Transfer Taxes Taxation Law 2

TRANSFER TAXES
Transfer taxes are excise taxes imposed upon the privilege of gratuitously transmitting one’s property to another. There are two types of transfer taxes: donor’s tax and estate tax. Donor’s Tax Imposed upon privilege to give Transfer is the living Estate Tax Imposed upon the privilege to transmit property to heirs Transfer is from the deceased, through his/her estate, to the living Transfer takes place only between natural persons

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between

Transfer may take place between natural and juridical persons I. ESTATE TAX

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PRINCIPLES Definition It is a graduated tax imposed upon the privilege of the decedent to transmit property at death and is based on the entire net estate. It is not a direct tax on the property transmitted or transferred although its amount is based thereon. Applicable Law It is a well-settled rule that estate taxation is governed by the statute in force at the time of the death of the decedent. The estate tax accrues as of the death of the decedent and the accrual of the tax is distinct from the obligation to pay the same. Upon the death of the decedent, succession takes place and the right of the State to tax the privilege to transmit the estate vests instantly upon death. (Section 3, RR 22003) Transfers Affected 1. Transfers Mortis Causa - Gratuitous transfers mortis causa or after death are the usual objects of the estate tax. Such transfers are either testate or intestate. 2. Transfers Inter Vivos - Generally, gratuitous transfers inter vivos attract donor’s tax. However, certain transfers inter vivos are treated as testamentary dispositions and are accordingly included in the computation of the gross estate in order to arrive at the proper estate tax liability. These transfers are the following: a. Transfers in contemplation of death (Sec. 85B) The term “in contemplation of death” does not refer to the general expectation of death which all entertain. The transfers referred to are those impelled by the thought of death (i.e., the motivating factor or controlling motive is the thought of death), regardless of whether the transferor was near the possibility of death or not. In ascertaining such intent, the following are considered: o The age of the decedent at the time the transfers were made; b.

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The decedent’s health, as he knew it, at or before the time of the transfers; The interval between the transfers and the decedent’s death; The amount of the property transferred in proportion to the amount of property retained; The nature and disposition of the decedent, e.g., whether peaceful or gloomy, sanguine or morbid, optimistic or pessimistic; The existence of a general testamentary scheme of which the transfers were part; The relationship of the donee or donees to the decedent, i.e. whether they were the natural objects of their bounty; The existence of a desire on the part of the decedent to escape the burden of managing property by transferring the property to others; The existence of a long established giftmaking policy on the part of the decedent; The existence of a desire on the part of the decedent to vicariously enjoy the enjoyment of the donees of the property transferred; and The existence of the desire by the decedent of avoiding estate taxes by means of making inter vivos transfers of property. (Source: Nolledo, The NIRC Annotated)

Transfer with retention or reservation of certain rights (Sec. 85B) This contemplates those cases where the owner transfers his property during life but still retains the economic benefits – the possession or enjoyment of the property, or the power to designate the persons who may exercise such rights. By reason of the restriction or encumbrance, the transferee is incapable of freely enjoying or disposing of the property until the transferor’s death, that the transfer may be regarded as having been intended to take effect in possession or enjoyment at the transferor’s death.  ILLUSTRATION: X transfers his property to Y in naked ownership and to Z in usufruct throughout Z’s lifetime subject to the condition that if Z predeceases X, the property shall return to X. If X dies during Z’s life, the value of the reversionary interest of X at death is includible in his gross estate (see Articles 756-757 of the Civil Code). The transfer is taxable as intended to take effect at or after death because the possibility of reversion to X makes Z’s interest conditional as long as X lives. NOTE: Transfer with retention or reservation of certain rights is grouped by the Tax Code under transfer in contemplation of death. Revocable transfers (Sec. 85C) A revocable transfer is one where the transferor has reserved the right to alter, amend or revoke such transfer, regardless of whether or not the power is actually exercised during his lifetime, and whether or not the power should be exercised by him

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alone or in conjunction with someone else. The power to alter, amend or revoke shall be considered to exist on the date of the decedent’s death EVEN THOUGH:  the exercise of the power is subject to a precedent giving of notice, or  the alteration, amendment or revocation takes effect only on the expiration of a stated period after the exercise of the power, whether or not on or before the date of the decedent’s death notice has been given or the power has been exercised.  If notice has not been given or the power has not been exercised before the date of his death, such notice shall be considered to have been given, or the power exercised, on the date of his death. d. Transfers of property arising under a general power of appointment (Sec. 85D) The rule is that the gross estate shall include any property passing or transferred under a general power of appointment exercised by the decedent:  by will, or  by deed executed in contemplation of, or intended to take effect in possession or enjoyment at, or after his death, or  by deed under which he has retained for his life or any period not ascertainable without reference to his death or for any period which does not in fact end before his death o the possession or enjoyment of, or the right to the income from, the property, or o the right, either alone or in conjunction with any person, to designate the persons who shall possess or enjoy the property or the income therefrom  Q: What is a power of appointment? It is the power or right to designate by will or by deed the person(s) who shall succeed to, possess or enjoy the property, or the income therefrom, received from the estate of the prior decedent. It involves the person creating the power (donor) and the person to whom is given the right to exercise the power (donee). The two kinds of appointment and their effects are as follows: Kind of Appointment General Nature DONEE has power to appoint any person he chooses who shall possess or enjoy the property without restriction Tax Implications Makes appointed property, for all legal intents, the property of the DONEE (includible in his estate) Effects DONEE holds the appointed property with all the attributes of ownership, under the concept of owner Special DONEE must appoint successor to the property only within a limited group or class of persons Not includible in the gross estate of the DONEE when he dies DONEE holds the appointed property in trust, or under the concept of trustee

e.

Transfers for insufficient consideration (Sec. 85G) These are transfers that are not bona fide sales of property for an adequate and full consideration in money or money’s worth. The following rules apply:  If bona fide sale – no value shall be included in the gross estate  If not a bona fide sale - the excess of the fair market value at the time of death over the value of the consideration received by the decedent shall form part of his gross estate.  If inter vivos transfer is proven fictitious – total value of the property at the time of death included in the gross estate; e.g. Case A 1,500 2,000 800 1,200 Case B 2,000 2,500 2,000 0 Case C 2,500 2,000 0 2,000

FMV, transfer FMV, death Consideration Received Value Included in the Gross Estate

Transfers Exempted and Properties Excluded 1. Acquisitions and transfers expressly declared as exempt: (Sec. 87) a. Merger of the usufruct in the owner of the naked title b. Transmission or delivery of the inheritance or legacy by the fiduciary heirs or legatee to the fiduciary c. Transmission from the first heirs, legatees or donees in favor of another beneficiary in accordance with the desire of the testator d. All bequests, devises, legacies or transfers to social welfare, cultural and charitable institutions, no part of the income of which inures to the benefit of any individual, provided that not more than 30% of the said bequests, devises, legacies or transfers shall be used for administrative purposes 2. Proceeds of:  A life insurance policy taken out by the decedent upon his own life, when beneficiary is OTHER THAN the estate, executor or administrator, and designation is IRREVOCABLE (Sec. 85E)  Thus, proceeds are INCLUDED in the gross estate:  When beneficiary is the estate, executor or administrator, whether designation is revocable or irrevocable

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 When beneficiary is other than the estate, executor or administrator, and designation is REVOCABLE  NOTE: According to the Insurance Code, the designation is presumed to be revocable, in case the designation of the beneficiary is not clear. a group life insurance policy taken out by a company for its employees, because the law speaks of policies “taken out by the decedent upon his own life” life insurance policies issued by the GSIS to government officials or employees, as they are exempt by law from taxes of all kinds (PD 1146, as amended)   It is inconsistent with the express provisions of statute, or Justice does not demand that it should be, as where the property has in fact a situs elsewhere.

3. 4.

Death benefits received from the SSS, accruing by reason of death (RA 1161, as amended) Amounts received from the Philippine and the U.S. Governments from the damages suffered during the last war (RA 227) Benefits received by beneficiaries residing in the Philippines under laws administered by the U.S. Veterans Administration (RA 360) Properties held in trust by the decedent Transfers by way of bona fide sales Separate or exclusive property of the surviving spouse is not deemed part of the gross estate of the decedent spouse. (Sec. 85, NIRC) Net estates which are not in excess of P200,000 are exempt from estate tax. (Sec. 84, NIRC)

CASE LAW: Collector v. Lara, 102 Phil 813 – As a rule, personal property is taxable at the domicile of the owner under the doctrine of mobilia sequuntur personam; nevertheless, when he, 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, in such a way as to bring his person or property within the reach of the Philippines, the reason for a single place of taxation no longer obtains. His property in the Philippines enjoys the protection of the government so that the right to collect the estate tax cannot be questioned. Q: What are the intangible properties which are considered by law as situated in the Philippines?  Franchise which must be exercised in the Philippines  Obligations or bonds issued by any corporation or sociedad anonima organized or constituted in the Philippines  Shares, obligations or bonds issued by any foreign corporation 85% of the business of which is located in the Philippines  Shares, obligations or bonds issued by any foreign corporation if such shares, obligations or bonds have acquired a business situs in the Philippines  Shares or rights in any partnership, business or industry established in the Philippines Q: What is the reciprocity rule? (Sec. 104, NIRC) There is reciprocity if the foreign country of which the decedent was a citizen and resident at the time of his death:  did not impose a transfer tax of any character, in respect of intangible personal property of citizens of the Philippines not residing in that foreign country; or  allowed a similar exemption from transfer tax in respect of intangible personal property owned by citizens of the Philippines not residing in that country NOTE:  For the reciprocity rule to apply, there must be TOTAL reciprocity. If any of the two states collects or imposes and does not exempt any transfer, death, legacy, or succession tax of any character, reciprocity does not work. [For instance,] in the Philippines, both estate and inheritance taxes are imposed on the estate while in California only inheritance tax is imposed. The reciprocity rule may not, therefore, be availed of. There cannot be partial reciprocity. It has to be total or none at all. (CIR v. Fisher, 110 Phil 686) Reciprocity in exemption does not require the “foreign country” to possess international personality in the traditional sense (i.e., compliance with the requisites of statehood). Thus, Tangier, Morroco (Collector v. CamposRueda, 42 SCRA 23) and California, a state in the American Union (Collector v. de Lara, 102 Phil 813) were held to be foreign countries within the meaning of Section 104.

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6. 7. 8.

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GROSS ESTATE Composition The gross estate of a decedent shall be composed of the following properties and interest therein at the time of his death:  Citizens and Resident Aliens – all properties, real or personal, tangible or intangible, wherever situated  Non-resident Aliens – only properties situated in the Philippines provided that, with respect to intangible personal property, its inclusion in the gross estate is subject to the rule of reciprocity provided for under Section 104 of the NIRC Q: What is “residence” for estate tax purposes? The term “residence” and “domicile” are synonymous and are used interchangeably without distinction. (Collector v. Lara, 102 Phil 813; Velilla v. Posadas, 62 Phil 624). For purposes of estate taxation, “residence” refers to the permanent home, the place to which whenever absent, for business or pleasure, one intends to return, and depends on facts and circumstances, in the sense that they disclose intent. (Corre v. Tan Corre, 100 Phil 321) It is, therefore, not necessarily the actual place of residence. Q: What is the situs of intangible personal property? The general rule is that the situs is at the domicile or residence of the owner. The principle, however, is not controlling when:

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o Valuation of the Gross Estate (§88 of the NIRC and §5 of RR 2-2003) GENERAL RULE: The properties comprising the gross estate shall be valued based on FAIR MARKET VALUE (FMV) as of the time of death.  Real property – FMV shall be the FMV as determined by the Commissioner OR the FMV as shown in the schedule of values fixed by the provincial and city assessors, whichever is HIGHER. Shares of Stock o Listed shares – FMV shall be the arithmetic mean between the highest and lowest quotation at a date of death, OR the date nearest the date of death, if none is available on the date of death itself o Unlisted shares - COMMON shares are valued based on BOOK VALUE; while PREFERRED shares are valued at PAR VALUE Right to usufruct, use or habitation, as well as that of annuity - there shall be taken into account the probable life of the beneficiary in accordance with the latest basic standard mortality table, to be approved by the Secretary of Finance, upon recommendation of the Insurance Commissioner. Cost of BURIAL PLOT, TOMBSTONES, MONUMENT or MAUSOLEUM but not their upkeep. In case the deceased owns a family estate or several burial lots, only the value corresponding to the plot where he is buried is deductible INTERMENT and/or CREMATION FEES and CHARGES All other expenses incurred for the performance of the RITES and CEREMONIES incident to interment

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Q: What are NOT deductible as funeral expenses? o Expenses incurred AFTER INTERMENT, such as for prayers, masses, entertainment, or the like o Any portion of the funeral and burial expenses BORNE or DEFRAYED by RELATIVES and FRIENDS of the deceased ILLUSTRATIONS: o If five percent (5%) of the gross estate is P70,000 and the amount actually incurred is P50,000, only P50,000 will be allowed as deduction; o If the expenses actually incurred amount to P90,000 and five percent (5%) of the gross estate is P70,000, only P70,000 will be allowed as deduction; o If five percent (5%) of the gross estate is P220,000 and the amount actually incurred is P215,000, the maximum amount that may be deducted is only P200,000; o If five percent (5%) of the gross estate is P 100,000 and the total amount incurred is P150,000 where P20,000 thereof is still unpaid, the only amount that can be claimed as deduction for funeral expenses is P100,000. The entire P50,000 excess amount consisting of P30,000 paid amount and P20,000 unpaid amount can no longer be claimed as FUNERAL EXPENSES. Neither can the P20,000 unpaid portion be deducted from the gross estate as CLAIMS AGAINST THE ESTATE. b) Judicial expenses of testamentary and intestate proceedings (§86-A1) Expenses allowed as a deduction under this heading are those incurred in the inventorytaking of the assets comprising the gross estate, their administration, the payment of debts of the estate, as well as the distribution of the estate among the heirs. These deductible items are expenses incurred DURING THE SETTLEMENT OF THE ESTATE BUT NOT BEYOND THE LAST DAY PRESCRIBED BY LAW, or the extension thereof, FOR THE FILING OF THE ESTATE TAX RETURN (RR 2-2003, Sec. 6-A2)

 Decedent’s interest  Value to be included in the gross estate is the extent of the interest therein of the decedent at the time of his death DEDUCTIONS 1. Expenses, losses, indebtedness and taxes a. Funeral expenses (§86-A1) The allowable deduction may either be the actual funeral expenses (whether paid or unpaid) up to the time of interment, or an amount equal to 5% of the gross estate, whichever is lower, but in no case to exceed P200,000. NOTE: The unpaid portion of the funeral expenses incurred which is in excess of the P200,000 threshold is NOT allowed to be claimed as a deduction under “claims against the estate” (see 1(c) below). (Section 6(A)(1) of RR 02-2003)

Q: What are examples of funeral expenses? (RR 2-2003, Sec. 6-A1) o The MOURNING APPAREL of the surviving spouse and unmarried minor children of the deceased, bought and used on the occasion of the burial o Expenses for the deceased’s wake, including food and drinks o PUBLICATION CHARGES for death notices o TELECOMMUNICATIONS EXPENSES incurred in informing relatives of the deceased

Q: What are examples of judicial expenses? o Fees of executor or administrator o Attorney’s fees o Court fees o Accountant’s fees o Appraiser’s fees o Clerk hire o Costs of preserving and distributing the estate

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o o  Costs of storing or maintaining property of the estate Brokerage fees for selling property of the estate o That the value of the decedent’s interest in the property which was encumbered by such mortgage or indebtedness is included in the value of the gross estate That the deduction shall be limited to the extent that they were contracted bona fide and for an adequate and full consideration in money or money’s worth, if such unpaid mortgages or indebtedness were founded upon a promise or an agreement.

CASE LAW: Commissioner v. Court of Appeals, 328 SCRA 666 – o Expenses incurred in the extrajudicial settlement of the estate should be allowed as a deduction from the gross estate. It is sufficient that the expense be a necessary contribution toward the settlement of the case. The notarial fee paid for the extrajudicial settlement is deductible since such settlement effected a distribution of [Pajonar’s] estate to his lawful heirs. o Attorney’s fees to be deductible from the gross estate must be essential to the collection of assets, payment of debts or the distribution of property to the persons entitled to it. c) Claims against the estate (§86-A1) Claims – debts or demands of a pecuniary nature which could have been enforced against the deceased in his lifetime and could have been reduced to simple money judgments. These may arise out of contract, tort or operation of law. Requisites for deductibility (RR 2-2003, Sec. 6-A3): 1) must be a PERSONAL OBLIGATION of the deceased existing at the time of his death (except unpaid funeral expenses and unpaid medical expenses, which are classified into their own separate categories) 2) liability must have been contracted in GOOD FAITH and for adequate and full consideration in money or money’s worth 3) the claim must be a debt or claim which is VALID IN LAW and ENFORCEABLE IN COURT 4) indebtedness must NOT have been CONDONED by the creditor or the action to collect from the decedent must not have prescribed. Q: What are the substantiation requirements? The duly-notarized debt instrument, If the claim arose out of a debt instrument A statement showing the disposition of the proceeds of the loan, if the indebtedness was incurred within 3 years before the death of the decedent. Claims against insolvent persons (§86A1) These shall be deductible from the gross estate, provided that the value of the decedent’s interest in the claim is included in the value of the gross estate. Unpaid mortgages, losses and taxes(§86-A1 and RR 2-2003, Sec. 6-A5) UNPAID MORTGAGES – shall be deductible from gross estate, subject to the following conditions:

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LOSSES – deductible from the gross estate if ALL of the following conditions are satisfied: o The losses were INCURRED DURING the SETTLEMENT of the estate o The losses arose from FIRES, STORMS, SHIPWRECK or OTHER CASUALTIES, or from ROBBERY, THEFT or EMBEZZLEMENT o The losses are NOT COMPENSATED BY INSURANCE or otherwise o The losses are not claimed as a deduction for income tax purposes in an income tax return o The losses were incurred NOT LATER THAN THE LAST DAY FOR PAYMENT OF THE ESTATE TAX TAXES – shall be deductible from the gross estate if: o They have accrued as of the death of the decedent o They were unpaid as of the time of death  NOTE: This deduction DOES NOT include income tax upon income received after death, or property taxes not accrued before his death, or the estate tax due from the transmission of his estate.

 1) 2)

d)

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Property previously taxed (vanishing deductions) (§86-A2) Vanishing deduction or deduction of property previously taxed is a deduction allowed on the property left behind by the decedent which he had acquired previously by inheritance or donation. Previously, a transfer tax had already been imposed on the property, either the estate tax if the property was acquired by inheritance or the donor’s tax if the same was acquired by donation. Now that the recipient of the inheritance or donation has died, the same property will again be subjected to a transfer tax, the estate tax. Thus, to minimize the effects of a double tax on the same property within a short period of time, i.e. five (5) years, the law allows a deduction to be claimed on the said property.  Example: Mr. A died in December 2003. In March 2003, Mr. B (Mr. A’s father) died and left Mr. A some properties as inheritance. May vanishing deductions be claimed as deductions in computing Mr. A’s net taxable estate? YES, vanishing deductions shall be allowed if the following conditions are met (REQUISITES FOR DEDUCTIBILITY): 1) Death – the present decedent (Mr. A) died within five years from the receipt of the

2.

