The Courtofficial shall have no power to rule on

objections to any question or to theadmission of exhibits, which objectionsshall be resolved by the Court uponsubmission of his report and thetranscripts within ten days fromtermination of the hearing. (Sec. 4, Rule12, A.M. No. 05-11-07)

(3) Motion for reconsideration or new trial [Rule

15, A.M. No. 05-11-07]

Who: Any aggrieved party may seek a

reconsideration or new trial of any decision,resolution or order of the Court.

May be opposed by: The adverse party mayfile an opposition to the motion forreconsideration or new trial within ten daysafter his receipt of a copy of the motion forreconsideration or new trial of a decision,resolution or order of the Court.




PAGE 247

When: He shall file a motion forreconsideration or new trial within fifteendays from the date he received notice of thedecision, resolution or order of the Court inquestion.

The Court shall resolve the motion forreconsideration or new trial within threemonths from the time it is deemedsubmitted for resolution.

How: The motion shall be in writing statingits grounds, a written notice of which shall beserved by the movant on the adverse party.

A motion for new trial shall be proved inthe manner provided for proof of

motions. A motion for the causementioned in subparagraph (a) of thepreceding section shall be supported byaffidavits of merits which may berebutted by counter-affidavits. A motionfor the cause mentioned insubparagraph (b) of the precedingsection shall be supported by affidavitsof the witnesses by whom such evidenceis expected to be given, or by dulyauthenticated documents which areproposed to be introduced in evidence.

A motion for reconsideration or newtrial that does not comply with theforegoing provisions shall be deemedpro forma, which shall not toll thereglementary period for appeal.

Effect: The filing of a motion forreconsideration or new trial shallsuspend the running of the periodwithin which an appeal may beperfected.

Grounds: A motion for new trial may bebased on one or more of the followingcauses materially affecting thesubstantial rights of the movant:(a) Fraud, accident, mistake or

excusable negligence which ordinaryprudence could not have guardedagainst and by reason of which such

aggrieved party has probably beenimpaired in his rights; or

(b) Newly discovered evidence, which hecould not, with reasonable diligence, have discovered and produced at thetrial and, which, if presented, would

probably alter the result.

A motion for new trial shall include allgrounds then available and those notincluded shall be deemed waived.

Restrictions: No party shall be allowedto file a second motion forreconsideration of a decision, finalresolution or order; or for new trial.

Appeal to the CTA, en banc:

No civil proceeding involving matter arisingunder the National Internal Revenue Code, theTariff and Customs Code or the LocalGovernment Code shall be maintained, exceptas herein provided, until and unless an appealhas been previously filed with the CTA anddisposed of in accordance with the provisions ofthis Act.

A party adversely affected by a resolution of aDivision of the CTA on a motion forreconsideration or new trial, may file a petitionfor review with the CTA en banc. (Sec. 18, RA

No. 1125 as amended)

Petition for review on certiorari to the Supreme

Court (Rule 16, A.M. No. 05-11-07)

A party adversely affected by a decision or rulingof the Court en banc may appeal by filing withthe Supreme Court a verified petition for reviewon certiorari within fifteen days from receipt of acopy of the decision or resolution, as provided inRule 45 of the Rules of Court. If such party hasfiled a motion for reconsideration or for newtrial, the period herein fixed shall run from the

party’s receipt of a copy of the resolutiondenying the motion for reconsideration or fornew trial.

The motion for reconsideration or for new trialfiled before the Court shall be deemedabandoned if, during its pendency, the movantshall appeal to the Supreme Court.




PAGE 248

Criminal cases

Institution and prosecution of criminal actions

(1) Institution of criminal action

Instituted by the filing an information in the

name of the People of the Philippines(a) Those involving violations of the NIRC and

other laws enforced by the BIR - Must beapproved by the Commissioner of InternalRevenue

(b) Those involving violations of the tariff andCustoms Code and other laws enforced bythe Bureau of Customs- Must be approvedby the Commissioner of Customs

Shall interrupt the running of the period ofprescription

(2) Prosecution of criminal action(a) Conducted and prosecuted under thedirection and control of the publicprosecutor

(b) Those involving violations of the NIRC andother laws enforced by the BIR orviolations of the tariff and Customs Codeand other laws enforced by the Bureau ofCustoms - The prosecution may beconducted by their respective dulydeputized legal officers.

(1) Institution on civil action in criminal action

In cases within the jurisdiction of theCourt, the criminal action and thecorresponding civil action for the recoveryof civil liability for taxes and penaltiesshall be deemed jointly instituted in thesame proceeding. The filing of thecriminal action shall necessarily carry withit the filing of the civil action. No right toreserve the filing of such civil actionseparately from the criminal action shallbe allowed or recognized.