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property from a prior decedent (Mr. B) or donor; 2) Identity of the property – The property with respect to which deduction is sought can be identified as the one received from the prior decedent or the donor, or as the property acquired in exchange for the original property so received. Inclusion of the property – The property must have formed part of the gross estate situated in the Philippines of the prior decedent, or the total amount of the gifts of the donor Previous taxation of the property – the donor's tax on the gift or estate tax on the prior succession (Mr. B’s succession) was finally determined and paid No vanishing deduction on the property was allowed to the estate of the prior decedent. (Illustration of how this requirement may NOT be met: In the example above, if Mr. B received the same properties as a donation from Mr. C in July 2002, a vanishing deduction on the properties was claimed with respect to Mr. B’s estate. Thus, no more vanishing deduction may be claimed by Mr. A’s estate) Q: How shall the amount of vanishing deduction be computed? Using the facts above, assume that Mr. A inherited a car and a house from his father Mr. B. The FMV of the car was P120,000 and the FMV of the house was P800,000 at the time of Mr. B’s death. At the time Mr. A inherited the land, it was subject to a mortgage of P80,000. Mr. A paid P70,000 of the mortgage during his lifetime (leaving a balance of P10,000). The FMV of the properties at the time of Mr. A’s death were P850,000 for the land and P70,000 for the car. Mr. A’s gross estate amounted to P3,200,000 while total deductions (excluding medical expenses, standard deductions, family home) amounted to P600,000. 1) First, compare the values of the property at the time of the prior decedent’s death and at the time of the present decedent’s death. The lower amount shall be the initial basis. in the example, the initial basis shall be P800,000 for the land and P70,000 for the car, for a total of P870,000 NOTE: The value used as initial basis is only for purposes of significant computing the amount of vanishing deduction. The value included in the decedent’s gross estate is ALWAYS the fair market value at the time of his death. Then, the value in (1) shall be reduced by any payment made by the present decedent on any mortgage or lien on the property 3.  3) Mr. A paid P70,000 of the mortgage. Thus, P870,000 less 70,000 is P800,000 The value as reduced in (2) shall be further reduced by an amount equal to: X Total amount of

3)

Value as reduced in (2) deductions* Gross Estate

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* excluding family home, medical expenses, standard deduction and amounts received under RA 4917 800/3200 x 600,000 equals 150,000. This will be deducted from P800,000, which gives a balance of P650,000 Finally, the remaining balance shall be multiplied by the corresponding percentage: If received by inheritance or gift: within one (1) year prior to the death of the present decedent More than one year but not more than two years prior to the death of the decedent More than two years but not more than three years prior to the death of the decedent More than three years but not more than four years prior to the death of the decedent More than four years but not more than five years prior to the death of the decedent

4)

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% 100% 80% 60%

40%

20%

Since Mr. A received the inheritance in March 2003 (within 1 year from his death in December 2003), the balance of P650,000 shall be multiplied by 100%. Thus, the allowable vanishing deduction is P650,000

Transfers for public purpose

The amount of all the BEQUESTS, LEGACIES, DEVISES or TRANSFERS to or for the use of the Government of the Republic of the Philippines, or any political subdivision thereof, for exclusively public purposes shall be deductible from gross estate. The whole amount or value of the property is deductible provided such amount or value had been included in the gross estate. 4. Family home  Q: What is a family home? It is the dwelling house, including the land on which it is situated, where the husband and wife, or a head or the family, and members of their family reside, as certified to by the Barangay Captain of the locality. The family home is deemed to be constituted on the house and lot from the time it is actually occupied as s family residence and

2)

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considered as such for as long as any of its beneficiaries actually resides therein. (Arts. 152 and 153, Family Code) However, actual occupancy of the house or house and lot as the family residence shall not be considered interrupted or abandoned in such cases as the temporary absence from the constituted family home due to travel or studies or work abroad, etc. In other words, the family home is generally characterized by permanency, that is, the place to which, whenever absent for business or pleasure, one still intends to return. (RR 2-2003, Sec. 6D)  Q: What are the conditions for the allowance of family home as deduction from the gross estate? 1) The family home must be the actual residential home of the decedent and his family at the time of his death, as certified by the barangay captain of the locality. 2) The total value of the family home must be included as part of the gross estate of the decedent 3) Allowable deduction must be in an amount equivalent to the current FMV of the family home as declared or included in the gross estate but in no case shall the deduction exceed P1,000,000 GROSS ESTATE – all property at the time of death, wherever situated DEDUCTIONS  funeral expenses  judicial expenses  claims against the estate  claims against insolvents  unpaid mortgage and debt  taxes and losses  transfers for public use  vanishing deductions  family home  standard deduction  medical expenses  amounts received under R.A. 4917  share in conjugal property GROSS ESTATE – includes only that part of gross estate located in the Philippines DEDUCTIONS  funeral expenses  judicial expenses  claims against the estate  claims against insolvents  unpaid mortgage and debt  taxes and losses  transfers for public use  vanishing deductions  share in conjugal property NOTE: To compute for total allowable deductions of the first six items above, this formula is used: Gross estate, Phils X Gross estate, world World expense s, losses, indebte dness, taxes etc.

5. Standard deduction (§86-A5) An amount equivalent to One million pesos (P1,000,000) shall be deducted from the gross estate without need of substantiation.

6. Medical expenses (§86-A6) All medical expenses (cost of medicine, hospital bills, doctors’ fees, etc.) incurred (whether paid or unpaid) shall be allowed as a deduction against gross estate, subject to the following conditions:  The expenses were incurred by the decedent within one (1) year prior to his death  The expenses are duly substantiated with receipts PROVIDED, that in no case shall the deductible medical expenses exceed Five Hundred Thousand Pesos (P500,000).  Any amount of medical expenses incurred within one year from death in excess of P500,000 CANNOT be claimed as a deduction under “Claims against the estate”. (RR 2-2003, Sec. 6-F) 7. Amounts received by heirs under R.A. 4917 (§86-A7)

NOTE: No deduction shall be allowed in the case of a non-resident decedent not a citizen of the Philippines, unless the executor, administrator, or anyone of the heirs, as the case may be, includes in the return required to be filed under Section 90 of the Code the value at the time of the decedent’s death of that part of his gross estate not situated in the Philippines. (Section 86, NIRC) Tax Rates Applicable: If the net estate is: BUT NOT OVER P 200,000 P 200,000 500,000 2,000,000 5,000,000 10,000,000 500,000 2,000,000 5,000,000 10,000,000 And Over THE TAX SHALL BE Exempt 0 P 15,000 135,000 465,000 1,215,000 OF THE EXCESS OVER P 200,000 500,000 2,000,000 5,000,000 10,000,000

OVER

PLUS

Any amount received by the heirs from the decedent’s employer as a consequence of the death of the decedent-employee in accordance with Republic Act No. 4917  PROVIDED that such amount is included in the gross estate of the decedent. QUICK GLANCE: Resident or citizen decedent Non-resident decedent alien

5% 8% 11% 15% 20%

Tax Credit for Estate Taxes (§86-E) Q: What is a tax credit? It is a remedy against international double taxation. To minimize the onerous effect of taxing the same property twice, tax credit against Philippine estate tax is allowed for estate taxes paid to foreign countries.

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Q: Who may avail of tax credit? Only the estate of a decedent who was a citizen or a resident of the Philippines at the time of his death can claim tax credit for any estate tax paid to a foreign country. Q: What is the amount allowable as tax credit? GENERAL RULE: The estate tax imposed by the Philippines shall be credited with the amounts of any estate tax imposed by the authority of a foreign country.  LIMITATIONS: The amount of the credit taken shall be subject to each of the following limitations: a. The amount of the credit in respect to the tax paid to any country shall not exceed the same proportion of the tax against which such credit is taken, which the decedent's net estate situated within such country taxable under the NIRC bears to his entire net estate; (PER COUNTRY BASIS) and The total amount of the credit shall not exceed the same proportion of the tax against which such credit is taken, which the decedent's net estate situated outside the Philippines taxable under the NIRC bears to his entire net estate. (OVERALL BASIS) is Lower) Country G (300/1500 x 15,000) Actually paid to Country G Country H (150/1500 x 15,000) Actually paid to Country H Tax credit allowed under Limitation A P 3,000 5,000 P 1,500 1,400 P 3,000

1,400 P 4,400

Solution – Limitation B: Net estate in all foreign countries. = Tax credit Net Estate – Worldwide x Phil. estate tax

The result after applying the formula above is compared to the tax actually paid in total to foreign countries. The lower of the two amounts will be added to get the total tax credit allowed under Limitation B. Amount Allowed (Whichever is Lower) 450/1500 x 15,000 Total foreign income taxes paid Tax credit allowed under Limitation B P 4,500 6,400 P 4,500

b.

ILLUSTRATION: Assume: Net Estate – Philippines (reduced by all allowable deductions, except standard deduction) Country G Net Estate Country H Net Estate Tax paid/incurred: Philippines Country G Country H P 1,050,000

Compare the tax credit allowed under Limitation A and Limitation B. The lower of the two amounts is the final allowable tax credit. In this case, the amount computed under Limitation A (4,400) is lower, thus it becomes the final allowable tax credit. If there is only one foreign country involved, both Limitations will yield the same answer. To get the tax credit allowable, use the formula in Limitation A. The resulting amount will be compared to the actual tax paid to the foreign country. The lower amount will be the final allowable tax credit. (Source: Reyes, Income Tax Law and Accounting) COMPLIANCE REQUIREMENTS Person Liable for Payment of Estate Tax Q: Who is liable to pay the estate tax? The estate, through the executor or administrator, shall have the primary obligation to pay the estate tax. Such payment shall be made before the delivery of the distributive share in the inheritance to any heir or beneficiary. Where there are two or more executors or administrators, all of them are severally liable for the payment of the tax. The estate tax clearance issued by the Commissioner or the Revenue District Officer (RDO) having jurisdiction over the estate, will serve as the authority to distribute the remaining/distributable properties/share in the inheritance to the heir or beneficiary.  HOWEVER, the heirs or beneficiaries have subsidiary liability for the payment of that portion of the estate which his distributive share bears to the value of the total net estate. The

300,000 150,000 15,000 5,000 1,400

Net taxable estate is P500,000 (1,050,000 + 300,000 + 150,000 – 1,000,000 standard deduction). The Philippine estate tax on P500,000 is P15,000 Solution – Limitation A: To get tax credit per country under Limitation A, this formula is followed: Net Estate in a Particular Country = Tax credit Net Estate – Worldwide x Phil. estate tax

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

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extent of his liability, however, shall in no case exceed the value of his share in the inheritance. Notice Requirement and Filing of Estate Tax Return Q: When must notice of death be filed? A written Notice of Death must be given to the BIR within two (2) months after the death of the decedent or within a period after the executor or administrator or executor qualifies as such: 1. In all cases of transfers subject to tax; or 2. Where, though exempt from tax, the gross value of the estate exceeds P20,000. Q: When is an estate tax return required to be filed? 1. When the estate is subject to estate tax, OR 2. When, though exempt from tax, the gross value of the estate exceeds Two hundred thousand pesos (P200,000), OR 3. Regardless of the gross value of the estate, when the said estate consists of registered or registrable property such as real property, motor vehicle, shares of stock or other similar property for which a clearance from the Bureau of Internal Revenue is required as a condition precedent for the transfer of ownership thereof in the name of the transferee, Q: What are the contents of the estate tax return? The executor, or the administrator, or any of the legal heirs, as the case may be, shall file a return under oath in duplicate, setting forth: 1. The value of the gross estate of the decedent at the time of his death, or in case of a nonresident, not a citizen of the Philippines, of that part of his gross estate situated in the Philippines; 2. The deductions allowed from gross estate in determining the net taxable estate; and 3. Such part of such information as may at the time be ascertainable and such supplemental data as may be necessary to establish the correct taxes. 4. For estate tax returns showing a gross value exceeding Two million pesos (P2,000,000) there must be a statement duly certified to by a Certified Public Accountant containing the following:  Itemized assets of the decedent with their corresponding gross value at the time of his death, or in the case of a nonresident, not a citizen of the Philippines, of that part of his gross estate situated in the Philippines;  Itemized deductions from gross estate allowed in Section 86; and  The amount of tax due whether paid or still due and outstanding. Q: When must the required estate tax return be filed? The estate tax return shall be filed within six (6) months from the decedent's death. However, the Commissioner shall have authority to grant, in meritorious cases, a reasonable extension not exceeding thirty (30) days for filing the return Q: Where must the estate tax return be filed? Except in cases where the Commissioner otherwise permits, the return shall be filed with:  an authorized agent bank,  or Revenue District Officer,  Collection Officer, or  duly authorized Treasurer of the city or municipality in which the decedent was domiciled at the time of his death, or  if there be no legal residence in the Philippines, with the Office of the Commissioner. Payment of Estate Tax Q: When must estate tax be paid? The estate tax shall be paid at the time the return is filed by the executor, administrator or the heirs. Q: Can the payment of estate tax be extended? The Commissioner may allow an extension of payment, if he finds that the payment on the due date of the estate tax or of any part thereof would impose undue hardship upon the estate or any of the heirs  extension not to exceed five (5) years, in case the estate is settled through the courts,  or two (2) years in case the estate is settled extrajudicially Where the taxes are assessed by reason of negligence, intentional disregard of rules and regulations, or fraud on the part of the taxpayer, no extension will be granted by the Commissioner.  If an extension is granted, the Commissioner may require the executor, or administrator, or beneficiary, as the case may be, to furnish a BOND in such amount, not exceeding DOUBLE the amount of the tax and with such sureties as the Commissioner deems necessary, conditioned upon the payment of the said tax in accordance with the terms of the extension. Q: What are the effects of granting an extension?  The amount in respect of which the extension is granted shall be paid on or before the date of the expiration of the period of the extension, and the running of the statute of limitations for deficiency assessment shall be suspended for the period of any such extension.  Any amount paid after the statutory due date of the tax, but within the extension period, shall be subject to interest but not to surcharge. Q: Can estate tax be paid in installments? Yes. In case the available cash of the estate is not sufficient to pay its total estate tax liability, the estate may be allowed to pay the tax by installment and a clearance shall be released only with respect to the property the corresponding/computed tax on which has been paid. (RR 2-2003) Q: What are the ways by which the government can collect any unpaid tax due from the estate of a deceased person?

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The government has two (2) ways of collecting any unpaid tax due from the estate of a deceased person: 1. Filing of Action – First, by filing an action against all the heirs for the collection from each one of them the amount of the tax proportionate to the inheritance received. Such action rests on the concept that hereditary property consists only of that part which remains after the settlement of all lawful claims against the estate for the settlement of which the entire estate is first liable. It achieves thereby two results: first, payment of the tax; and second, adjustment of the shares of each heir in the distributed estate as lessened by the tax. Enforcement of Tax Lien – Another remedy, pursuant to the lien created by Section 219 of the Tax Code upon all property and rights to property belonging to the taxpayer, is by subjecting said property of the estate which is in the hands of an heir or transferee to the payment of the tax due on the estate. This remedy seeks only one objective: payment of the tax. As a holder of property belonging to the estate, an heir is liable for the tax up to the amount of the property in his hands. As an heir, he is individually answerable for the part of the tax proportionate to the share he received from the inheritance. His liability, however, cannot exceed the amount of his share. After payment of the tax, he will have a right of contribution from his co-heirs, to achieve an adjustment of the proper share of each heir in the distributable estate. (Commissioner v. Pineda, 21 SCRA 105) No judge shall authorize the executor or administrator to deliver a distributive share to any party interested in the estate, unless a certification from the BIR that the estate tax has been paid is shown. (§94) 3. Register of Deeds The Register of deeds shall not register in the registry of property any transfer of real property or real rights therein, or any mortgage, by way of donation or mortis causa or inheritance, without a certification from the BIR of payment of the estate tax, and they shall immediately notify the BIR of non-payment of tax discovered by them. (§95) Bank If a bank has knowledge of the death of a person who maintained a joint account or deposit jointly with another, it shall not allow any withdrawal by a surviving depositor from the said joint account unless the Commissioner has certified that the estate tax has been paid.  EXCEPTION: the administrator or any heir may, with the authorization of the Commissioner, withdraw an amount NOT EXCEEDING P20,000. (§95) Lawyer, Notary Public or any Government Officer Any lawyer, notary public, or any government officer who, by reason of his official duties, intervenes in the preparation or acknowledgment of documents regarding partition or disposal of donations mortis causa, legacy or inheritance, shall furnish the BIR with copies of such documents and any information whatsoever which may facilitate the collection of estate tax. (§95) Debtor A debtor shall not pay his debts to the heirs, legatees, executor or administrator of his creditor-decedent without a certification from the BIR that the estate tax has been paid.  EXCEPTION: if the credit is included in the inventory of estate of the decedent. (§95) Corporate Secretary of other responsible officer No transfer to any new owner in the books of any corporation, sociedad anonima, partnership, business or industry organized or established in the Philippines, of any shares, obligations, bonds or rights by way of donations mortis causa, legacy or inheritance shall be made, UNLESS a certification from the BIR that the estate tax has been paid is shown. (§97)

2.

4.

5.

OBLIGATIONS OF EXECUTOR, ADMINISTRATOR, OFFICERS, OTHERS 1. Executor or Administrator  When the gross estate is more than P20,000, the executor, administrator or any of the legal heirs shall: b) give a written notice of death to the BIR within two months after the decedent’s death OR after the executor or administrator shall have qualified c) file the estate tax return within the time prescribed by law d) pay the estate tax within the time prescribed by law  If the executor or administrator makes a written application to the Commissioner for determination of the amount of estate tax and discharge from personal liability therfor, the Commissioner shall notify the executor or administrator of the amount of the tax. Upon payment of the tax, the executor or administrator shall be DISCHARGED from PERSONAL LIABILITY for any deficiency in the tax thereafter found to be due, and shall be entitled to a receipt or writing showing such discharge. (§92) Judge 6.

7.

ILLUSTRATIONS o Decedent is an unmarried head of a family a. Real and personal properties P5,000,000

2.

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Family home Gross estate P7,000,000 Less: Deductions Ordinary deductions Funeral expenses Other Special deductions Family Home Standard deduction 1,000,000 Medical expenses (2,500,000) Net taxable estate 2,000,000 Gross estate P9,500,000 Less: Deductions Ordinary deductions Conjugal deductions Funeral expenses P 200,000 Other deductions 1,300,000 (1,500,000) Special deductions Family Home P1,000,000 Standard deduction 1,000,000 Medical expenses 500,000 (2,500,000) Net estate P5,500,000 Less: Share of Surviving Spouse ½ of net conjugal estate ((5,000,000 – 1,500,000)/2) (1,750,000) Net taxable estate Family home is conjugal or community property

P 200,000 deductions 1,300,000 (1,500,000) P1,000,000 500,000 P3,000,000

NOTE:  Although the family home is valued at P2 million, the maximum allowable deduction for the family home is P1million only.  Medical expenses are not included in the deductions referred under Section 86(A)(1) of the Code but are treated as a special item of deduction under Section 86(A)(6) of the same Code. b) Real and personal properties P5,000,000 Family home 800,000 Gross estate P5,800,000 Less: Deductions Ordinary deductions Funeral expenses 200,000 Other deductions (1,500,000) Special deductions Family Home P 800,000 Standard deduction 1,000,000 Medical expenses 500,000 (2,300,000) Net taxable estate P2,000,000 NOTE: Deduction for family home is allowed for P800,000 only (declared value of the family home). o Decedent is a married man with a surviving spouse  Family home is exclusive property Conjugal properties Real and personal properties P5,000,000 Exclusive properties Family home P2,000,000 Other exclusive properties 2,500,000 4,500,000

P3,750,000 

P 1,300,000

Conjugal properties Family home P2,000,000 Other real properties 5,000,000 P7,000,000 Exclusive properties 2,000,000 Gross estate P9,000,000 Less: Deductions Ordinary deductions Conjugal deductions Funeral expenses 200,000 Other deductions 1,300,000

P

P2,250,000 

(1,500,000) Special deductions Family Home P1,000,000 Standard deduction 1,000,000 Medical expenses 500,000 (2,500,000) Net estate P5,000,000 Less: Share of Surviving Spouse ½ of net conjugal estate ((7,000,000 – 1,500,000)/2) (2,750,000) Net taxable estate Family home is conjugal property, valued at P1500000 Conjugal properties Family home P1,500,000

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Other real properties 5,000,000 P6,500,000 Exclusive properties 2,000,000 Gross estate P8,500,000 Less: Deductions Ordinary deductions Conjugal deductions Funeral expenses P 200,000 Other deductions 1,300,000 (1,500,000) Special deductions Family Home P 750,000 Standard deduction 1,000,000 Medical expenses 500,000 (2,250,000) Net estate P4,750,000 Less: Share of Surviving Spouse ½ of net conjugal estate ((6,500,000 – 1,500,000)/2) (2,500,000) Net taxable estate P2,250,000 NOTE: Only 750,000 is allowed as a deduction for the family home, considering that it was conjugal property valued at P1,500,000. This value is subdivided into P750,000, which belonged to the decedent, and P750,000, which belonged to the surviving spouse. The part owned by the decedent (P750,000) is compared with the P1,000,000 maximum deduction, the lower of the two amounts being the allowable deduction. PROBLEMS 1. X received an inheritance from his deceased father in the form of a residential lot on January 5, 1999. At this time, the fair market value was P1,000,000. This land was previously mortgaged by X’s father for P500,000. X was able to pay only P300,000 before he died on January 10, 2004. At this date, the fair market value of the lot was already P2,000,000. What deduction/s may be claimed for estate tax purposes? Answer: X’s estate may claim the unpaid mortgage as a deduction from his gross estate in the amount of P200,000, provided the value of the property which is P2,000,000 is reported as part of the gross estate, undiminished by the mortgage. Vanishing deduction may no longer be claimed since the interval between the time of death of the present decedent and the death of the prior decedent is more than five (5) years. 2. On the first anniversary of the death of Y, his heirs hosted a sumptuous dinner for his doctors, nurses, and others who attended to Y during his last illness. The cost of the dinner amounted to Php 50,000. Compared to his gross estate, the Php 50,000 did not exceed five percent of the estate. Is the said cost of the dinner to commemorate his oneyear death anniversary deductible from his gross estate? (2001 Bar) Answer: NO. This expense will not fall under any of the allowable deductions from gross estate. Whether viewed in the context of either funeral expenses or medical expenses, the same will not qualify as a deduction because:  funeral expenses may include medical expenses of the last illness BUT NOT expenses incurred after burial nor expenses incurred to commemorate death anniversary (De Guzman v. De Guzman, 83 SCRA 256)  medical expenses are allowed only if incurred by the decedent within one year PRIOR to his death. (§86-A6) 3. Mr. Felix dela Cruz, a bachelor resident citizen, suffered from a heart attack while on a business trip to the USA. He died intestate on 15 June 2000 in New York City, leaving behind real properties as follows:  real properties in New York  family home in Valle Verde, Pasig City  an office condo in Makati City  shares of stock in San Miguel Corp.  cash in bank  personal belongings The decedent is heavily insured with Insular Life. He had no known debts at the time of his death. As the sole heir and appointed Administrator, how would you determine the gross estate of the decedent? What deductions may be claimed by the estate and when and where shall the return be filed and estate tax paid? (2000 Bar) Answer: All the properties enumerated above shall be included in the gross estate, because dela Cruz is a resident citizen. (§85A) The amount includible with respect to the life insurance proceeds would be to the extent of the amount receivable by the estate, executor or administrator, under policies taken out by the decedent upon his own life, irrespective of whether or not the insured retained the power of revocation, OR the amount receivable by any beneficiary designated in the insurance policy, except when the designation of the beneficiary is irrevocable. (§85E) The deductions that may be claimed are:  funeral expenses  judicial expenses in intestate proceedings  value of the family home in an amount not exceeding P1M  standard deduction of P1M  medical expenses incurred within one year prior to death in an amount not exceeding P500,000

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The estate tax return shall be filed within six months from the decedent’s death (except if the Commissioner has granted an extension in meritorious cases). The return shall be filed with an authorized agent bank, Revenue District Officer, Collection Officer or duly authorized Treasurer of Pasig City, the city in which dela Cruz was domiciled at the time of his death. (§90D) 4. Cliff Robertson, an American citizen, was a permanent resident of the Philippines. He died in Miami, Florida. He left 10,000 shares of Meralco, a condominium unit at the Twin Towers Building in Pasig, Metro Manila, and a house and lot in Los Angeles, California. What assets shall be included in the Estate Tax Return to be filed with the BIR? (1994 Bar) Answer: All of Mr. Robertson’s assets are taxable. The properties of a resident alien decedent like Mr. Robertson are taxable wherever situated. 5. A died, survived by his wife and three children. The estate tax was properly paid and the estate settled and divided and distributed among the four heirs. Later, the BIR found out that the estate failed to report the income received by the estate during administration. The BIR issued a deficiency tax assessment plus interest, surcharges and penalties. Since the three children are residing abroad, the BIR sought to collect the full tax deficiency only against the widow. Is the BIR correct? (1999 Bar) Answer: YES, the BIR is correct. In a case where the estate has been distributed to the heirs, the collection remedies available to the BIR in collecting tax liabilities of an estate may either be 1) sue all heirs and collect from each of them the amount of tax proportionate to the inheritance received, or 2) by virtue of the lien created under Section 219, sue only one heir and subject the property he received from the estate to the payment of the estate tax. The BIR therefore is correct in pursuing the second remedy although this will give rise to the right of the heir who pays to seek reimbursement from the other heirs. (Collector v. Pineda, 21 SCRA 105) In no case, however, can the BIR enforce the tax liability in excess of the share of the widow in the inheritance. II. DONOR’S TAX PRINCIPLES Definition The Tax Reform Act of 1997 does not provide a definition of donor’s tax. It simply subjects a “gift” to donor’s tax. According to Article 725 of the Civil Code, a gift or donation is “an act of liberality whereby a person disposes gratuitously of a thing or right in favor of another who accepts it.” Thus, before being
1

subjected to the donor’s tax, a gift or donation must first satisfy the following REQUISITES: 1. 2. 3. 4. The donor must have CAPACITY There must be an INTENT TO DONATE There must be DELIVERY, either actual or constructive The donee must ACCEPT the donation

Q: What are the kinds of donations? 1. Donations inter vivos – a donation made between living persons, which is perfected the moment the donor knows of the acceptance of the gift by the donee1; subject to donor’s tax 2. Donations mortis causa – a donation which takes effect upon the death of the donor; subject to estate tax

Q: What are considered donations for tax purposes? 1. Sales, exchanges and other transfers of property for less than an adequate and full consideration in money or money’s worth 2. Condonation or remission of debt where the debtor did not render service in favor of the creditor  Noteworthy, the element of donative intent is conclusively presumed in transfers of property for less than an adequate or full consideration in money or money’s worth. In this case, the difference between the fair market value of the gift or donation and the actual value received shall constitute the gift. However, real property considered capital assets under the Tax Code are excepted from this rule. (Section 100 in relation to Section 24(d)) In other words, the difference between fair market value and actual value received in transfers of real property considered capital assets for less than an adequate or full consideration in money or money’s worth shall not be subject to donor’s tax. This is because under Section 24(d), the fair market value itself, if higher than the gross selling price, is the base for computing the capital gains tax imposed upon the sale of such capital assets. Thus, what the seller avoids in the payment of the donor’s tax, it pays for in the capital gains tax.

Q: What is the applicable law? The law in force at the time of the perfection/completion of the donation shall govern the imposition of the donor’s tax. (Section 11, RR 2-2003) NOTE: Any contribution in cash or in kind to any candidate, political party or coalition of parties for campaign purposes shall be governed by the Election Code, as amended. (Sec. 99(C), NIRC)

In the case of donations of immovable property, they must be made in a public document specifying therein the property donated. The acceptance may be made in the same Deed of Donation or in a separate public document, but it shall not take effect unless it is done during the lifetime of the donor. If the acceptance is made in a separate instrument, the donor shall be notified thereof in an authentic form, and this step shall be noted in both instruments.

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CASE LAW: Abello v. CIR (Feb. 23, 2005)—The SC has held in this case that the contributions of the ACCRA partners to the campaign funds of Sen. Angara during the 1987 national elections constitutes a donation, thus, subject to gift taxes. However, the SC in its decision has noted that succeeding cases shall be governed by RA 7166 enacted by Congress on Nov. 25, 1991. The RA provides in Sec 13 that political/electoral contributions, duly reported to the Commission on Elections, are NOT subject to the payment of any gift tax. PROPERTIES INCLUDED Q: What are the classes of donors and what is their gross gift? 1. Citizens or Residents of the Philippines – all properties located not only within the Philippines but also in foreign countries Nonresident Alien – all real and tangible properties within the Philippines, and intangible personal property, unless there is reciprocity, in which case it is not taxable of deductions and are, therefore, deductible from gross gifts in order to arrive at the taxable net gifts. The following donations are exempt from donor’s tax: 1. Dowries or donations made on account of marriage before its celebration or within one year thereafter by parents to each of their legitimate, recognized natural, or adopted children to the extent of the first P10,000. However, this exemption may not be availed of by a non-resident not a citizen of the Philippines. Q: Can both parents making a donation to a child in consideration of marriage avail of the P10,000 deduction? Yes. If both spouses made the gift, then the gift is taxable one-half to each donor spouse; in other words, the gift is considered as having been made one-half by the husband and one-half by the wife. There is a necessity for filing separate donor’s tax returns, considering that husband and wife are considered as separate and distinct taxpayers for purposes of donor’s tax. (Section 12, RR 22003) However, where there is failure to prove that the donation was actually made by both spouses, the donation is taxable as an exclusive act of the husband (Tang Ho v. BTA, 97 Phil 890), without prejudice to the right of the wife to question the validity of the donation without her consent pursuant to the provisions of the Civil Code and the Family Code. (Section 12, supra) Gifts made to or for the use of the National Government or any entity created by any of its agencies which is not conducted for profit, or to any political subdivision of the said Government Gifts in favor of an educational and/or charitable, religious, cultural or social welfare corporation, institution, accredited nongovernment organization, trust or philanthropic organization or research institution or organization, provided not more than 30% of said gifts will be used by such donee for administration purposes Q: What is a non-profit educational and/or charitable corporation, etc? It is a school, college or university and/or charitable corporation, accredited NGO, trust or philanthropic organization and/or research institution or organization:  Incorporated as a non-stock entity,  Paying no dividends,  Governed by trustees who receive no compensation, and  Devoting all its income, whether students’ fees or gifts, donations, subsidies or other forms of philanthropy, to the accomplishment and promotion of the purposes enumerated in its Articles of Incorporation 4. Encumbrances on the property donated if assumed by the donee in the deed of donation

2.

Q: What are the intangible properties which are considered by law as situated in the Philippines? 1. Franchise which must be exercised in the Philippines 2. Obligations or bonds issued by any corporation or sociedad anonima organized or constituted in the Philippines Shares, obligations or bonds issued by any foreign corporation 85% of the business of which is located in the Philippines Shares, obligations or bonds issued by any foreign corporation if such shares, obligations or bonds have acquired a business situs in the Philippines Shares or rights in any partnership, business or industry established in the Philippines 2.

3.

4.

3.

5.

Q: What is the rule on reciprocity? (Section 104, NIRC) There is reciprocity if the foreign country of which the decedent was a citizen and resident at the time of his death: 1. did not impose a transfer tax of any character, in respect of intangible personal property of citizens of the Philippines not residing in that foreign country; or 2. allowed a similar exemption from transfer tax in respect of intangible personal property owned by citizens of the Philippines not residing in that country

This rule applies to the transmission by gift of intangible personal property located or with a situs within the Philippines of a nonresident alien. (See page 4 for the relevant notes on reciprocity) EXEMPTIONS Exemptions are not to be treated as exclusions from the gross gifts of the donor. They partake the nature

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5. Donations made to entities exempted under special laws, e.g.: o Aquaculture Department of the Southeast Asian Fisheries Development Center of the Philippines o Development Academy of the Philippines o Integrated Bar of the Philippines o International Rice Research Institute o National Museum o National Library o National Social Action Council o Ramon Magsaysay Foundation o Philippine Inventor’s Commission o Philippine American Cultural Foundation o Task Force on Human Settlement on the donation of equipment, materials and services Donations to persons not strangers where the total of such net gifts for the calendar year is not more than P100,000.00 There are two sets of donor’s tax rates. The applicable donor’s tax rate is dependent upon the relationship between the donor and the donee, more specifically: 1. If the donee is a stranger to the donor, the tax rate is equivalent to 30 % of the net gifts. Q: Who is a stranger for purposes of the donor’s tax? a. a person who is not a brother, sister (whether by whole or half-blood), spouse, ancestor or lineal descendant, or b. a person who is not a relative by consanguinity in the collateral line within the fourth degree of relationship. (Sec. 99(B))  Note that donations made between business organizations and those made between an individual and a business organization shall be considered as donations made to a stranger (RR 22003) If the donee is not a stranger to the donor, the tax for each calendar year shall be computed on the basis of the total net gifts made during the calendar year: But not Over 100,000 200,000 500,000 1,000,00 0 3,000,00 0 5,000,00 0 10,000,0 00 The Tax Shall Be Exempt 0 2,000 14,000 44,000 204,000 404,000 1,004,00 0 Plu s Of the Excess Over 100,000 200,000 500,000 1,000,000 3,000,000 5,000,000 10,000,00 0

6.

2.

Q: What is the meaning of “net gifts”? “Net Gift” shall mean the net economic benefit from the transfer that accrues to the donee. Accordingly, if a mortgaged property is transferred as a gift, but imposing upon the donee the obligation to pay the mortgage liability, then the net gift is measured by deducting from the fair market value of the property the amount of the mortgage assumed. (Section 11, RR 2-2003) COMPUTATION How is donor’s tax computed? This general formula shall be followed: Gross gifts made Less: Deductions from the gross gifts Net gifts made Multiplied by applicable rate Donor’s tax on the net gifts

Over 0 100,000 200,000 500,000 1,000,00 0 3,000,00 0 5,000,00 0 10,000,0 00

2% 4% 6% 8% 10 % 12 % 15 %

 Note: A legally adopted child is entitled to all the rights and obligations provided by law to legitimate children, and therefore, a donation to him shall not be considered as a donation made to a stranger. OBJECT OF TAXATION The donor’s tax shall be imposed whether the transfer is in trust or otherwise, whether the gift is direct or indirect and whether the property is real or personal, tangible or intangible. The computation of the donor’s tax is on a cumulative basis over a period of one calendar year Illustrations: 1. Donation to son by parents on account of marriage (P100,000):  Husband Net Taxable Gift = P50,000 – 10,000 = P40,000 Tax Due = None, since P40,000 is below the P100,000 threshold  Wife – same as above

If there were several gifts made during the year, this formula is followed: Gross gifts made on this date Less: Deductions from the gross gifts Net gifts made on this date Add: all prior net gifts during the year Aggregate net gifts Multiplied by applicable rate Donor’s tax on the aggregate net gifts Less: donor’s tax paid on prior net gifts Donor’s tax due on the net gifts to date

RATES OF TAX

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2. Donation to son and daughter-in-law by parents on account of marriage (P100,000):  Husband o Gift pertaining to the son Net Taxable Gift = P25,000 – 10,000 = P15,000 Tax Due = None, since P15,000 is below the P100,000 threshold o Gift pertaining to the daughterin-law Net Taxable Gift = P25,000 Tax Due = P25,000 x 30% = P7,500  Wife – same as above Donations to donees not considered strangers for tax purposes were made on:  January 30, 2002 – P 2,000,000  March 30, 2002 -- 1,000,000  August 15, 2002 -500,000 ENTIRE NET GIFTS NOTE: The computation of the donor’s tax credit is the same as the computation for estate tax credit. Please refer to the illustration in page 8. COMPLIANCE REQUIREMENTS Q: Who are required to file the Donor’s Tax Return? Every person, whether natural or juridical, resident or non-resident, who transfers or causes to transfer property by gift, whether in trust or otherwise, whether the gift is direct or indirect and whether the property is real or personal, tangible or intangible. Q: What are the contents of the Donor’s Tax Return? 1. Each gift made during the calendar year which is to be included in computing net gifts; 2. The deductions claimed and allowable; 3. Any previous net gifts made during the same After the first donatio n P 2,000,0 00 After the donation second After the donation third

3.

VALUATION   If the gift is made in property, the fair market value at that time will be considered the amount of gift. In case of real property, the taxable base is the fair market value as determined by the Commissioner of Internal Revenue (Zonal Value) or fair market value as shown in the latest schedule of values of the provincial and city assessor (Market Value per Tax Declaration), whichever is higher. If there is no zonal value, the taxable base is the fair market value that appears in the latest tax declaration If there is an improvement, the value of improvement is the construction cost per building permit and/or occupancy permit plus 10% per year after year of construction, or the market value per latest tax declaration.

Net Taxab le Gift

January Donation P2,000,000 March Donation 1,000,000 Total P3,000,000 P 204,000

-

TAX CREDIT A situation may arise when the property given as a gift is located in a foreign country and the donor may be subject to donor’s tax twice on the same property: first, by the Philippine government and second, by the foreign government where the property is situated. The remedy of claiming a tax credit is, therefore, aimed at minimizing the burdensome effect of double taxation by allowing the taxpayer to deduct his foreign tax from his Philippine tax, subject to the limitations provided by law. Q: Who may claim tax credit? Tax credit for donor’s tax may be claimed only by a resident citizen, non-resident citizen and resident alien.

Corre spond ing Donor ’s Tax (refer to sched ule) Tax Due / Payab le

P124,00 0

January Donation P2,000,000 March Donation 1,000,000 August Donation 500,000 Total P3,500,000 P254,000

P124,00 0

Donor’s Tax P 204,000 Less: Tax Previously Paid 124,000 Tax Due P 80,000

Donor’s Tax P 254,000 Less: Tax Previously Paid (124,000 + 80,000) 204,000 Tax Due P 50,000

4. 5. 6.

calendar year; The name of the donee; Relationship of the donor to the donee; and Such further information as the Commissioner may require.

Q: What are the limitations on the tax credit? 1. PHILIPPINE NET GIFT (foreign country) X DONOR’S TAX ENTIRE NET GIFTS 2. NET GIFT (all foreign countries)X PHILIPPINE DONOR’S TAX

Q: When and where should the Donor’s Tax Return be filed? The donor’s tax return shall be filed within thirty (30) days after the date the gift is made or completed and the tax due thereon shall be paid at the same time that the return is filed. Unless the Commissioner otherwise permits, the return shall be filed and the tax paid to an authorized agent bank, the Revenue District Officer, Revenue Collection Officer or duly authorized Treasurer of the city or municipality where the

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donor was domiciled at the time of the transfer, or if there be no legal residence in the Philippines, with the Office of the Commissioner. In the case of gifts made by a non-resident, the return may be filed with the Philippine Embassy or Consulate in the country where he is domiciled at the time of the transfer, or directly with the Office of the Commissioner. For this purpose, the term “OFFICE OF THE COMMISSIONER” shall refer to the Revenue District Office (RDO) having jurisdiction over the BIR-National Office Building which houses the Office of the Commissioner, or presently, to the Revenue District Office No. 39 – South Quezon City. PROBLEMS 1. Your bachelor client, a Filipino residing in Quezon City, wants to give his sister a gift of P200,000. He seeks your advice for purposes of reducing, if not eliminating, the donor’s tax on the gift: whether it is better for him to give all of the P200,000 on Christmas 2001, or to give P100,000 on Christmas 2001 and the other P100,000 on January 1, 2002. Please explain your advice. (2001 Bar) Answer: I would advise him to split the donation. Giving the P200,000 as a one-time donation would mean that it will be subject to a higher tax bracket under the graduated tax structure, thereby necessitating the payment of donor’s tax. On the other hand, splitting the donation into two equal amounts of P100,000 given on two different years will totally relieve the donor from donor’s tax because the first P100,000 donation in the graduated tax brackets is exempt. While the donor’s tax is computed on the cumulative donations, the aggregation of all donations made by a donor is allowed only over one calendar year. 2. Mr. Bill Morgan, a Canadian citizen and a resident of Ontario, sends a gift check of $20,000 to his future Filipina daughter-in-law, who is to be married to his only son. Is the donation of Mr. Morgan subject to tax? (1992 Bar) Answer: Yes. While the gift has been made on account of marriage, to qualify for the exemption to the extent of the first P10,000 of the value thereof, such gift should have been given to a legitimate, recognized natural, or adopted child of the donor. 3. X owned idle land not used in connection with his business. At the insistence of a close friend, X sold the land to him at a friendly price of P600,000, although its fair market value at that time was P1,000,000. The BIR assessed X for payment of donor’s tax on the difference of P400,000 on the ground that the sale is a transfer for less than an adequate consideration in money or money’s worth. Is the BIR correct on the assessment? Answer: No, the BIR is not correct. The land is properly classified as a capital asset, being real property not used in connection with trade or business. As such, the sale is instead subject to a 6% capital gains tax based on the gross selling price or fair market value, whichever is higher. 4. X donated mortgaged property with a fair market value of P1,000,000 to Y subject to the condition that Y shall undertake the mortgage liability worth P400,000. What is the base for computing the donor’s tax? Answer: The base shall be the net gift which is P600,000 or the difference between the fair market value of the mortgaged property and the mortgage liability. 5. Y, the surviving spouse, renounces her share in the conjugal partnership after the dissolution of her marriage. Is she liable to pay donor’s tax? Answer: It depends. If Y renounces her share in favor of other heirs or any other person, she is liable to pay donor’s tax based on her share. However, if Y makes a general renunciation of her share, she is not liable to pay donor’s tax. 6. When is a franchise considered as intangible personal property within the Philippines? Answer: Franchise is an intangible within if the same is exercised within the Philippines. Otherwise, it shall be considered an intangible without. 7. When is a share of stock, obligation or bond considered as intangible personal property within? Answer:  Obligations or bonds issued by any corporation or sociedad anonima organized or constituted in the Philippines  Shares, obligations or bonds issued by any foreign corporation 85% of the business of which is located in the Philippines  Shares, obligations or bonds issued by any foreign corporation if such shares, obligations or bonds have acquired a business situs in the Philippines  Shares or rights in any partnership, business or industry established in the Philippines 8. On 6 December 2001, LVN Corporation donated a piece of vacant lot situated in Mandaluyong City to an accredited and duly registered non-stock, non-profit educational institution to be used by the latter in building a sports complex for students. In order that donations to non-stock, non-profit educational institutions may be exempt from donor’s tax, what conditions must be met by the DONEE? (2002 Bar) Answer: The condition is that not more than thirty percent (30%) of the said donation for the taxable year shall be used by the accredited non-stock, nonprofit corporation/NGO institution (qualified-donee institution) for administration purposes pursuant to the provisions of Section 101(A)(3) and (B)(2) of the National Internal Revenue Code. (RR 2-2003, Sec. 13(C)) 9. A, aged 90 years and suffering from incurable cancer, on 1 August 2001 wrote a will and on the same day, made several inter-vivos gifts to his

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children. He died ten days later. In your opinion, are the gifts considered transfers in contemplation of death for purposes of determining properties to be included in the gross estate? Explain your answer. (2001 Bar) Answer: YES. When the donor makes his will within a short time of, or simultaneously with the making of the gifts, the gifts are considered as having been made in contemplation of death (Roces v. Posadas 58 Phil 108). Obviously, the intention of the donor in making the gifts is to avoid the imposition of the estate tax and since the donees are likewise his forced heirs who are called upon to inherit, it will create a presumption juris tantum that said donations were made mortis causa, hence the properties donated shall be included as part of A’s gross estate. 10. Are contributions to a candidate in an election subject to donor’s tax? (1998 Bar) Answer: NO, provided the recipient candidate had complied with the requirement of filing of returns of contributions with the COMELEC as required under the Omnibus Election Code. §99C of the NIRC states that the taxability of this type of donations is governed by the Election code. (Mamalateo) Alternative Answer: YES, because there are no provisions under the Tax Code that grant any exemption. (Domondon) 11. A, an individual, sold to B, his brother-in-law, his lot with a market value of P1M for P600,000. A’s cost of the lot is P100,000. B is financially capable of buying the lot. A also owns X Co, which has a fast growing business. A sold some of his shares of stock in X Co. to his key executives in X Co. These executives are not related to A. The selling price is P3M, which is the book value of the shares sold but with a market value of P5M. A’s cost in the shares sold is P1M. The purpose of A in selling the shares is to enable his key executives to acquire a proprietary interest in the business and have a personal stake in its business. Explain if the transactions above are subject to donor’s tax. Answer: The first transaction where a lot was sold by A to his brother-in-law for a price below its FMV will not be subject to donor’s tax if the lot qualifies as a capital asset. The transfer for less than adequate and full consideration, which gives rise to a deemed gift, does not apply to the sale of property subject to capital gains tax (Section 100, NIRC). However, if the lot sold is an ordinary asset, the excess of the FMV over the consideration received shall be considered a gift subject to the donor’s tax. The sale of shares of stock below the FMV thereof is subject to the donor’s tax pursuant to the provisions of Section 100 of the NIRC. The excess of the FMV over the selling price is a deemed gift. Alternative Answer: No donor’s tax, because in determining the gain from the transfer [for purposes of computing the capital gains tax on the sale of shares not listed nor traded in a local stock exchange], the basis is either the actual selling price or the FMV of the stocks transferred, whichever is higher. (Sec. 24(C), NIRC and RR 2-82) In which case, the reason for imposing a donor’s tax on sales for inadequate consideration does not exist.