Appeal and period to appeal criminal cases

Deciding Body Period to Appeal

Mode of Appeal

RegionalTrial Court inthe exercise of

its original jurisdiction(to CTADivision)

15 days fromreceipt ofdecision

Appealpursuant toSec. 3(a) and

6, Rule 122 ofthe Rules ofCourt

CTA Division(to CTA EnBanc)


May beextended forgood causefor not more

than 15 days

Petition forreview asprovided inRule 43 of theRules of Court

The Court enbanc shall act

on the appeal.Regional TrialCourts in theexercise oftheirappellate jurisdiction(To CTAdivision)


Petition forreview asprovided inRule 43 of theRules of Court

Solicitor General as counsel for the People and

government officials sued in their official

capacity

The Solicitor General shall represent the Peopleof the Philippines and government officials suedin their official capacity in all cases brought tothe Court in the exercise of its appellate jurisdiction. He may deputize the legal officersof the Bureau of Internal Revenue in casesbrought under the National Internal RevenueCode or other laws enforced by the Bureau ofInternal Revenue, or the legal officers of theBureau of Customs in cases brought under theTariff and Customs Code of the Philippines orother laws enforced by the Bureau of Customs,

to appear in behalf of the officials of saidagencies sued in their official capacity: Provided,however, such duly deputized legal officers shallremain at all times under the direct control andsupervision of the Solicitor General.




PAGE 249

Petition for review on certiorari to the Supreme

Court

A party adversely affected by a decision or rulingof the CTA en banc may file with the SupremeCourt a verified petition for review on certioraripursuant to Rule 45 of the 1997 Rules of Civil

Procedure. (Sec. 19, R.A. No. 1125 as amended)

TAXPAYER’S SUIT IMPUGNING THEVALIDITY OF TAX MEASURES OR ACTS OFTAXING AUTHORITIES

Taxpayer’s suit, defined A "taxpayer's suit" refers to a case where the actcomplained of directly involves the illegaldisbursement of public funds derived fromtaxation. (Kilosbayan v. Guingona, Jr. (1994))

Distinguished from citizen’s suit The plaintiff in a taxpayer's suit is in a differentcategory from the plaintiff in a citizen's suit. Inthe former, the plaintiff is affected by theexpenditure of public funds, while in the latter,he is but the mere instrument of the publicconcern. [De Castro v. Judicial and Bar Council(2010)]

Requisites for challenging theconstitutionality of a tax measure or act oftaxing authority

(1) Concept of locus standi as applied in taxation

(1) CONCEPT OF LOCUS STANDI: Thedoctrine of locus standi is the right ofappearance in a court of justice. Thedoctrine requires a litigant to have amaterial interest in the outcome of a case.In private suits, locus standi requires alitigant to be a "real party in interest,"which is defined as "the party who standsto be benefited or injured by the judgmentin the suit or the party entitled to theavails of the suit."

In public suits, this Court recognizes thedifficulty of applying the doctrineespecially when plaintiff asserts a publicright on behalf of the general publicbecause of conflicting public policy issues.On one end, there is the right of theordinary citizen to petition the courts to befreed from unlawful government intrusion

and illegal official action. At the otherend, there is the public policy precludingexcessive judicial interference in officialacts, which may unnecessarily hinder thedelivery of basic public services.

The Court has adopted the "direct injurytest" to determine locus standi in publicsuits. In People v. Vera, it was held that aperson who impugns the validity of astatute must have "a personal andsubstantial interest in the case such thathe has sustained, or will sustain directinjury as a result." The "direct injury test"in public suits is similar to the "real partyin interest" rule for private suits underSection 2, Rule 3 of the 1997 Rules of CivilProcedure. [Planter’s Products, Inc. v.

Fertiphil Corporation, G.R. No. 166006,March 14, 2008]

(2) AS APPLIED TO TAXATION:(a) It is well-stated that the validity of a

statute may be contested only by onewho will sustain a direct injury inconsequence of its enforcement. Yet,there are many decisions nullifying, atthe instance of taxpayers, lawsproviding for the disbursement ofpublic funds, upon the theory that "theexpenditure of public funds by an

officer of the State for the purpose ofadministering an unconstitutional actconstitutes a misapplication of suchfunds," which may be enjoined at therequest of a taxpayer. [Pascual v.Secretary of Public Works (1960)]

(b) A taxpayer is allowed to sue wherethere is a claim that public funds areillegally disbursed, or that the publicmoney is being deflected to anyimproper purpose, or that there iswastage of public funds through the

enforcement of an invalid orunconstitutional law. A person suingas a taxpayer, however, must showthat the act complained of directlyinvolves the illegal disbursement ofpublic funds derived from taxation. Hemust also prove that he has sufficientinterest in preventing the illegalexpenditure of money raised by




taxation and that he will sustain adirect injury because of theenforcement of the questioned statuteor contract. In other words, for ataxpayer’s suit to prosper, tworequisites must be met: (1) public funds

derived from taxation are disbursed by

The constitutionality of the levy is already indoubt on a plain reading of the statute. It isOur constitutional duty to squarely resolvethe issue as the final arbiter of all justiciablecontroversies. The doctrine of standing,being a mere procedural technicality, should

be waived, if at all, to adequately thresh out

242464506-BOC-2014-Taxation-Law-Reviewer.pdf

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