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VALUE-ADDED TAX2
I. CONCEPT Value added tax (VAT) is a percentage tax imposed at every stage of the distribution process on the sale, barter, or exchange (including any other transaction deemed by law as sale), or lease of goods or properties, and on the performance of service in the course of trade or business, or on the importation of goods, whether for business or non-business purposes. It is a business tax levied on certain transactions involving a wide range of goods, properties, and services, such tax being payable by the seller, lessor, or transferor. The tax is so-called because it is imposed on the value not previously subjected to VAT (De Leon, “The National Internal Revenue Code Annotated,” 2000 edition) The multi-stage VAT has been around since January 1, 1988 when it has been enacted under Executive Order (EO) No. 273. Under this system, the VAT is imposed on the sale and distribution process, and culminating in sale to the final customer. (Acosta and Vitug, “Tax Law and Jurisprudence,” 2001 edition) The taxpayer (the seller) determines his tax liability by computing the tax on the gross selling price or gross receipt (this is called the “output tax”), and subtracting or crediting the earlier VAT on the purchase or importation of goods or on the sale of service (called the “input tax”) against the tax due on his own sale. The following computation shows of the basic formula for the the VAT Payable:
xxx xxx xxx xxx

 

RR 16-20053: The seller is the one statutorily liable for the payment of the tax but the amount of the tax may be shifted or passed on to the buyer, transferee, or lessee of the goods, properties, or services. This rule shall likewise apply to existing contracts of sale or lease of goods, properties or services at the time of the effectivity of RA No. 9337. It is a business tax/percentage tax. Because it is a business tax, it is also an excise tax, or a tax on the privilege of engaging in the business of selling goods or services, or in the importation of goods. Constitutionality of VAT

ABAKADA Guro Party List, et. al. v Ermita The assailed provisions of RA 9337 are those that say that the President, upon the recommendation of the Sec. of Finance, shall raise the rate of VAT to 12% when VAT as a percentage of the GDP of the previous year exceeds 2 4/5% and when the deficit as a percentage of the previous year’s GDP exceeds 1 ½%. This is NOT an undue delegation of legislative power. It is simply a delegation of ascertainment of facts upon which enforcement and administration of the increased rate under the law is contingent. No discretion would be exercised by the President. The word shall is used in the common proviso. It is the ministerial duty of the President to immediately impose the 12% rate upon the existence of any of the conditions specified by Congress.4 This is also not to nullify the President’s control over the Sec. of Finance. Here, the Sec. of Finance is NOT acting as the alter ego of the President, but is acting as the agent of the legislative department. Reasons for the two conditions before VAT rate is increased to 12%: The first condition, that is if VAT/GDP is less than 2.8%, means that the government has weak or no capability of implementing the VAT or that the VAT is not effective in the function of the tax collection. There would be no value in increasing it to 12% because such action would be ineffectual. The second condition, that is when the deficit/GDP is 1.5% or less, means that the fiscal condition of government has reached a relatively sound position or is towards the direction of a balanced budget position. Thus, there would be no need to increase the VAT rate since the fiscal house is in a relatively healthy position. Otherwise stated, if the ratio is more than 1.5%, there is indeed a need to increase the VAT rate. Another assailed provision is Sec. 8 amending Sec. 110(B), which imposes a limitation on the amount of input tax (70% of the output tax) that may be

Gross taxable sales/receipts Less: Sales returns Sales allowances Sales discounts Net sales Multiply with the VAT rate Output tax (12% of Net sales) Input tax carried over from previous Domestic purchases Importations Total Input tax (12% of Total) Total Input tax

(xxx) xxx 12% xxx xxx

period xxx xxx xxx

xxx (xxx)

VAT payable (Output tax less input tax) xxx (All amounts in the formula must be NET of VAT)

II. 

NATURE & CHARACTERISTICS It is an indirect tax, the amount of which may be shifted to or passed on the buyer, transferee, or lessee of the goods, properties or services. (Sec. 105)

2

Credits: 2008 AD, C2005

Revenue Regulations (RR) No. 4-2007 dated February 7, 2007 introduced recent changes to RR No. 16-2005. A sample of which reads as: “SEC. 4.106-1. VAT on Sale of Goods or Properties. – VAT is imposed and collected on every sale, barter or exchange, or transactions “deemed sale” of taxable goods or properties at the rate of twelve percent (12%) (starting February 1, 2006) of the gross selling price or gross value in money of the goods or properties sold, bartered, or exchanged, or deemed sold in the Philippines.” 4 The rate was indeed increased to 12%, effective Feb. 1, 2006, as per Revenue Memorandum (RMC) No. 7-06, dated January 31, 2006

3

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credited against the output tax. The Court says this does not violate due process. The excess input tax, if any, is retained in a business’ books of accounts and remains creditable in the succeeding quarter/s. In addition, Sec. 112(B) allows a VAT-registered person to apply for the issuance of a tax credit certificate or refund for any unused input taxes, to the extent that such input taxes have not been applied against the output taxes. Such unused input tax may be used in payment of his other internal revenue taxes.5 The input tax is NOT a property or a property right within the constitutional purview of the due process clause. A VAT-registered person’s entitlement to the creditable input tax is a mere statutory privilege. The right to credit input tax as against the output tax is clearly a privilege created by law, a privilege that also the law can remove, or in this case, limit. [Note: This limitation of creditable input tax has been eliminated by RA 9361, effective December 2006. Pls refer to the discussion on input taxes on page 40.] With respect to Sec. 8, amending Sec. 110 (A), which provides for 60-month amortization of the input tax on capital goods purchased: It is not oppressive, arbitrary, and confiscatory. The taxpayer is not permanently deprived of his privilege to credit the input tax. For whatever is the purpose, it involves executive economic policy and legislative wisdom in which the Court cannot intervene. The tax law is uniform: it provides a standard rate of 0% or 10% (or 12% now) on all goods or services. The law does not make any distinction as to the type of industry or trade that will bear the 70% limitation on the creditable input tax, 5-year amortization of input tax on purchase of capital goods, or the 5% final withholding tax by the government. It is equitable: The law is equipped with a threshold margin (P1.5M). Also, basic marine and agricultural products in their original state are still not subject to tax. Congress also provided for mitigating measures to cushion the impact of the imposition of the tax on those previously exempt. Excise taxes on petroleum products and natural gas were reduced. Percentage tax on domestic carriers was removed. Power producers are now exempt from paying franchise tax. VAT, by its very nature, is regressive. The VAT paid eats the same portion of an income, whether big or small. The lower income group or businesses with low-profit margins are always hardest hit. BUT the Constitution does not really prohibit the imposition of indirect taxes (which is essentially regressive). What it simply provides is that Congress shall “evolve a progressive system of taxation”. In Tolentino v. Sec. of Finance, the Court said that direct taxes are to be preferred, and as much as possible, indirect taxes should be minimized… but not avoided entirely because it is difficult, if not impossible, to avoid them. Tolentino v. Guingona Petitioners contend that R.A. 7716 did not “originate exclusively” in the House of Representatives because it was a result of the consolidation of two distinct bills (a Senate bill and a House bill). The SC says it is not the law, but the revenue bill, which is required by the Consti to originate exclusively from the House of Representatives. To insist that a revenue statute, and not only the bill which initiated the legislative process, must substantially be the same as the House bill would be to deny the Senate’s power not only to concur with amendments, but also to propose amendments. What the Consti simply means is that the initiative for filing revenue, tariff or tax bills etc. must come from the House of Representatives on the theory that, elected as they are from the districts, the members of the House can be expected to be more sensitive to the local needs and problems. On alleged violation of the rule that the system of taxation should be progressive, instead of regressive: The petitioners argue that VAT is regressive and that it violates the Consti requirement that Congress shall evolve a progressive system of taxation. They cite several studies and statistics which support their theory, although the new VAT system has yet to be implemented. Regressivity is not a negative standard for courts to enforce. What Congress is required by the Consti to do is to “evolve a progressive system of taxation.” This provision is placed in the Consti as moral incentives to legislation, not as judicially enforceable rights. The Consti mandate to “evolve a progressive system of taxation” simply means that direct taxes are to be preferred as much as possible, and indirect taxes should be minimised. Resort to indirect taxes should be minimised but not avoided entirely. Also, the regressive effects are corrected by the zero rating of certain transactions and through the exemptions. The transactions which are subject to VAT \are those which involve goods and services which are used or availed of mainly by higher income groups ( real properties held primarily for sale to customers, right or privilege to use patent, copyright...) III. TRANSACTIONS SUBJECT TO VAT A. Any sale, barter or exchange of goods and properties, or similar transactions in the course of trade or business B. Any sale of services, or similar transactions, in the course of trade or business C. Any lease of goods and properties or similar transactions, in the course of trade or business D. Any importation of goods, whether in the course of trade or business or not RMC 9-2006: Reimbursable expenses Transactions and amounts that are subject to VAT: 1. If the reimbursable expenses and/or advanced payments for certain expenses (e.g. arrastre, wharfage, documentation, trucking, handling charges, storage fees, duties and taxes, etc.) made by brokers on behalf of their customers are receipted with the broker’s VAT official receipt. 2. Any advanced payment for expenses incurred (e.g. transportation, overtime and facilitation fee to facilitate the clearing of goods through customs) for the benefit of brokers, notwithstanding that the same is reimbursed by their customers.

5

This, however, is not accurate. The option to apply for tax credit certificate or refund is available to the VAT taxpayer only in case his VAT registration is cancelled, unless he is subject to VAT zero-rate.

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Reimbursable expenses and/or advanced payments shall NOT be subject to VAT on the part of the broker if the following conditions/procedures are complied with: 1. The reimbursable expenses and/or advanced payments EXCEPT those incurred for the benefit of the brokers, are receipted separately using NON-VAT Official Acknowledgment Receipts to be issued by the brokers to the Customers upon collection of the reimbursements or advances previously recorded as “Receivable For Cash Advances on Behalf of Customers”, which recording was done upon payment, on behalf of customers, of the advances to the third-party service providers who issued official receipts in the name of the customers and not of the brokers 2. The third-party service providers to whom the advanced payments or reimbursable expenses of the customers have been paid by the brokers shall issue receipts in the name of the Customers 3. The brokers shall record the reimbursable expenses of or the advanced payments on behalf of Customers under the account “Receivable for Cash Advances on Behalf of Customers” 4. For liquidation purposes, the brokers shall attach the original copy of all said official receipts issued by the third-party service providers in the name of the customers to the NON-VAT official acknowledgment receipts of the brokers issued to their Customers upon payment by the latter of the reimbursable expenses *The Customers may be able to claim input tax for the services of the third-party service providers that are subject to VAT if the same are receipted by the third-party service providers’ VAT official receipts evidencing the latter’s reporting of the same for VAT purposes. IV. PERSONS LIABLE Sec. 105. Persons liable – Any person who, in the course of trade or business, sells, barters, exchanges, leases goods or properties, renders services, and any person who imports goods shall be subject to the value-added tax (VAT) imposed on Sections 106 to 108 of this Code. The value-added tax is an indirect tax and the amount of tax may be shifted or passed on to the buyer, transferee or lessee of the goods, properties, or services. This rule shall likewise apply to existing contracts of sale or lease of goods, properties, or services at the time of the effectivity of RA 7716. The phrase “in the course of trade or business” means the regular conduct or pursuit of a commercial or an economic activity, including transactions incidental thereto, by any person regardless of whether or not the person engaged therein is a non-stock, nonprofit organization (irrespective of the disposition of its net income and whether or not it sells exclusively to members or their guests), or government entity. The rule of regularity, to the contrary notwithstanding, services as defined in this Code rendered in the Philippines by nonresident foreign persons shall be considered as being rendered in the course of trade or business. A. Any person who, in the course of trade or business, (1) sells, barters, exchanges goods or properties, (2) leases goods or properties, and (3) renders services. Exception: 1. When the sales do not exceed P100,000 (meaning not considered to be in the course of trade or business but only for subsistence, even if he, in the course of trade or business, (1) sells, barters, exchanges goods or properties, (2) leases goods or properties, and (3) renders services; hence, he is not liable for either VAT or percentage tax) 2. The rule of regularity, to the contrary notwithstanding, services as defined in this Code rendered in the Philippines by nonresident foreign persons shall be considered as being rendered in the course of trade or business. RR 16-2005 clarifies this: Non-resident persons who perform services in the Philippines are deemed to be in the course of trade or business, even if performance is NOT regular. B. Any person who imports goods RR 16-2005: … the importer, whether an individual or corporation and whether or not made in the course of his trade or business, shall be liable to pay VAT.

RATES IN GENERAL A. 12% VAT i. SALE OF GOODS OR PROPERTIES

Sec. 106. Value-added Tax on Sale of Goods or Properties. – Rate and Base of Tax – There shall be levied, assessed, and collected on every sale, barter or exchange of goods, or properties, a value-added tax equivalent to ten percent (10%) of the gross selling price or gross value in money of the goods or properties sold, bartered, or exchanged, such tax to be paid by the seller or transferor: Provided, That the President, upon the recommendation of the Sec. of Finance, shall, effective January 1, 2006, raise the rate of value-added tax to 12%, after any of the following conditions has been satisfied: Value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds 2 4/5%; or National government deficit as a percentage of GP of the previous year exceeds 1 ½%. (1) The term “goods or properties” shall mean all tangible and intangible objects which are capable of pecuniary estimation and shall include: (a) Real properties held primarily for sale to customers or held for lease in the ordinary course of trade or business; (b) The right or the privilege to use patent, copyright, design, or model, plan, secret formula or process, goodwill, trademark, trade brand or other like property or right; (c) The right or the privilege to use in the

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Philippines of any industrial, commercial or scientific equipment; (d) The right or the privilege to use motion picture films, films tapes and discs; and (e) Radio, television, satellite transmission and cable television time. The term “gross selling price” means the total amount of money or its equivalent which the purchaser pays or is obligated to pay to the seller in consideration of the sale, barter or exchange of the goods or properties, excluding the value-added tax. The excise tax, if any, on such goods or properties shall form part of the gross selling price…xxx…. (as amended by RA 9337, underscore for emphasis) Note: The rate of VAT was indeed raised to 12% beginning 1 February 2006. (RMC No. 7-06, dated January 31, 2006) RR 16-2005: Notes on Sale of real properties. – In the case of sale of real properties on the installment plan, the real estate dealer shall be subject to VAT on the installment payments, including interest and penalties, actually and/or constructively received by the seller. Sale of residential lot exceeding P1.5M, residential house and lot or other residential dwellings exceeding P2.5M, where the instrument of sale is executed on or after July 1, 2005, shall be subject to [12%] VAT. Where the instrument of sale was executed prior to July 1, 2005, the price needs only to exceed P1M for the installment sale of residential house and lot or other residential dwellings to be subject to 10% VAT. “Sale of real property on installment plan” means sale of real property by a real estate dealer, the initial payments of which in the year of sale (downpayment + all payments actually or constructively received during the year of sale) do not exceed 25% of the gross selling price. However, in the case of sale of real properties on the deferred-payment basis, not on the installment plan, (meaning the initial payments in the year of sale exceed 25% of the gross selling price), the transaction shall be treated as cash sale which makes the entire selling price taxable in the month of sale. Transmission of property to a trustee shall NOT be subject to VAT IF the property is to be merely held in trust for the trustor and/or beneficiary. However, IF the property transferred is one for sale, lease or use in the ordinary course of trade or business AND the transfer constitutes a completed gift, the transfer is subject to VAT as a deemed sale transaction. The transfer is a completed gift if the transferor divests himself absolutely of control over the property, i.e., irrevocable transfer of corpus and/or irrevocable designation of beneficiary. The gross selling price shall mean: 1) The consideration stated in the sales document, or 2) The fair market value, Whichever is HIGHER The fair market value shall mean, whichever is the HIGHER of: a) FMV as determined by the Commissioner (zonal value), or b) FMV as shown in schedule of values of the Provincial & City assessors (real property tax declaration) If the gross selling price is based on the zonal value or market value of the property, the zonal or market value shall be deemed INCLUSIVE of VAT. If the VAT is not billed separately, the selling price stated in the sales document shall be deemed to be INCLUSIVE of VAT. TRANSACTIONS DEEMED SALE (subject to 12% VAT) Sec. 106. …xxx… (B) Transactions Deemed Sale. – The following transactions shall be deemed sale: (1) Transfer, use or consumption not in the course of business of goods properties originally intended for sale or for use in the course of business; (2) Distribution or transfer to: (a) Shareholders or investors as share in the profits of the VAT-registered persons; or (b) Creditors in payment of debt; (3) Consignment of goods if actual sale is not made within 60 days following the date such goods were consigned; and (4) Retirement from or cessation of business, with respect to inventories of taxable goods existing as of such retirement or cessation. (C) Changes in or Cessation of Status of a VATregistered Person. – The tax imposed in Subsection (A) of this Section shall also apply to goods disposed of or existing as of a certain date if under the circumstances to be prescribed in rules and regulations to be promulgated by the Secretary of Finance, upon recommendation of the Commissioner, the status of a person as a VAT-registered person changes or is terminated…xxx….

RR 16-2005: Transactions deemed sale (pls refer to Sec. 106), some notes: (1) For example, when a VAT-registered person withdraws goods from his business for his personal use (2) Property dividends which constitute stocks in trade or properties primarily held for sale or lease declared out of retained earnings on or after Jan. 1, 1996 and distributed by the company to its shareholders shall be subject to VAT based on the zonal value or FMV at the time of the distribution, whichever is applicable. (3) Consigned goods returned by the consignee within the 60-day period are not deemed sold; (4) Retirement from or cessation of business with respect to ALL goods on hand, whether capital goods, stock-in-trade, supplies or materials, as of the date of such retirement or cessation, whether or not the business is continued by the new owner or successor. Examples are change of ownership of the business (e.g. when a sole proprietorship incorporates, or the proprietor sells his entire business) and dissolution of a partnership and creation of a new partnership which takes over the business. Change or Cessation of Status as VAT-registered Person

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1) Subject to output tax—applicable to goods/properties originally intended for sale or use in business and capital goods which are existing as of the occurrence of the following: a) Change of business activity from VAT taxable status to VAT-exempt status. b) Approval of a request for cancellation of registration due to reversion to exempt status c) Approval of a request for cancellation of registration due to a desire to revert to exempt status AFTER the lapse of 3 consecutive years from the time of registration by a person who voluntarily registered despite being exempt under Sec. 109 (2) d) Approval of request for cancellation of registration of one who commenced business with the expectation of gross sales/receipts exceeding P1.5M but who failed to exceed this amount during the first 12 months of operation NOT subject to output tax a) Change of control of a corporation by the acquisition of the controlling interest of such corporation by another stockholder or group of stockholders. b) Change in the trade or corporate name of the business c) Merger or consolidation of corporations. The unused input tax of the dissolved corporation, as of the date of merger or consolidation, shall be absorbed the surviving or new corp. exempt persons or entities, the purchasers, transferees or recipients shall be considered the importers thereof, who shall be liable for an internal revenue tax on such importation. The tax due on such importation shall constitute a lien on the goods superior to all charges or liens on the goods, irrespective of the possessor thereof. (as amended by RA 9337, underscore for emphasis) VAT is imposed on goods imported, whether for use in business or not. iii. SALE OF SERVICES & USE/LEASE OF PROPERTIES

2)

For transactions deemed sale, the output tax shall be based on the market value of the goods deemed sold as of the time of the occurrence of the transactions. However, in case of retirement or cessation of business, the tax base shall be the acquisition cost or the current market price of the goods or properties, whichever is LOWER. ii. IMPORTATION OF GOODS

Sec. 107. Value-Added Tax on Importation of Goods. (A) In General. - There shall be levied, assessed and collected on every importation of goods a value-added tax equivalent to ten percent (10%) based on the total value used by the Bureau of Customs in determining tariff and customs duties, plus customs duties, excise taxes, if any, and other charges, such tax to be paid by the importer prior to the release of such goods from customs custody: Provided, That where the customs duties are determined on the basis of the quantity or volume of the goods, the value-added tax shall be based on the landed cost plus excise taxes, if any: Provided, further, That the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise the rate of valueadded tax to twelve percent (12%), after any of the following conditions has been satisfied: (i) Value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds two and four-fifth percent (2 4/5%); or (ii) National government deficit as a percentage of GDP of the previous year exceeds one and one-half percent (1 1/2%). (B) Transfer of Goods by Tax-exempt Persons. - In the case of tax free importation of goods into the Philippines by persons, entities or agencies exempt from tax where such goods are subsequently sold, transferred or exchanged in the Philippines to non-

Sec. 108. Value-added Tax on Sale of Services and Use or Lease of Properties. (A) Rate and Base of Tax. - There shall be levied, assessed and collected, a value-added tax equivalent to ten percent (10%) of gross receipts derived from the sale or exchange of services, including the use or lease of properties: Provided, That the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise the rate of value-added tax to twelve percent (12%), after any of the following conditions has been satisfied: (i) Value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds two and four-fifth percent (2 4/5%); or (ii) National government deficit as a percentage of GDP of the previous year exceeds one and one-half percent (1 1/2%). The phrase 'sale or exchange of services' means the performance of all kinds of services in the Philippines for others for a fee, remuneration or consideration, including those performed or rendered by construction and service contractors; stock, real estate, commercial, customs and immigration brokers; lessors of property, whether personal or real; warehousing services; lessors or distributors of cinematographic films; persons engaged in milling, processing, manufacturing or repacking goods for others; proprietors, operators or keepers of hotels, motels, rest-houses, pension houses, inns, resorts; proprietors or operators of restaurants, refreshment parlors, cafes and other eating places, including clubs and caterers; dealers in securities; lending investors; transportation contractors on their transport of goods or cargoes, including persons who transport goods or cargoes for hire and other domestic common carriers by land relative to their transport of goods or cargoes; common carriers by air and sea relative to their transport of passengers, goods or cargoes from one place in the Philippines to another place in the Philippines; sales of electricity by generation companies, transmission, and distribution companies; services of franchise grantees of electric utilities, telephone and telegraph, radio and television broadcasting and all other franchise grantees except those under Section 119 of this Code and non-life insurance companies (except their crop insurances), including surety, fidelity, indemnity and bonding companies; and similar services regardless of whether or not the performance thereof calls for the exercise or use of the physical or mental faculties. The phrase 'sale or exchange of services' shall likewise include: (1) The lease or the use of or the right or privilege to use any copyright, patent, design or model plan, secret formula or process, goodwill, trademark, trade brand or other like property or right;

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(2) The lease or the use of, or the right to use of any industrial, commercial or, scientific equipment; (3) The supply of scientific, technical, industrial or commercial knowledge or information; (4) The supply of any assistance that is ancillary and subsidiary to and is furnished as a means of enabling the application or enjoyment of any such property, or right as is mentioned in subparagraph (2) or any such knowledge or information as is mentioned in subparagraph (3); (5) The supply of services by a nonresident person or his employee in connection with the use of property or rights belonging to, or the installation or operation of any brand, machinery or other apparatus purchased from such nonresident person; (6) The supply of technicai advice, assistance or services rendered in connection with technical management or administration of any scientific, industrial or commercial undertaking, venture, project or scheme; (7) The lease of motion picture films, films, tapes and discs; and (8) The lease or the use of or the right to use radio, television, satellite transmission and cable television time. Lease of properties shall be subject to the tax herein imposed irrespective of the place where the contract of lease or licensing agreement was executed if the property is leased or used in the Philippines. The term 'gross receipts' means the total amount of money or its equivalent representing the contract price, compensation, service fee, rental or royalty, including the amount charged for materials supplied with the services and deposits and advanced payments actually or constructively received during the taxable quarter for the services performed or to be performed for another person, excluding value-added tax…xxx…. (as amended by RA 9337, underscored parts amended or added by RA 9337) Notes: (unless otherwise indicated, from RR 162005) 1. Persons engaged in milling, processing, manufacturing or repacking goods for others are subject to VAT, EXCEPT palay into rice, corn into corn grits, and sugarcane into raw sugar For dealers in securities, “gross receipts” means gross selling price less cost of the securities sold. RR 7-95: Pre-need companies are considered dealers in securities. Lending investors – all persons OTHER than banks, non-bank financial intermediaries, finance companies and other financial intermediaries NOT performing quasi-banking functions who make a practice of lending money for themselves or others at interest Subject to VAT: Franchise grantees of electric utilities, telephone and telegraph, radio and/or TV broadcasting and all other franchise grantees (including PAGCOR and its licensees/franchisees) EXCEPT franchise grantees of radio and/or TV broadcasting whose annual gross receipts of the preceding year do not exceed P10M (which shall be subject to 3% franchise tax under Sec. 119, subject to optional registration), and franchise grantees of gas and water facilities (under Sec. 109, subject to 2% franchise tax). With respect to franchise grantees of telephone and telegraph services, amounts received for overseas dispatch, message, or conversation originating from the Philippines are subject to the percentage tax under Sec. 120 and hence exempt from VAT. 5. Lease of properties shall be subject to the tax herein imposed irrespective of the place where the contract of lease or licensing agreement was executed if the property is leased or used in the Philippines. In a lease contract, the advance payment by the lessee may be: a) a loan to the lessor from the lessee – NOT subject to VAT b) an option money for the property – NOT subject to VAT c) a security deposit to insure the faithful performance of certain obligations of the lessee to the lessor – NOT subject to VAT. BUT if the security deposit is applied to rental, it shall be subject to VAT at the time of its application. d) or pre-paid rental – subject to VAT when received, irrespective of the accounting method employed by the lessor On transportation:  All receipts from service, hire, or operating lease of transportation equipment not subject to the percentage tax on domestic common carriers and keepers of garages shall be subject to VAT. (Pls refer to Sec. 117 for other percentage taxes. Transporting Persons Goods/cargo Whether transporting persons or goods/cargo Kind of carrier Domestic Domestic Domestic Tax Liability 3%, Sec. 117 12% VAT Domestic trip - 12% VAT International trip – zerorated 3%, Sec. 118 Domestic flight - 12% VAT International flight – zero-rated 3%, Sec. 118

6.

7.

Common carrier By land

By sea

2.

International By air Domestic

3.

International 8.

4.

Sale of electricity by generation, transmission, and distribution companies shall be subject to 12% VAT, EXCEPT sale of power or fuel generated through renewable sources of energy, such as, but not limited to, biomass, solar, wind hydropower, geothermal, ocean energy, and other emerging energy sources using technologies such as fuel cells and hydrogen fuels, which shall be subject to 0% rate of VAT (zero-rated). The universal charge passed on and collected by distribution companies and electric cooperatives shall be excluded from the computation of gross receipts.

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9. Insurance and reinsurance commissions, as opposed to premiums, whether life or non-life, are subject to VAT. Non-life insurance premiums are subject to VAT. Life insurance premiums are NOT subject to VAT, for they are subject to percentage tax. B. 0% VAT (ZERO-RATED TRANSACTIONS) (6) The sale of goods, supplies, equipment and fuel to persons engaged in international shipping or international air transport operations. (#6 added by RA 9337) (b) Foreign Currency Denominated Sale. - The phrase 'foreign currency denominated sale' means sale to a nonresident of goods, except those mentioned in Sections 149 and 150, assembled or manufactured in the Philippines for delivery to a resident in the Philippines, paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP). (c) Sales to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects such sales to zero rate… xxx…. (underscore for emphasis) Section 6 of RR 4-2007, dated February 7, 2007: The term effectively zero-rated sale of goods and properties shall refer to the local sale of goods and properties by a VAT-registered person to a person or entity who was granted indirect tax exemption under special laws or international agreement. Note: RR 4-2007 removed the distinction between automatic and effectively zero-rated transactions found in prior Revenue Regulations (including RR 162005) with respect to prior application. The following line in RR 16-2005 has been DELETED by RR 4-2007: “Other cases of zero-rated sales shall require prior application with the appropriate BIR office for effective zero-rating. Without an approved application for effective zero-rating, the transaction otherwise entitled to zero-rating shall be considered exempt. The foregoing rule notwithstanding, the Commissioner may prescribe such rules to effectively implement the processing of applications for effective zero-rating.” This is probably a consequence of the Supreme Court ruling in the case of Commissioner of Internal Revenue v. Seagate Technology (Philippines).

A zero-rated sale by a VAT-registered person is a taxable transaction for VAT purposes, but shall not result in any output tax. However, the input tax on purchases of goods, properties or services related to such zero-rated sale shall be available as tax credit or refund. (RR 16-2005)6 i. SALE OF GOODS OR PROPERTIES

Sec. 106… xxx…. (2) The following sales by VAT-registered persons shall be subject to zero percent (0%) rate: (a) Export Sales. - The term 'export sales' means: (1) The sale and actual shipment of goods from the Philippines to a foreign country, irrespective of any shipping arrangement that may be agreed upon which may influence or determine the transfer of ownership of the goods so exported and paid for in acceptable foreign currency or its equivalent in goods or services, and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas,(BSP); (2) Sale of raw materials or packaging materials to a nonresident buyer for delivery to a resident local export-oriented enterprise to be used in manufacturing, processing, packing or repacking in the Philippines of the said buyer's goods and paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP): (3) Sale of raw materials or packaging materials to export-oriented enterprise whose export sales exceed seventy percent (70%) of total annual production; (4) Sale of gold to the Bangko Sentral ng Pilipinas (BSP); (5) Those considered export sales under Executive Order No. 226, otherwise known as the Omnibus Investment Code of 1987, and other special laws; and

6 Thus, the benefit of being zero-rated vis-à-vis being exempt is that enterprises which enjoy zero-rating of transactions can avail of input taxes on purchases of goods, properties, or services (as either tax credit or refund, there being no output tax against which input tax can be credited). In mathematical terms, the enterprises enjoy 100% of their input taxes. On the other hand, exempt enterprises cannot avail of these input taxes; instead, these input taxes form part of cost/expense. Thus, the net benefit these enterprises get from their exempt transactions is 35% (in the case of corporations), or to the extent that they can be used as deductions from income in the computation of income tax payable (subject to rules in income taxation).

There is therefore a 65% difference (100% in the case of zero-rated transactions, less 35% in exempt transactions). [Editor’s note]

Commissioner of Internal Revenue vs. Seagate Technology (Philippines) February 11, 2005 The BIR regulations additionally requiring an approved prior application for effective zero rating cannot prevail over the clear VAT nature of Seagate’s transactions (subject to zero-rating, as an entity registered with the PEZA). The scope of such regulations is not “within the statutory authority x x x granted by the legislature.” A mere administrative issuance, like a BIR regulation, cannot amend the law; the former cannot purport to do any more than interpret the latter. The courts will not countenance one that overrides the statute it seeks to apply and implement. Other than the general registration of a taxpayer the VAT status of which is aptly determined, no provision under our VAT law requires an additional application to be made for such taxpayer’s transactions to be considered effectively zero-rated. An effectively zerorated transaction does not and cannot become exempt simply because an application therefor was not made or, if made, was denied. To allow the additional requirement is to give unfettered discretion to those officials or agents who, without fluid

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consideration, are bent on denying a valid application. Moreover, the State can never be estopped by the omissions, mistakes or errors of its officials or agents. Export sales 1) The sale and actual shipment of goods from the Philippines to a foreign country… AND paid for in acceptable foreign currency or its equivalent in goods or services, AND accounted for in accordance with the rules and regulations of the BSP Sale of raw materials or packaging materials to a nonresident buyer for delivery to a resident local export-oriented enterprise to be used in manufacturing, processing, packing or repacking in the Philippines of the said buyer's goods AND paid for in acceptable foreign currency AND accounted for in accordance with the rules and regulations of the BSP Sale of raw materials or packaging materials to export-oriented enterprise whose export sales exceed seventy percent (70%) of total annual production. Any enterprise whose export sales exceed 70% of the total annual production of the preceding taxable year shall be considered an export-oriented enterprise upon accreditation under the rules & regulations of Export Development Act, RA 7844 (RR 7-95) Sale of gold to the Bangko Sentral ng Pilipinas (BSP); 6) to a manufacturer/producer whose products are 100% exported are considered export sales. A certification to his effect must be issued by the Board of Investment which shall be good for 1 year unless subsequently re-issued. (RR 16-2005) The sale of goods, supplies, equipment and fuel to persons engaged in international shipping or international air transport operations. (added by RA 9337) Provided, that the same is limited to goods, supplies, equipment and fuel pertaining to or attributable to the transport of goods and passengers from a port in the Phil. directly to a foreign port without docking or stopping at any other port in the Phil., and that if any portion of such fuel, goods, or supplies is used for purposes other than that mentioned here, such portion of fuel, goods, and supplies shall be subject to 12% VAT.

2)

3)

Foreign Currency Denominated Sale - sale to a nonresident of goods, except those mentioned in Sections 149 and 150 (automobiles and non-essential goods like jewelry, perfume, and yachts), assembled or manufactured in the Philippines for delivery to a resident in the Philippines, paid for in acceptable foreign currency AND accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP). Sales of locally manufactured or assembled goods for household and personal use to Filipinos abroad and other non-residents of the Philippines as well as returning Overseas Filipinos under the Internal Export Program of the government paid for in convertible foreign currency AND accounted for in accordance with the rules and regulations of the BSP shall also be considered export sales. Sales to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects such sales to zero rate. Example: a) sales to enterprises duly registered & accredited with the i) Subic Bay Metropolitan Authority, ii) Philippine Economic Zone Authority (PEZA), b) international agreements to which the Phil. is signatory, such as i. Asian Development Bank (ADB), ii. International Rice Research Institute (IRRI) RMC 74-99: Tax Treatment of Sales of Goods and Services Made by Suppliers from Western Territory to a PEZA registered enterprise and Sale Transactions made by PEZA registered enterprises Within and Without the Zone The Phil VAT law adheres to the “Cross Border Doctrine”, which basically means that no VAT shall be imposed to form part of the cost of goods destined for consumption OUTSIDE of the territorial border of the taxing authority. Hence, actual export of goods and services from the Phil to a foreign country must be free from VAT. Conversely, those destined for use or consumption WITHIN the Phil shall be imposed with the 10% VAT.

4) 5)

Those considered export sales under the Omnibus Investment Code of 1987, and other special laws (ex. Bases Conversion & Development Act of 1992) Under Omnibus Investment Code: a) Phil. port FOB value of export products exported directly by a registered export producer b) Net selling price of export products sold by a registered export producer to another export producer, or to an export trader that subsequently exports the same (only when actually exported by the latter) The following shall be considered constructively exported: a) sales to bonded manufacturing warehouses of export-oriented manufacturers b) sales to export processing zones c) sales to registered export traders operating bonded trading warehouses supplying raw materials in the manufacture of export products under guidelines to be set by the Board in consultation with the BIR and Bureau of Customs d) sales to diplomatic missions and other agencies and/or instrumentalities granted tax immunities, of locally manufactured, assembled or repacked products, whether paid for in foreign currency or not. Provided that export sales of registered export traders may include commission income, and that exportation of goods on consignment shall not be deemed export sales until the export products consigned are in fact sold by the consignee, and provided finally that sales by a VAT-registered supplier

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A. Tax Treatment of Sales Made by VAT registered Supplier from Customs Territory to a PEZA registered enterprise 1) if the buyer is a PEZA registered enterprise which is subject to the 5% special tax regime (a) Sale of Goods – this shall be treated as INDIRECT EXPORT, hence considered SUBJECT TO 0% VAT. (b) Sale of Service – this shall be treated SUBJECT TO 0% VAT under the “cross border doctrine” 2) if the buyer is a PEZA registered enterprise which is NOT embraced by the 5% tax regime (a) Sale of Goods – this shall be treated as INDIRECT EXPORT, hence considered SUBJECT TO 0% VAT. (b) Sale of Service – this shall be treated SUBJECT TO 0% VAT under the “cross border doctrine” (b) if PEZA registered seller is subject to taxes under NIRC (ie not subject to 5% special tax regime) – subject to 0% VAT pursuant to “cross border doctrine” ii. SALE OF SERVICES & USE/LEASE OF PROPERTIES

Sec. 108. …xxx… (amendments introduced by RA 9337 indicated) (B) Transactions Subject to Zero Percent (0%) Rate. The following services performed in the Philippines by VAT- registered persons shall be subject to zero percent (0%) rate. (1) Processing, manufacturing or repacking goods for other persons doing business outside the Philippines which goods are subsequently exported, where the services are paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP); [NO CHANGE] (2) Services other than those mentioned in the preceding paragraph, the consideration for which is paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP); [AMENDED. THIS NOW READS: Services other than those mentioned in the preceding paragraph rendered to a person engaged in business conducted outside the Philippines or to a nonresident person not engaged in business who is outside the Philippines when the services are performed, the consideration for which is paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP)] (3) Services rendered to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects the supply of such services to zero percent (0%) rate; [NO CHANGE] (4) Services rendered to vessels engaged exclusively in international shipping; and [AMENDED. THIS NOW READS: Services rendered to persons engaged in international shipping or international air transport operations, including leases of property for use thereof] (5) Services performed by subcontractors and/or contractors in processing, converting, of manufacturing goods for an enterprise whose export sales exceed seventy percent (70%) of total annual production. [NO CHANGE] [RA 9337 ALSO ADDS THESE TWO: (6) Transport of passengers and cargo by air or sea vessels from the Philippines to a foreign country; and (7) Sale of power or fuel generated through renewable sources of energy such as, but not limited to, biomass, solar, wind, hydropower, geothermal, ocean energy, and other emerging energy sources using technologies such as fuel cells and hydrogen fuels.] RR 4-2007: The term effectively zero-rated sales of services shall refer to the local sale of services by a

NOTE: Any sale of goods, property or services made by a VAT registered supplier from the Customs Territory* to any registered enterprise operating in the ecozone, REGARDLESS of the class or type of the latter’s PEZA registration, is actually qualified and thus LEGALLY ENTITLED TO THE 0% VAT. Accordingly, all sales of goods or property to such enterprise made by a VAT registered supplier from the Customs Territory shall be treated SUBJECT TO 0% VAT. means the national “Customs Territory” territory of the Phil OUTSIDE of the proclaimed boundaries of the ECOZONES. B. Tax Treatment of Sales Made by a VAT-Exempt Supplier from the Customs Territory to a PEZA registered enterprise Sale of goods, property and services by VAT-Exempt supplier from the Customs Territory to a PEZA registered enterprise shall be treated EXEMPT FROM VAT, regardless of whether or not the PEZA registered buyer is subject to taxes under the NIRC or enjoying the 5% special tax regime. C. Tax Treatment of Sales Made by a PEZA Registered Enterprise 1) Sale of Goods by a PEZA registered enterprise to a buyer from the Customs Territory (ie domestic sales) -- this case shall be treated as a technical IMPORTATION made by the buyer. Such buyer shall be treated as an IMPORTER thereof and shall be imposed with the corresponding VAT. 2) Sale of Services by a PEZA registered enterprise to a buyer from the Customs Territory – this is NOT embraced by the 5% special tax regime, hence, such seller shall be SUBJECT TO 10% VAT. 3) Sale of Goods by a PEZA registered enterprise to Another PEZA registered enterprise (ie Intra-ECOZONE Sales of Goods) – this shall be EXEMPT from VAT. Sale of Services by ECOZONE enterprise, to Another ECOZONE enterprise (IntraECOZONE enterprise Sale of Service) (a) if PEZA registered seller is subject to 5% special tax regime – EXEMPT from VAT

4)

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VAT-registered person to a person or entity who was granted indirect tax exemption under special laws or international agreement. RR 4-2007 removed the distinction between automatic and effectively zero-rated transactions found in prior Revenue Regulations (inc. RR 16-2005) with respect to prior application. The following line in RR 16-2005 has been deleted by RR 4-2007: “The concerned taxpayer must seek prior approval or prior confirmation from the appropriate offices of the BIR so that a transaction is qualified for effective zerorating. Without an approved application for effective zero-rating, the transaction otherwise entitled to zerorating shall be considered exempt. The foregoing rule notwithstanding, the Commissioner may prescribe such rules to effectively implement the processing of applications for effective zero-rating.” This is probably a consequence of the Supreme Court ruling in the case of Commissioner of Internal Revenue v. Seagate Technology (Philippines). Please refer to page 30. Zero-rated transactions 1) Processing, manufacturing or repacking goods for other persons doing business outside the Philippines which goods are subsequently exported, where the services are paid for in acceptable foreign currency AND accounted for in accordance with the rules and regulations of the BSP Services other than those mentioned in the preceding paragraph rendered to a person engaged in business conducted outside the Philippines or to a nonresident person not engaged in business who is outside the Philippines when the services are performed, the consideration for which is paid for in acceptable foreign currency AND accounted for in accordance with the rules and regulations of the BSP Services rendered to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects the supply of such services to zero percent (0%) rate; Services rendered to persons engaged in international shipping or international air transport operations, including leases of property for use thereof; Provided, however, that the services referred to herein shall not pertain to those made to common carriers by air and sea relative to their transport of passengers, goods or cargoes from one place in the Phil. to another place in the Phil., the same being subject to 12% VAT under Sec. 108 Services performed by subcontractors and/or contractors in processing, converting, of manufacturing goods for an enterprise whose export sales exceed seventy percent (70%) of total annual production. Transport of passengers and cargo by air or sea vessels from the Philippines to a foreign country; (pls see table on page 29) and; Sale of power or fuel generated through renewable sources of energy such as, but not limited to, biomass, solar, wind, hydropower, geothermal, ocean energy, and other emerging energy sources using technologies such as fuel cells and hydrogen fuels. Zero-rating shall apply strictly to the sale of power or fuel generated through renewable sources of energy, and shall not extend to the sale of services related to the maintenance or operation of plants generating said power. C. FINAL WITHHOLDING VAT OF 5%

SEC. 114. Return and Payment of Value-Added Tax. … xxx…. (C) Withholding of Value-Added Tax. - The Government or any of its political subdivisions, instrumentalities or agencies, including governmentowned or -controlled corporations (GOCCs) shall, before making payment on account of each purchase of goods and services which are subject to the valueadded tax imposed in Sections 106 and 108 of this Code, deduct and withhold a final value-added tax at the rate of five percent (5%) of the gross payment thereof: Provided, That the payment for lease or use of properties or property rights to nonresident owners shall be subject to ten percent (10%) withholding tax at the time of payment. For purposes of this Section, the payor or person in control of the payment shall be considered as the withholding agent. The value-added tax withheld under this Section shall be remitted within ten (10) days following the end of the month the withholding was made. (RA 9337) NOTE: This 5% final VAT withheld by the government is an innovation of RA 9337. RR 16-2005: The 5% final VAT shall represent the net VAT payable of the seller. The remaining 5% (or 7%, with the raise of VAT to 12%) effectively accounts for the standard input VAT, in lieu of the actual input VAT directly attributable or ratably apportioned to such sales. (This means that where the 5% final VAT applies, the basic formula of output tax less input tax does not apply. ) Should actual input VAT exceed 7% of the gross payments, the excess may form part of the sellers’ expense or cost. On the other hand, if actual input VAT is less than 7% of gross payment, the difference must be closed to expense or cost, in effect reducing it. However, 12% shall be withheld with respect to the following: 1) Lease or use of properties or property rights owned by non-residents 2) Services rendered to local insurance companies, with respect to reinsurance premiums payable to non-residents; and 3) Other services rendered in the Philippines by nonresidents. V. TRANSACTIONS EXEMPT FROM VAT

2)

3)

4)

5)

(amendments introduced by RA 9337 indicated, text in ALL CAPS added by RA 9337)

6) 7)

SEC. 109. Exempt Transactions. – 1) SUBJECT TO THE PROVISIONS OF SUBSECTION (2) HEREOF, The following shall be exempt from the value-added tax: (a) Sale of nonfood agricultural products; marine and forest products in their original state by the primary producer or the owner

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of the land where the same are produced; [DELETED BY RA 9337] (b) Sale of cotton seeds in their original state; and copra; [DELETED] (c) Sale or importation of agricultural and marine food products in their original state, livestock and poultry of or kind generally used as, or yielding or producing foods for human consumption; and breeding stock and genetic materials therefor. Products classified under this paragraph and paragraph (a) shall be considered in their original state even if they have undergone the simple processes of preparation or preservation for the market, such as freezing, drying, salting, broiling, roasting, smoking or stripping. Polished and/or husked rice, corn grits, raw cane sugar and molasses, ordinary salt, AND COPRA shall be considered in their original state; [AMENDED] (d) Sale or importation of fertilizers; seeds, seedlings and fingerlings; fish, prawn, livestock and poultry feeds, including ingredients, whether locally produced or imported, used in the manufacture of finished feeds (except specialty feeds for race horses, fighting cocks, aquarium fish, zoo animals and other animals generally considered as pets); (e) Sale or importation of coal and natural gas, in whatever form or state, and petroleum products (except lubricating oil, processed gas, grease, wax and petrolatum) subject to excise tax imposed under Title VI; [DELETED] (f) Sale or importation of raw materials to be used by the buyer or importer himself in the manufacture of petroleum products subject to excise tax, except lubricating oil, processed gas, grease, wax and petrolatum; [DELETED] (g) Importation of passenger and/or cargo vessels of more than five thousand tons (5,000) whether coastwise or ocean-going, including engine and spare parts of said vessel to be used by the importer himself as operator thereof; [DELETED] (h) Importation of personal and household effects belonging to the residents of the Philippines returning from abroad and nonresident citizens coming to resettle in the Philippines: Provided, That such goods are exempt from customs duties under the Tariff and Customs Code of the Philippines; (i) Importation of professional instruments and implements, wearing apparel, domestic animals, and personal household effects (except any vehicle, vessel, aircraft, machinery other goods for use in the manufacture and merchandise of any kind in commercial quantity) belonging to persons coming to settle in the Philippines, for their own use and not for sale, barter or exchange, accompanying such persons, or arriving within ninety (90) days before or after their arrival, upon the production of evidence satisfactory to the Commissioner, that such persons are actually coming to settle in the Philippines and that the change of residence is bona fide; (j) Services subject to percentage tax under Title V; (k) Services by agricultural contract growers and milling for others of palay into rice, corn into grits and sugar cane into raw sugar; (l) Medical, dental, hospital and veterinary services subject to the provisions of Section 17 of Republic Act No. 7716, as amended EXCEPT THOSE RENDERED BY PROFESSIONALS: [AMENDED] (m) Educational services rendered by private educational institutions, duly accredited by the Department of Education, Culture and Sports (DECS) Department of Education (DEPED), the Commission on Higher Education (CHED), THE TECHNICAL EDUCATION AND SKILLS DEVELOPMENT AUTHORITY (TESDA), and those rendered by government educational institutions; [AMENDED] (n) Sale by the artist himself of his works of art, literary works, musical compositions and similar creations, or his services performed for the production of such works; [DELETED] (o) Services rendered by individuals pursuant to an employer-employee relationship; (p) Services rendered by regional or area headquarters established in the Philippines by multinational corporations which act as supervisory, communications and coordinating centers for their affiliates, subsidiaries or branches in the Asia-Pacific Region and do not earn or derive income from the Philippines; (q) Transactions which are exempt under international agreements to which the Philippines is a signatory or under special laws, except those under Presidential Decree Nos. 66, 529 [Petroleum Exploration Concessionaires under the Petroleum Act of 1949] and 1590; [AMENDED] (r) Sales by agricultural cooperatives duly registered with the Cooperative Development Authority to their members as well as sale of their produce, whether in its original state or processed form, to non-members; their importation of direct farm inputs, machineries and equipment, including spare parts thereof, to be used directly and exclusively in the production and/or processing of their produce; (s) Sales by electric cooperatives duly registered with the Cooperative Development authority or National Electrification Administration, relative to the generation and distribution of electricity as well as their importation of machineries and equipment, including spare parts, which shall be directly

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used in the generation and distribution of electricity; [DELETED] (t) Gross receipts from lending activities by credit or multi-purpose cooperatives duly registered with the Cooperative Development Authority whose lending operation is limited to their members; [AMENDED] (u) Sales by non-agricultural, non- electric and non-credit cooperatives duly registered with the Cooperative Development Authority: Provided, That the share capital contribution of each member does not exceed Fifteen thousand pesos (P15,000) and regardless of the aggregate capital and net surplus ratably distributed among the members; (v) Export sales by persons who are not VATregistered; (w) Sale of real properties not primarily held for sale to customers or held for lease in the ordinary course of trade or business or real property utilized for low-cost and socialized housing as defined by Republic Act No. 7279, otherwise known as the Urban Development and Housing Act of 1992, and other related laws, house and lot and other residential dwellings valued at One million pesos (P1,000,000) and below RESIDENTIAL LOT VALUED AT ONE MILLION FIVE HUNDRED THOUSAND PESOS (P1,500,000) AND BELOW, HOUSE AND LOT, AND OTHER RESIDENTIAL DWELLINGS VALUED AT TWO MILLION FIVE HUNDRED THOUSAND PESOS (P2,500,000) AND BELOW: Provided, That not later than January 31st of the calendar year subsequent to the effectivity of this Act and each calendar year thereafter, the amount of One million pesos (P1,000,000) shall be adjusted to its present value JANUARY 31, 2009 AND EVERY THREE (3) YEARS THEREAFTER, THE AMOUNTS HEREIN STATED SHALL BE ADJUSTED TO THEIR PRESENT VALUES using the Consumer Price Index, as published by the national Statistics Office (NSO); [AMENDED] (x) Lease of a residential unit with a monthly rental not exceeding TEN THOUSAND PESOS (10,000) Eight thousand pesos (P8,000); Provided, That not later than January 31st of the calendar year subsequent to the effectivity of Republic Act No. 8241 and each calendar year thereafter, the amount of Eight thousand pesos (P8,000) JANUARY 31, 2009 AND EVERY THREE (3) YEARS THEREAFTER, THE AMOUNT HEREIN STATED shall be adjusted to its present value using the Consumer Price Index as published by the National Statistics Office (NS0); [AMENDED] (y) Sale, importation, printing or publication of books and any newspaper, magazine review or bulletin which appears at regular intervals with fixed prices for subscription and sale and which is not devoted principally to the publication of paid advertisements; and [RA 9337 ADDED SUBSECTIONS] THE FOLLOWING TWO

(S) SALE, IMPORTATION OR LEASE OF PASSENGER OR CARGO VESSELS AND AIRCRAFT, INCLUDING ENGINE, EQUIPMENT AND SPARE PARTS THEREOF FOR DOMESTIC OR INTERNATIONAL TRANSPORT OPERATIONS; (T) IMPORTATION OF FUEL, GOODS, AND SUPPLIES BY PERSONS ENGAGED IN INTERNATIONAL SHIPPING OR AIR TRANSPORT OPERATIONS; (U) Services of banks, non-bank financial intermediaries performing quasi-banking functions and other non-bank financial intermediaries; and (z) Sale or lease of goods or properties or the performance of services other than the transactions mentioned in the preceding paragraphs, the gross annual sales and/or receipts do not exceed the amount of Five hundred fifty thousand pesos (P550,000) ONE MILLION FIVE HUNDRED THOUSAND PESOS (P1,500,0000: Provided, That not later than January 31st of the calendar year subsequent to the effectivity of Republic Act No. 8241 and each calendar year thereafter, the amount of Five hundred fifty thousand pesos (550,000) JANUARY 31, 2009 AND EVERY THREE (3) YEARS THEREAFTER, THE AMOUNT HEREIN STATED shall be adjusted to its present value using the Consumer Price Index, as published by the National Statistics Office (NSO). [AMENDED] The foregoing exemptions to the contrary notwithstanding, any person whose sale of goods or properties or services which are otherwise not subject to VAT, but who issues a VAT invoice or receipt therefor shall, in addition to his liability to other applicable percentage tax, if any, be liable to the tax imposed in Section 106 or 108 without the benefit of input tax credit, and such tax shall also be recognized as input tax credit to the purchaser under Section 110, all of this Code. [DELETED] (2) A VAT-REGISTERED PERSON MAY ELECT THAT SUBSECTION (1) NOT APPLY TO ITS SALE OF GOODS OR PROPERTIES OR SERVICES: PROVIDED, THAT AN ELECTION MADE UNDER THIS SUBSECTION SHALL BE IRREVOCABLE FOR A PERIOD OF THREE (3) YEARS FROM THE QUARTER THE ELECTION WAS MADE. [ADDED BY RA 9337]
Notes on exempt transactions (from RR 16-2005): VAT-exempt transactions refer to the sale of goods or properties and/or services and the use or lease of properties that is not subject to VAT (output tax) and the seller is not allowed any tax credit of VAT (input tax) on purchases. The person making the exempt sale of goods, properties or services shall not bill any output tax to his customers because the said transaction is not subject to VAT.

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1. Livestock or poultry does not include fighting cocks, race horses, zoo animals and other animals generally considered as pets. Original state – even if they have undergone the simple processes of preparation or preservation for the market, such as freezing, drying, salting, broiling, roasting, smoking or stripping, including those using advanced technological means of packaging, such as shrink wrapping in plastics, vacuum packing, tetrapack, and other similar packaging methods. 2. Services subject to percentage tax under Title V: (1) Sale or lease of goods or properties or the performance of services of non-VATregistered persons, the gross annual sales and/or receipts of which does not exceed the amount of P1.5M; Provided, That not later than January 31, 2009 and every three (3) years thereafter, the amount herein stated shall be adjusted to its present value using the Consumer Price Index, as published by the National Statistics Office (Sec. 116); (2) Services rendered by domestic common carriers by land, for the transport of passengers and keepers of garages (Sec. 117); (3) Services rendered by international air/shipping carriers (Sec. 118); (4) Services rendered by franchise grantees of radio and/or television broadcasting whose annual gross receipts of the preceding year do not exceed P10M, and by franchise grantees of gas and water utilities (Sec. 119); (5) Service rendered for overseas dispatch, message or conversation originating from the Philippines (Sec. 120); (6) Services rendered by any person, company or corporation (except purely cooperative companies or associations) doing life insurance business of any sort in the Philippines (Sec. 123); (7) Services rendered by fire, marine or miscellaneous insurance agents of foreign insurance companies (Sec. 124); (8) Services of proprietors, lessees or operators of cockpits, cabarets, night or day clubs, boxing exhibitions, professional basketball games, Jai-Alai and race tracks (Sec. 125); and (9) Receipts on sale, barter or exchange of shares of stock listed and traded through the local stock exchange or through initial public offering (Sec. 127). Medical, dental, hospital and veterinary services, except those rendered by professionals. Laboratory services are exempted. If the hospital or clinic operates a pharmacy or drug store, the sale of drugs and medicine is subject to VAT. “Educational services” does not include seminars, in-service training, review classes and other similar services rendered by persons who are not accredited by the DepED, CHED, and/or TESDA. With respect to non-agricultural, non-electric and non-credit cooperatives duly registered with the Cooperative Development Authority, their sales are exempt (provided that the share capital contribution of each member does not exceed 6. P15K, regardless of the aggregate capital and net surplus ratably distributed among the members) BUT their importation of machineries and equipment, including spare parts thereof, to be used by them are SUBJECT to VAT. Compare this with agricultural cooperatives (duly registered with the CDA), whose exemption includes importation of direct farm inputs, machineries and equipment, including spare parts thereof, to be used directly and exclusively in the production and/or processing of their produce. Sale of real properties – the ff. sales are exempt: (1) Sale of real properties NOT primarily held for sale to customers or held for lease in the ordinary course of trade or business. (2) Sale of real properties utilized for low-cost housing as defined by RA No. 7279, otherwise known as the "Urban Development and Housing Act of 1992" and other related laws, such as RA No. 7835 and RA No. 8763. “Low-cost housing" refers to housing projects intended for homeless low-income family beneficiaries, undertaken by the Government or private developers, which may either be a subdivision or a condominium registered and licensed by the Housing and Land Use Regulatory Board/Housing (HLURB) under BP Blg. 220, PD No. 957 or any other similar law, wherein the unit selling price is within the selling price ceiling per unit of P750,000.00 under RA No. 7279, and other laws, such as RA No. 7835 and RA No. 8763. (3) Sale of real properties utilized for socialized housing as defined under RA No. 7279, and other related laws, such as RA No. 7835 and RA No. 8763, wherein the price ceiling per unit is P225,000.00 or as may from time to time be determined by the HUDCC and the NEDA and other related laws. "Socialized housing" refers to housing programs and projects covering houses and lots or home lots only undertaken by the Government or the private sector for the underprivileged and homeless citizens which shall include sites and services development, long-term financing, liberated terms on interest payments, and such other benefits in accordance with the provisions of RA No. 7279and RA No. 7835 and RA No. 8763. "Socialized housing" shall also refer to projects intended for the underprivileged and homeless wherein the housing package selling price is within the lowest interest rates under the Unified Home Lending Program (UHLP) or any equivalent housing program of the Government, the private sector or nongovernment organizations. (4) Sale of residential lot valued at P1.5M and below, or house & lot and other residential dwellings valued at P2.5M and below, where the instrument of sale/transfer/disposition was executed on or after July 1, 2005; Provided, That not later than January 31, 2009 and every 3 years thereafter, the amounts stated herein shall be adjusted to its present value using the Consumer Price Index, as published by the National Statistics Office (NSO); Provided, further, that such adjustment shall be published through

3.

4.

5.

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revenue regulations to be issued not later than March 31 of each year; If two or more adjacent residential lots are sold or disposed in favor of one buyer, for the purpose of utilizing the lots as one residential lot, the sale shall be exempt from VAT only if the aggregate value of the lots does not exceed P1.5M. Adjacent residential lots, although covered by separate titles and/or separate tax declarations, when sold or disposed to one and the same buyer, whether covered by one or separate Deed of Conveyance, shall be presumed as a sale of one residential lot. 7. Lease of residential units with a monthly rental per unit not exceeding P10K, regardless of the amount of aggregate rentals received by the lessor during the year. Lease of residential units where the monthly rental per unit exceeds 10K but the aggregate of such rentals of the lessor during the year do not exceed One Million Five Hundred Pesos P1.5M shall likewise be exempt from VAT, however, the same shall be subjected to three percent (3%) percentage tax. In cases where a lessor has several residential units for lease, some are leased out for a monthly rental per unit of not exceeding P10K while others are leased out for more than P10K per unit, his tax liability will be as follows: a. The gross receipts from rentals not exceeding P10K per month per unit shall be exempt from VAT regardless of the aggregate annual gross receipts. b. The gross receipts from rentals exceeding P10K per month per unit shall be subject to VAT IF the aggregate annual gross receipts from said units only (not including the gross receipts from units leased for not more than P10K) exceeds P1.5M. Otherwise, the gross receipts will be subject to the 3% tax imposed under Section 116 of the Tax Code. The term 'residential units' shall refer to apartments and houses & lots used for residential purposes, and buildings or parts or units thereof used solely as dwelling places (e.g., dormitories, rooms and bed spaces) except motels, motel rooms, hotels and hotel rooms. The term 'unit' shall mean an apartment unit in the case of apartments, house in the case of residential houses; per person in the case of dormitories, boarding houses and bed spaces; and per room in case of rooms for rent. 7. The exemption from VAT on the importation and local purchase of passenger and/or cargo vessels shall be limited to those of 150 tons and above, including engine and spare parts of said vessels; Provided, further, that the vessels to be imported shall comply with the age limit requirement, at the time of acquisition counted from the date of the vessel's original commissioning, as follows: (i) for passenger and/or cargo vessels, the age limit is 15 years old, (ii) for tankers, the age limit is 10 years old, and (iii) for high-speed passenger crafts, the age limit is 5 years old 8. Importation of fuel, goods and supplies by persons engaged in international shipping or air transport operations; Provided, that the said fuel, goods and supplies shall be used exclusively or shall pertain to the transport of goods and/or passenger from a port in the Philippines directly to a foreign port without stopping at any other port in the Philippines; Provided, further, that if any portion of such fuel, goods or supplies is used for purposes other than that mentioned in this paragraph, such portion of fuel, goods and supplies shall be subject to 10% VAT For purposes of the threshold of P1,5M, the husband and the wife shall be considered separate taxpayers. However, the aggregation rule for each taxpayer shall apply. For instance, if a professional, aside from the practice of his profession, also derives revenue from other lines of business which are otherwise subject to VAT, the same shall be combined for purposes of determining whether the threshold has been exceeded. The VAT-exempt sales shall NOT be included in determining the threshold. VI. a) DETERMINING THE VAT BASE

9.

Sale of Goods VAT Base = gross selling price or gross value in money of the goods sold or exchanged Gross selling price shall include:  charges for packaging, delivery & insurance  excise taxes if goods are subject to excise tax

For transactions deemed sale, the output tax shall be based on the market value of the goods deemed sold as of the time of the occurrence of the transactions. However, in case of retirement or cessation of business, the tax base shall be the acquisition cost or the current market price of the goods or properties, whichever is LOWER. In the case of a sale where the gross selling price is unreasonably lower than the fair market value, the actual market value shall be the tax base. b) Sale of Services VAT Base = Gross Receipts “Gross receipts” means the total amount of money or its equivalent representing the contract price, compensation, service fee, rental or royalty, including the amount charged for materials supplied with the services and deposits and advance payments actually or constructively received during the taxable quarter for the services performed or to be performed for another person, excluding VAT. occurs when the “Constructive receipt” money consideration or its equivalent is placed at the control of the person who rendered the service without restrictions by the payor. Examples: 1) deposit in banks which are made available to the seller of services without restrictions

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2) issuance by the debtor of a notice to offset any debt or obligation and acceptance thereof by the seller as payment for services rendered transfer of the amounts retained by the contractee to the acount of the contractor. Code, except automobiles, aircraft and yachts. [AMENDED] (b) Purchase of services on which a value-added tax has been actually paid. (2) The input tax on domestic purchase OR IMPORTATION of goods or properties shall be creditable: [AMENDED] (a) To the purchaser upon consummation of sale and on importation of goods or properties; and (b) To the importer upon payment of the value-added tax prior to the release of the goods from the custody of the Bureau of Customs. Provided, That the input tax on goods purchased or imported in a calendar month for use in trade or business for which deduction for depreciation is allowed under this Code, shall be spread evenly over the month of acquisition and the fifty-nine (59) succeeding months if the aggregate acquisition cost for such goods, excluding the VAT component thereof, exceeds One million pesos (P1,000,000): Provided, however, That if the estimated useful life of the capital good is less than five (5) years, as used for depreciation purposes, then the input VAT shall be spread over such a shorter period: Provided, finally, that in the case of purchase of services, lease or use of properties, the input tax shall be creditable to the purchaser, lessee or licensee upon payment of the compensation, rental, royalty or fee. [AMENDED] (3) A VAT-registered person who is also engaged in transactions not subject to the value-added tax shall be allowed tax credit as follows: (a) Total input tax which can be directly attributed to transactions subject to value-added tax; and (b) A ratable portion of any input tax which cannot be directly attributed to either activity. The term "input tax" means the value-added tax due from or paid by a VAT-registered person in the course of his trade or business on importation of goods or local purchase of goods or services, including lease or use of property, from a VAT-registered person. It shall also include the transitional input tax determined in accordance with Section 111 of this Code. The term "output tax" means the value-added tax due on the sale or lease of taxable goods or properties or services by any person registered or required to register under Section 236 of this Code. (B) Excess Output or Input Tax. - If at the end of any taxable quarter the output tax exceeds the input tax, the excess shall be paid by the VAT-registered person. If the input tax exceeds the output tax, the excess shall be carried over to the succeeding quarter or quarters: Provided, however, that any input tax attributable to the purchase of capital goods or to zero-rated sales by a VAT-registered person may at his option be refunded or credited against other internal revenue taxes, subject to the provisions of Section 112.7 [AMENDED]
7

3)

Reimbursable expenses may be EXCLUDED from the tax base IF the ff. conditions are complied with: 1) the expenses are supported by invoices/receipts in the name of the customer 2) the expenses are paid or will be paid to a 3rd party 3) there is no mark-up on the amounts billed, and 4) the reimbursable expenses should NOT be included in the Seller’s VAT Invoice or if so included, these should be clearly indicated in the VAT Invoice as reimbursable expenses. c) Importation of Goods VAT Base = total value (used by Bureau of Customs in determining tariff and customs duties) + customs duties + excise tax (if any) + other charges In case the valuation used by Bureau of Customs in computing customs duties is by volume or quantity, the LANDED COST* shall be the tax base. *LANDED COST = invoice amount + customs duties + freight + insurance + other charges + excise tax (if any) NOTE: The VAT on importation shall be paid by the importer PRIOR to the release of such goods from customs custody. (RR 16-2005) VII. INPUT TAXES

(amendments introduced by RA 9337 indicated, text in ALL CAPS added by RA 9337) SEC. 110. Tax Credits. – (A) Creditable Input Tax. (1) Any input tax evidenced by a VAT invoice or official receipt issued in accordance with Section 113 hereof on the following transactions shall be creditable against the output tax: (a) Purchase or importation of goods: (i) For sale; or (ii) For conversion into or intended to form part of a finished product for sale including packaging materials; or (iii) For use as supplies in the course of business; or (iv) For use as materials supplied in the sale of service; or (v) For use in trade or business for which deduction for depreciation or amortization is allowed under this

As amended by RA 9361. RA 9337, effective July 1, 2005, amended this subsection to read as follows: “If at the end of any taxable quarter the output tax exceeds the input tax, the excess shall be paid by the VAT-registered person. If the input tax exceeds the output tax, the excess shall be carried over to the succeeding quarter or quarters: Provided, That the input

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(C) Determination of Creditable Input Tax. - The sum of the excess input tax carried over from the preceding month or quarter and the input tax creditable to a VAT-registered person during the taxable month or quarter shall be reduced by the amount of claim for refund or tax credit for valueadded tax and other adjustments, such as purchase returns or allowances and input tax attributable to exempt sale. The claim for tax credit referred to in the foregoing paragraph shall include not only those filed with the Bureau of Internal Revenue but also those filed with other government agencies, such as the Board of Investments the Bureau of Customs. SEC. 111. Transitional/Presumptive Input Tax Credits. (A) Transitional Input Tax Credits. - A person who becomes liable to value-added tax or any person who elects to be a VAT-registered person shall, subject to the filing of an inventory according to rules and regulations prescribed by the Secretary of finance, upon recommendation of the Commissioner, be allowed input tax on his beginning inventory of goods, materials and supplies equivalent for eight percent (8%) TWO PERCENT (2%) of the value of such inventory or the actual value-added tax paid on such goods, materials and supplies, whichever is higher, which shall be creditable against the output tax. [AMENDED] (B) Presumptive Input Tax Credits. (1) Persons or firms engaged in the processing of sardines, mackerel and milk, and in manufacturing refined sugar and cooking oil AND PACKED NOODLE BASED INSTANT MEALS, shall be allowed a presumptive input tax, creditable against the output tax, equivalent to one and one-half percent (1 1/2%) FOUR PERCENT (4%) of the gross value in money of their purchases of primary agricultural products which are used as inputs to their production. [AMENDED] As used in this Subsection, the term "processing" shall mean pasteurization, canning and activities which through physical or chemical process alter the exterior texture or form or inner substance of a product in such manner as to prepare it for special use to which it could not have been put in its original form or condition. (2) Public works contractors shall be allowed a presumptive input tax equivalent to one and one-half percent (1 1/2%) of the contract price with respect to government contracts only in lieu of actual input taxes therefrom. [DELETED] SEC. 112. Refunds or Tax Credits of Input Tax. (A) Zero-Rated or Effectively Zero-Rated Sales. any VAT-registered person, whose sales are zerorated or effectively zero-rated may, within two (2) years after the close of the taxable quarter when the sales were made, apply for the issuance of a tax credit certificate or refund of creditable input tax due or paid attributable to such sales, except transitional input tax, to the extent that such input tax has not been applied against output tax: Provided, however, That in the case of zero-rated sales under Section 106(A)(2)(a)(1), (2) and (B) and Section 108 (B)(1) and (2), the acceptable foreign currency exchange proceeds thereof had been duly accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP): Provided, further, That where the taxpayer is engaged in zero-rated or effectively zero-rated sale and also in taxable or exempt sale of goods of properties or services, and the amount of creditable input tax due or paid cannot be directly and entirely attributed to any one of the transactions, it shall be allocated proportionately on the basis of the volume of sales. PROVIDED, FINALLY, THAT FOR A PERSON MAKING SALES THAT ARE ZERORATED UNDER SECTION 108 (B)(6), THE INPUT TAXES SHALL BE ALLOCATED RATABLY BETWEEN HIS ZERO-RATED AND NON-ZERO-RATED SALES. [AMENDED] (B) Capital Goods. - A VAT-registered person may apply for the issuance of a tax credit certificate or refund of input taxes paid on capital goods imported or locally purchased, to the extent that such input taxes have not been applied against output taxes. The application may be made only within two (2) years after the close of the taxable quarter when the importation or purchase was made. [DELETED] (C) Cancellation of VAT Registration. - A person whose registration has been cancelled due to retirement from or cessation of business, or due to changes in or cessation of status under Section 106(C) of this Code may, within two (2) years from the date of cancellation, apply for the issuance of a tax credit certificate for any unused input tax which may be used in payment of his other internal revenue taxes. (D) Period Within Which Refund or Tax Credit of Input Taxes Shall be Made. - In proper cases, the Commissioner shall grant a refund or issue the tax credit certificate for creditable input taxes within one hundred twenty (120) days from the date of submission of complete documents in support of the application filed in accordance with Subsections (A) and (B) hereof. In case of full or partial denial of the claim for tax refund or tax credit, or the failure on the part of the Commissioner to act on the application within the period prescribed above, the taxpayer affected may, within thirty (30) days from the receipt of the decision denying the claim or after the expiration of the one hundred twenty day-period, appeal the decision or the unacted claim with the Court of Tax Appeals. (E) Manner of Giving Refund. - Refunds shall be made upon warrants drawn by the Commissioner

tax inclusive of input VAT carried over from the previous quarter that may be credited in every quarter shall not exceed seventy percent (70%) of the output VAT: Provided, however, That any input tax attributable to zero-rated sales by a VATregistered person may at his option be refunded or credited against other internal revenue taxes, subject to the provisions of Section 112.” HOWEVER, this was again amended by Congress through RA 9361 passed on Nov. 21, 2006. RR 22007, dated January 11, 2007, provides that this regulation enforcing the amendment introduced by RA 9361 shall take effect immediately and shall apply to the quarterly VAT returns to be filed after the effectivity of RA 9361 (which is 15 days after its publication) except VAT returns covering taxable quarters ending earlier than December 2006.

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or by his duly authorized representative without the necessity of being countersigned by the Chairman, Commission on audit, the provisions of the Administrative Code of 1987 to the contrary notwithstanding: Provided, That refunds under this paragraph shall be subject to post audit by the Commission on Audit. Notes from RR 16-2005: Input tax means the VAT due on or paid by a VATregistered person on importation of goods or local purchases of goods, properties, or services, including lease or use of properties, in the course of his trade or business. It shall also include the transitional input tax and the presumptive input tax determined in accordance with Sec. 111 of the Tax Code. It includes input taxes which can be directly attributed to transactions subject to the VAT plus a ratable portion of any input tax which cannot be directly attributed to either the taxable or exempt activity. Input tax must evidenced by a VAT invoice or official receipt issued by a VAT-registered person in accordance with Secs. 113 and 237 of the Tax. Claim for Input Tax on Depreciable Goods. — Where a VAT-registered person purchases or imports capital goods, which are depreciable assets for income tax purposes, the aggregate acquisition cost of which (exclusive of VAT) IN A CALENDAR MONTH EXCEEDS P1M, regardless of the acquisition cost of each capital good, shall be claimed as credit against output tax in the following manner: (a) If the estimated useful life of a capital good is 5 YEARS OR MORE — The input tax shall be spread evenly over a period of 60 months and the claim for input tax credit will commence in the calendar month when the capital good is acquired. The total input taxes on purchases or importations of this type of capital goods shall be divided by 60 and the quotient will be the amount to be claimed monthly. (b) If the estimated useful life of a capital good is LESS THAN 5 YEARS — The input tax shall be spread evenly on a monthly basis by dividing the input tax by the actual number of months comprising the estimated useful life of the capital good. The claim for input tax credit shall commence in the calendar month that the capital goods were acquired. Where the aggregate acquisition cost (exclusive of VAT) of the existing or finished depreciable capital goods purchased or imported DURING ANY CALENDAR MONTH DOES NOT EXCEED P1M, the total input taxes will be allowable as credit against output tax in the month of acquisition. The aggregate acquisition cost of a depreciable asset in any calendar month refers to the total price agreed upon for one or more assets acquired and not on the payments actually made during the calendar month. Thus, an asset acquired in installment for an acquisition cost of more than P1M will be subject to the amortization of input tax despite the fact that the monthly payments/installments may not exceed P1M. Illustration: LBH Corporation sold capital goods on installment on October 1, 2005. It is agreed that the selling price, including the VAT, shall be payable in five (5) equal monthly installments. The data pertinent to the sold assets are as follows: Selling Price (exclusive of VAT) P5,000,000.00 Passed-on VAT (at 12%) 600,000.00 The input tax of P 600,000.00 on the bought capital goods worth P5M shall be spread evenly over a period of 60 months starting the month of purchase (because the total selling price exceeded P1M, even if the actual payment in the year did not exceed P1M) if the estimated useful life is 5 years or more. Thus, the input tax that can be credited per month is P8.333.33 (P500K/60 months). If the estimated useful life is 4 years, then the input tax creditable is P10,416.67 (P500K/48 months). If the depreciable capital good is sold/transferred within a period of 5 years or prior to the exhaustion of the amortizable input tax thereon, the entire unamortized input tax on the capital goods sold/transferred can be claimed as input tax credit during the month/quarter when the sale or transfer was made. However, for example, if the capital good was bought at the total selling price of P1M (exclusive of VAT) and there was no other capital good purchased in the month of October, the entire input tax of P120K (12% of P1M) can be credited in the month of October. Apportionment of Input Tax on Mixed Transactions. — A VAT-registered person who is also engaged in transactions not subject to VAT shall be allowed to recognize input tax credit on transactions subject to VAT as follows: 1. All the input taxes that can be directly attributed to transactions subject to VAT may be recognized for input tax credit; Provided, that input taxes that can be directly attributable to VAT taxable sales of goods and services to the Government or any of its political subdivisions, instrumentalities or agencies, including government-owned or controlled corporations (GOCCs) shall not be credited against output taxes arising from sales to non-Government entities; and 2. If any input tax cannot be directly attributed to either a VAT taxable or VAT-exempt transaction, the input tax shall be pro-rated to the VAT taxable and VAT-exempt transactions and only the ratable portion pertaining to transactions subject to VAT may be recognized for input tax credit. Illustration: ERA Corporation has the following sales during the month: Sale to private entities subject to 12% P100,000.00 Sale to private entities subject to 0% 100,000.00 Sale of exempt goods 100,000.00 Sale to gov't. subjected to 5% final VAT Withholding 100,000.00 Total sales for the month ————— P400,000.00 =========

The following were its input taxes (or passed on by its VAT suppliers): Input tax on taxable goods (12%) P5,000.00 Input tax on zero-rated sales 3,000.00

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Input tax on sale of exempt goods 2,000.00 Input tax on sale to government 4,000.00 Input tax on depreciable capital good not attributable to any specific activity (monthly amortization for 60 months) P20,000.00 A. The creditable input tax for the month shall be computed as follows: Input tax on sale subject to 12% P5,000.00 Input tax on zero-rated sale 3,000.00 Ratable portion of the input tax not directly attributable to any activity, computed below Taxable sales (0% and 12%) ——————————— Total Sales P200,000.00 ————— 400,000.00 X Amount of input tax not directly attributable Determination of Input Tax Creditable during a Taxable Month or Quarter. — xxx All creditable input taxes8 (as illustrated in the previous example to be P18K) during the month or quarter any amount of input tax carried-over from the preceding month or quarter Less: amount of claim for VAT refund or tax credit certificate (whether filed with the BIR, the Department of Finance, the Board of Investments, BOC) other adjustments (purchases returns or allowances) xxx

(xxx)

X

P20,000.00 = P10,000.00

(xxx) xxx

Total creditable input tax for the month (P5,000+ P3,000 +P10,000) P18,000.00 B. The input tax attributable to sales to government for the month shall be computed as follows: Input tax on sale to gov't. P4,000.00 Ratable portion of the input tax not directly attributable to any activity, computed as follows: Taxable sales to government ——————————— Total Sales P100,000.00 ————— 400,000.00 X P20,000.00 X Amount of input tax not directly attributable = P5,000.00

VAT Payable (Excess Output)t or Excess Input Tax. (a) If at the end of any taxable quarter the output tax exceeds the input tax, the excess shall be paid by the VAT-registered person. Illustration: For a given taxable quarter ABC Corp. has output VAT of 100 and input VAT of 80. Since output tax exceeds the input tax for such taxable quarter, all of the input tax may be utilized to offset against the output tax. Thus, the net VAT payable is 100 minus 80 = 20. (b) If the input tax inclusive of input tax carried over from the previous quarter EXCEEDS the output tax, the EXCESS input tax shall be carried over to the succeeding quarter or quarters; Provided, however, that any input tax attributable to zero-rated sales by a VAT-registered person may at his option be refunded or applied for a tax credit certificate which may be used in the payment of internal revenue taxes, subject to the limitations as may be provided for by law, as well as, other implementing rules. Illustration: For a given taxable quarter XYZ Corp. has output VAT of 100 and input VAT of 110. 100-110 = -10. Since input tax exceeds the output tax for such taxable quarter, the unutilized input tax amounting to 10 is carried over to the succeeding month. Transitional/Presumptive Input Tax Credits. (a) Transitional Input Tax Credits on Beginning Inventories Taxpayers who became VAT-registered persons upon exceeding the minimum turnover of P1.5M in any 12month period, or who voluntarily register even if their turnover does not exceed P1.5M (except franchise grantees of radio and television broadcasting whose threshold is P10M) shall be entitled to a transitional input tax on the inventory on hand. The transitional input tax shall be 2% of the value of the beginning inventory on hand OR actual VAT paid on such, goods, materials and supplies, whichever is HIGHER, which amount shall be creditable against the output tax of

Total input tax attributable to sales P9,000.00 to government (P4,000 + P5,000) - These amounts are not available for input tax credit but may be recognized as cost or expense. That is because as far as sales to government are concerned, there is a VAT that is finally withheld (at 5%). C. The input tax attributable to VAT-exempt sales for the month shall be computed as follows: Input tax on VAT-exempt sales P2,000.00 Ratable portion of the input tax not directly attributable to any activity, computed below: VAT-exempt sales ——————— Total Sales P100,000.00 X ————— 400,000.00 X Amount of input tax not directly attributable = P5,000.00

P20,000.00

Total input tax attributable to P7,000.00 VAT-exempt sales (P2,000+ P5,000) - These amounts are not available for input tax credit but may be recognized as cost or expense.

8

Remember, this does NOT include input tax attributable to exempt sales, and input tax attributable to sales subject to final withholding VAT

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VAT-registered person. The value allowed for income tax purposes on inventories shall be the basis for the computation of the 2% transitional input tax, excluding goods that are exempt from VAT under Sec. 109 of the Tax Code. (b) Presumptive Input Tax Credits Persons or firms engaged in the processing of sardines, mackerel, and milk, and in manufacturing refined sugar, cooking oil and packed noodle-based instant meals, shall be allowed a presumptive input tax, creditable against the output tax, equivalent to 4% of the gross value in money of their purchases of primary agricultural products which are used as inputs to their production. Claims for Refund/Tax Credit Certificate of Input Tax. — (a) Zero-rated and Effectively Zero-rated Sales of Goods, Properties or Services A VAT-registered person whose sales of goods, properties or services are zero-rated or effectively zero-rated may apply for the issuance of a tax credit certificate/refund of input tax attributable to such sales. The input tax that may be subject of the claim shall EXCLUDE the portion of input tax that has been applied against the output tax. The application should be filed within two (2) years after the close of the taxable quarter when such sales were made. Where the taxpayer is engaged in both zero-rated or effectively zero-rated sales and in taxable (including sales subject to final withholding VAT) or exempt sales of goods, properties or services, and the amount of creditable input tax due or paid cannot be directly and entirely attributed to any one of the transactions, only the proportionate share of input taxes allocated to zero-rated or effectively zero-rated sales can be claimed for refund or issuance of a tax credit certificate. (b) Cancellation of VAT registration A VAT-registered person whose registration has been cancelled due to retirement from or cessation of business, or due to changes in or cessation of status under Sec. 106 (C) of the Tax Code may, within 2 years from the date of cancellation, apply for the issuance of a tax credit certificate for any unused input tax which he may use in payment of his other internal revenue taxes; Provided, however, that he shall be entitled to a refund if he has no internal revenue tax liabilities against which the tax credit certificate may be utilized. (c) Where to file the claim for refund/tax credit certificate Claims for refunds/tax credit certificate shall be filed with the appropriate BIR office (Large Taxpayers Service (LTS) or Revenue District Office (RDO)) having jurisdiction over the principal place of business of the taxpayer; Provided, however, that direct exporters may also file their claim for tax credit certificate with the One Stop Shop Center of the Department of Finance; Provided, finally, that the filing of the claim with one office shall preclude the filing of the same claim with another office. (d) Period within which refund or tax credit certificate/refund of input taxes shall be made In proper cases, the Commissioner of Internal Revenue shall grant a tax credit certificate/refund for creditable input taxes within one hundred twenty (120) days from the date of submission of complete documents in support of the application filed in accordance with subparagraph (a) above. In case of full or partial denial of the claim for tax credit certificate/refund as decided by the Commissioner of Internal Revenue, the taxpayer may appeal to the Court of Tax Appeals (CTA) within thirty (30) days from the receipt of said denial, otherwise the decision shall become final. However, if no action on the claim for tax credit certificate/refund has been taken by the Commissioner of Internal Revenue after the one hundred twenty (120) day period from the date of submission of the application with complete documents, the taxpayer may appeal to the CTA within 30 days from the lapse of the 120-day period. VIII. SUBSTANTIATION REQUIREMENTS

RR 16-2005: Substantiation of Input Tax Credits (a) Input taxes must be substantiated and supported by the following documents, and must be reported in the information returns required to be submitted to the Bureau: (1) For the importation of goods — import entry or other equivalent document showing actual payment of VAT on the imported goods. (2) For the domestic purchase of goods and properties — invoice showing the information required under Secs. 113 and 237 of the Tax Code. (3) For the purchase of real property — public instrument i.e., deed of absolute sale, deed of conditional sale, contract/agreement to sell, etc., together with VAT invoice issued by the seller. (4) For the purchase of services — official receipt showing the information required under Secs. 113 and 237 of the Tax Code. A cash register machine tape issued to a registered buyer shall constitute valid proof of substantiation of tax credit only if it shows the information required under Secs. 113 and 237 of the Tax Code. (b) Transitional input tax shall be supported by an inventory of goods as shown in a detailed list to be submitted to the BIR. (c) Input tax on "deemed sale" transactions shall be substantiated with the invoice required (please refer to the table on page 46). (d) Input tax from payments made to non-residents (such as for services, rentals and royalties) shall be supported by a copy of the Monthly Remittance Return of Value Added Tax Withheld (BIR Form 1600) filed by the resident payor in behalf of the non-resident evidencing remittance of VAT due which was withheld by the payor. (e) Advance VAT on sugar shall be supported by the Payment Order showing payment of the advance VAT. IX. INVOICING REQUIREMENTS

SEC. 113. Invoicing and Accounting Requirements for VAT-Registered Persons. (A) Invoicing Requirements. - A VAT-registered person shall issue: (1) A VAT invoice for every sale, barter or exchange of goods or properties; and (2) A VAT official receipt for every lease of goods or properties, and for every sale, barter or exchange of services.

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(B) Information Contained in the VAT Invoice or VAT Official Receipt. - The following information shall be indicated in the VAT invoice or VAT official receipt: (1) A statement that the seller is a VAT-registered person, followed by his taxpayer's identification number (TIN); (2) The total amount which the purchaser pays or is obligated to pay to the seller with the indication that such amount includes the value-added tax: Provided, That: (a) The amount of the tax shall be shown as a separate item in the invoice or receipt; (b) If the sale is exempt from value-added tax, the term "VAT-exempt sale" shall be written or printed prominently on the invoice or receipt; (c) If the sale is subject to zero percent (0%) valueadded tax, the term "zero-rated sale" shall be written or printed prominently on the invoice or receipt; (d) If the sale involves goods, properties or services some of which are subject to and some of which are VAT zero-rated or VAT-exempt, the invoice or receipt shall clearly indicate the breakdown of the sale price between its taxable, exempt and zero-rated components, and the calculation of the value-added tax on each portion of the sale shall be shown on the invoice or receipt: "Provided, That the seller may issue separate invoices or receipts for the taxable, exempt, and zero-rated components of the sale. (3) The date of transaction, quantity, unit cost and description of the goods or properties or nature of the service; and (4) In the case of sales in the amount of one thousand pesos (P1,000) or more where the sale or transfer is made to a VAT-registered person, the name, business style, if any, address and taxpayer identification number (TIN) of the purchaser, customer or client. …xxx…. Notes from RR 16-2005: Only VAT-registered persons are required to print their TIN followed by the word "VAT" in their invoice or official receipts. Said documents shall be considered as a "VAT Invoice" or VAT official receipt. All purchases covered by invoices/receipts other than VAT Invoice/VAT Official Receipt shall not give rise to any input tax. VAT invoice/official receipt shall be prepared at least in duplicate, the original to be given to the buyer and the duplicate to be retained by the seller as part of his accounting records. actual sale is not made within 60 days Retirement from or cessation of business with respect to all goods on hand the transaction, which should include all the info prescribed in Sec. 113(B) An inventory shall be prepared and submitted to the RDO who has jurisdiction over the taxpayer’s principal place of business not later than 30 days after retirement or cessation from the business. An invoice shall be prepared for the entire inventory, which shall be the basis of the entry into the subsidiary sales journal. The invoice need not enumerate the specific items appearing in the inventory regarding the description of the goods. If the business is to be continued by the new owners or successors, the entire amount of output tax on the amount deemed sold shall be allowed as input taxes.

X.

ACCOUNTING REQUIREMENTS

Invoicing and Accounting SEC. 113. Requirements for VAT-Registered Persons. …xxx… (C) Accounting Rquirements. - Notwithstanding the provisions of Section 233, all persons subject to the value-added tax under Sections 106 and 108 shall, in addition to the regular accounting records required, maintain a subsidiary sales journal and subsidiary purchase journal on which the daily sales and purchases are recorded. The subsidiary journals shall contain such information as may be required by the Secretary of Finance. ...xxx…. RR 16-2005: A subsidiary record in ledger form shall be maintained for the acquisition, purchase or importation of depreciable assets or capital goods which shall contain, among others, information on the total input tax thereon as well as the monthly input tax claimed in VAT declaration or return.

Invoicing and Recording Deemed Sale Transactions. Transaction Invoicing Requirement Transfer, use or Memorandum entry in consumption not in the the subsidiary sales course of business of journal to record goods or properties withdrawal of goods for originally intended for personal use sale or for use in the course of business Distribution or transfer to Invoice, at the time of shareholders/investors or the transaction, which creditors should include all the info prescribed in Sec. 113(B) Consignment of goods if Invoice, at the time of

XI.

CONSEQUENCES OF ISSUING ERRONEOUS VAT INVOICE OR VAT OFFICIAL RECEIPT

Added by RA 9337: SEC. 113. Invoicing and Accounting Requirements for VAT-Registered Persons. …xxx… (D) Consequence of Issuing Erroneous Vat Invoice or Vat Official Receipt. (1) If a person who is not a VAT-registered person issues an invoice or receipt

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showing his Taxpayer Identification Number (TIN), followed by the word "VAT": (a) The issuer shall, in addition to any liability to other percentage taxes, be liable to: (i) The tax imposed in Section 106 or 108 without the benefit of any input tax credit; and (ii) A 50% surcharge under Section 248 (B) of this code; (b) The VAT shall, if the other requisite information required under Subsection (B) hereof is shown on the invoice or receipt, be recognized as an input tax credit to the purchaser under Section 110 of this Code. (2) If a VAT-registered person issues a VAT invoice or VAT official receipt for a VATexempt transaction, but fails to display prominently on the invoice or receipt the term "VAT-exempt Sale", the issuer shall be liable to account for the tax imposed in Section 106 or 108 as if Section 109 did not apply. (E) Transitional Period. - Notwithstanding Subsection (B) hereof, taxpayers may continue to issue VAT invoices and VAT official receipts for the period July 1, 2005 to December 31, 2005, in accordance with Bureau of Internal Revenue administrative practices that existed as of December 31, 2004. Under sub-par(2), clarification: If a VAT-registered person issues a VAT invoice or VAT official receipt for a VAT-exempt transaction, but fails to display prominently on the invoice or receipt the words "VATexempt sale", the transaction shall become taxable and the issuer shall be liable to pay VAT thereon. The purchaser shall be entitled to claim an input tax credit on his purchase. (RR 16-2005) XIII. REGISTRATION REQUIREMENTS SEC. 236. Registration Requirements … xxx…. (F) Cancellation of Registration. (1) General Rule. - The registration of any person who ceases to be liable to a tax type shall be cancelled upon filing with the Revenue District Office where he is registered, an application for registration information update in a form prescribed therefor; (2) Cancellation of Value-Added Tax Registration. - A VAT-registered person may cancel his registration for VAT if: (a) He makes written application and can demonstrate to the Commissioner's satisfaction that his gross sales or receipts for the following twelve (12) months, other than those that are exempt under Section 109 (A) TO (U), will not exceed One million five hundred thousand pesos (P1,500,000); or (b) He has ceased to carry on his trade or business, and does not expect to recommence any trade or business within the next twelve (12) months. The cancellation of registration will be effective from the first day of the following month. (G) Persons Required to Register for Value-added Tax. (1) Any person who, in the course of trade or business, sells, barters or exchanges goods or properties, or engages in the sale or exchange of services, shall be liable to register for Valueadded tax if: (a) His gross sales or receipts for the past twelve (12) months, other than those that are exempt under section 109 (a) to (u), have exceeded One million five hundred thousand pesos (P1,500,000); or (b) There are reasonable grounds to believe that his gross sales or receipts for the next twelve (12) months, other than those that are exempt under Section 109 (A) to (U), will exceed one million five hundred thousand pesos (P1,500,000). (2) Every person who becomes liable to be registered under paragraph (1) of this Subsection shall register with the Revenue District Office which has jurisdiction over the head office or branch of that person, and shall pay the annual registration fee prescribed in Subsection (B) hereof. If he fails to register, he shall be liable to pay the tax under Title IV as if he were a VATregistered person, but without the benefit of input tax credits for the period in which he was not properly registered. (H) Optional Registration for Value-added Tax of Exempt Person. – (1) Any person who is not required to register for Value-added tax under Subsection (G) hereof may elect to register for Value-added tax by registering with the Revenue District Office that has jurisdiction over the head office of that person, and paying the annual registration fee in Subsection (B) hereof. (2) Any person who elects to register under this Subsection shall not be entitled to cancel his registration under Subsection (F)(2) for the next three (3) years. For purposes of Title IV of this Code, any person who has registered value-added tax as a tax type in accordance with the provisions of Subsection (C) hereof shall be referred to as a "VAT-registered person" who shall be assigned only one Taxpayer Identification Number (TIN). … xxx…. (amended by RA 9337) RR 16-2005: Annual registration fee = P500.00 Once registered as a VAT person, the taxpayer shall be liable to output tax and be entitled to input tax credit beginning on the first day of the month following registration. Non-VAT or VAT-exempt persons are also required to register as NON-VAT persons and pay the annual registration fee of P500.00 for every separate or distinct establishment or place of business before the start of such business and every year thereafter on or before the 31st day of January. Individuals engaged in business where the gross sales or receipts do NOT exceed P100,000.00 during any 12-month period, and cooperatives other than electric cooperatives, are required to register but will not be made to pay the P500.00 fee.

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Franchise grantees of radio and television broadcasting whose gross annual receipt for the preceding calendar year exceeded P10M shall register within 30 days from the end of the calendar year. Franchise grantees of the same whose annual gross receipts do not exceed P10M derived from the business covered by the law granting the franchise may opt for VAT registration. This option, once exercised, shall be irrevocable (as opposed to VATexempt persons, in general, who choose to be VATregistered, in which case VAT registration cannot be cancelled for 3 years only). Any person who is VAT-registered but enters into transactions which are exempt from VAT (mixed transactions) may opt that the VAT apply to his transactions which would have been exempt. Cancellation of VAT registration: A VAT-registered person may cancel his registration for VAT as provided for in Sec. 236 (F) (2), and also in the following instances: 1. A change of ownership, in the case of a single proprietorship; 2. Dissolution of a partnership or corporation; 3. Merger or consolidation with respect to the dissolved corporation(s); 4. A person who has registered prior to planned business commencement, but failed to actually start his business Some instances where taxpayer will update his registration by submitting a duly accomplished Registration Update Form: 1. A person's business has become exempt in accordance with Sec. 109 2. A change in the nature of the business itself from sale of taxable goods and/or services to exempt sales and/or services; 3. A person whose transactions are exempt from VAT who voluntarily registered under VAT system, who after the lapse of three years after his registration, applies for cancellation of his registration as such; and 4. A VAT-registered person whose gross sales or receipts for three consecutive years did not exceed P1,500,000.00 beginning July 1, 2005, which amount shall be adjusted to its present value every three years using the Consumer Price Index, as published by the NSO. Upon updating his registration, the taxpayer shall become liable to the percentage tax imposed in Sec. 116 of the Tax Code. A short period return for the remaining period that he was VAT-registered shall be filed within twenty five (25) days from the date of cancellation of his registration. XIV. FILING OF RETURNS & PAYMENT OF VAT SEC. 114. Return and Payment of Value-Added Tax. (A) In General. - Every person liable to pay the value-added tax imposed under this Title shall file a quarterly return of the amount of his gross sales or receipts within twenty-five (25) days following the close of each taxable quarter prescribed for each taxpayer: Provided, however, That VATregistered persons shall pay the value-added tax on a monthly basis. Any person, whose registration has been cancelled in accordance with Section 236, shall file a return and pay the tax due thereon within twenty-five (25) days from the date of cancellation of registration: Provided, That only one consolidated return shall be filed by the taxpayer for his principal place of business or head office and all branches. (B) Where to File the Return and Pay the Tax. Except as the Commissioner otherwise permits, the return shall be filed with and the tax paid to an authorized agent bank, Revenue Collection Officer or duly authorized city or municipal Treasurer in the Philippines located within the revenue district where the taxpayer is registered or required to register. (C) Withholding of Value-Added Tax. - The Government or any of its political subdivisions, instrumentalities or agencies, including government-owned or -controlled corporations (GOCCs) shall, before making payment on account of each purchase of goods and services which are subject to the value-added tax imposed in Sections 106 and 108 of this Code, deduct and withhold a final value-added tax at the rate of five percent (5%) of the gross payment thereof: Provided, That the payment for lease or use of properties or property rights to nonresident owners shall be subject to ten percent (10%) withholding tax at the time of payment. For purposes of this Section, the payor or person in control of the payment shall be considered as the withholding agent. The value-added tax withheld under this Section shall be remitted within ten (10) days following the end of the month the withholding was made. (as amended by RA 9337) RR 16-2005: Filing of Return. — Every person liable to pay VAT shall file a quarterly return of the amount of his quarterly gross sales or receipts within twenty five (25) days following the close of taxable quarter using the latest version of Quarterly VAT Return. The term "taxable quarter" shall mean the quarter that is synchronized to the income tax quarter of the taxpayer (i.e., the calendar quarter or fiscal quarter). Amounts reflected in the monthly VAT declarations for the first 2 months of the quarter shall still be included in the quarterly VAT return which reflects the cumulative figures for the taxable quarter. Payments in the monthly VAT declarations shall, however, be credited in the quarterly VAT return to arrive at the net VAT payable or excess input tax/over-payment as of the end of a quarter. Example. — Suppose the accounting period adopted by the taxpayer is fiscal year ending October. The taxpayer has to file monthly VAT declarations for the months: November, December February, March May, June August, September

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on or before the 20th day of the month following the close of the taxable month His quarterly VAT returns corresponding to the quarters ending January, April, July, and October Shall be filed and taxes due thereon be paid, after crediting payments reflected in the Monthly VAT declarations, on or before February 25, May 25, August 25, and November 25, 2003, respectively. The monthly VAT Declarations (BIR Form 2550M) of taxpayers whether large or non-large shall be filed and the taxes paid not later than the 20th day following the end of each month. The return for withholding of VAT shall be filed and the withholding VAT paid on or before the tenth (10th) day of the following month. Payment of VAT – upon filing of VAT return Advance Payment — The following are subject to the advance payment of VAT: 1. Sale of Refined Sugar 2. Sale of Flour Short Period Return Any person who retires from business with due notice to the BIR office where the taxpayer (head office) is registered or whose VAT registration has been cancelled shall file a final quarterly return and pay the tax due thereon within twenty five (25) days from the end of the month when the business ceases to operate or when VAT registration has been officially cancelled; Provided, however, that subsequent monthly declarations/quarterly returns are still required to be filed if the results of the winding up of the affairs/business of the taxpayer reveal taxable transactions. Where to File and Pay 1. The monthly VAT declaration and quarterly return shall be filed with, and VAT due thereon paid to, an AAB under the jurisdiction of the Revenue District/BIR Office where the taxpayer (head office of the business establishment) is required to be registered. 2. In cases where there are no duly accredited agent banks within the municipality or city, the monthly VAT declaration and quarterly VAT return, shall be filed with and any amount due shall be paid to the RDO, Collection Agent or duly authorized Treasurer of the Municipality/City where such taxpayer (head office of the business establishment) is required to be registered. 3. The quarterly VAT return and the monthly VAT declaration, where no payment is involved, shall be filed with the RDO/LTDO/Large Taxpayers Assistance Division (LTAD), Collection Agent, duly authorized Municipal/City Treasurer of Municipality/City where the taxpayer (head office of the business establishment) is registered or required to be registered. Only one consolidated quarterly VAT return or monthly VAT declaration covering the results of operation of the head office as well as the branches for all lines of business subject to VAT shall be filed by the taxpayer, for every return period, with the BIR office where said taxpayer is required to be registered. Persons Required to Submit Summary Lists of Sales/Purchases. — (1) Persons Required to Submit Summary Lists of Sales. — All persons liable for VAT such as manufacturers, wholesalers, service-providers, among others, with quarterly total sales/receipts (net of VAT) exceeding Two Million Five Hundred Thousand Pesos (P2,500,000.00). (2) Persons Required to Submit Summary Lists of Purchases. — All persons liable for VAT such as manufacturers, service-providers, among others, with quarterly total purchases (net of VAT) exceeding One Million Pesos (P 1,000,000.00). When and Where to File the Summary Lists of Sales/Purchases. shall be submitted in diskette form to the RDO or LTDO or LTAD having jurisdiction over the taxpayer, on or before the twenty-fifth (25th) day of the month following the close of the taxable quarter (VAT quarter. However, taxpayers under the jurisdiction of the LTS, and those enrolled under the EFPS, shall, through electronic filing facility submit their Summary List of Sales/Purchases to the RDO/LTDO/LTAD, on or before the thirtieth (30th) day of the month following the close of the taxable quarter. Information that Must be Contained in the Quarterly Summary List of Sales to be Submitted: the monthly total sales generated from regular buyers/customers, regardless of the amount of sale per buyer/customer, as well as from casual buyers/customers with individual sales amounting to P100,000.00 or more. For this purpose, the term "regular buyers/customers" shall refer to buyers/customers who are engaged in business or exercise of profession AND those with whom the taxpayer has transacted at least 6 transactions regardless of amount per transaction either in the previous year or current year. The term "casual buyers/customers", on the other hand, shall refer to buyers/customers who are engaged in business or exercise of profession BUT did not qualify as regular buyers/customers as defined in the preceding statement. The Quarterly Summary List of Sales to Regular Buyers/Customers and Casual Buyers/Customers and Output Tax shall reflect the following: (1) BIR-registered name of the buyer who is engaged in business/exercise of profession; (2) TIN of the buyer (Only for sales that are subject to VAT); (3) Exempt Sales; (4) Zero-rated Sales; (5) Sales Subject to VAT (exclusive of VAT); (6) Sales Subject to Final VAT Withheld; and (7) Output Tax (VAT on sales subject to 10%). (The total amount of sales shall be system-generated) Information that must be Contained in the Quarterly Summary List of Purchases (1) The Quarterly Summary List of Local Purchases and Input Tax a. BIR-registered name of the seller/supplier/service-provider; b. Address of seller/supplier/service-provider; c. TIN of the seller; d. Exempt Purchases;

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e. Zero-rated Purchases; f. (i) Purchases Subject to VAT (exclusive of VAT) — on services; (ii) Purchases Subject to VAT (exclusive of VAT) — on capital goods; and (iii) Purchases Subject to VAT (exclusive of VAT) — on goods other than capital goods (iv) Purchases Subject to Final VAT Withheld g. Creditable Input Tax; and (to be computed not on a per supplier basis but on a per month basis) h. Non-Creditable Input Tax (to be computed not on a per supplier basis but on a per month basis) (The total amount of purchases shall be systemgenerated) (2) The Quarterly Summary List of Importations. — (a) The import entry declaration number; (b) Assessment/Release Date; (c) The date of importation; (d) The name of the seller; (e) Country of Origin; (f) Dutiable Value; (g) All Charges Before Release From Customs' Custody; (h) Landed cost: (i) Exempt; (ii) Taxable (Subject to VAT); (i) VAT paid; (j) Official Receipt (OR) Number of the OR evidencing payment of the tax; and (k) Date of VAT payment For the claimed input tax arising from services rendered in the Philippines by nonresidents, no summary list is required to be submitted. Once any of the taxable quarters total sales and/or purchases exceed the threshold amounts as provided above, VAT taxpayer shall be required to submit the summary lists for the next 3 succeeding quarters, regardless of whether or not such succeeding taxable quarter sales and/or purchases exceed the herein set threshold amounts of P2,500,000.00 for sales and P1,000,000.00 for purchases. Penalties in case of failure to submit quarterly summary list of sales and purchases. A person who fails to file, keep or supply a statement, list, or information required herein on the date prescribed therefor shall pay, upon notice and demand by the Commissioner of Internal Revenue, an administrative penalty of P1,000.00 for each such failure, unless it is shown that such failure is due to reasonable cause and not to willful neglect. For this purpose, the failure to supply the required information for each buyer or seller of goods and services shall constitute a single act or omission punishable hereof. However, the aggregate amount to be imposed for all such failures during a taxable year shall not exceed P25,000.00. In addition to the imposition of the administrative penalty, willful failure by such person to keep any record and to supply the correct and accurate information at the time or times as required herein, shall be subject to the criminal penalty under the relevant provisions of the Tax Code (e.g., Sec. 255, Sec. 256, etc.,), upon conviction of the offender. The imposition of any of the penalties under the Tax Code and the compromise of the criminal penalty on such violations, notwithstanding, shall not in any manner relieve the violating taxpayer from the obligation to submit the required documents. Finally, the administrative penalty shall be imposed at all times, upon due notice and demand by the Commissioner of Internal Revenue. A subpoena duces tecum for the submission of the required documents shall be issued on the second offense. A third offense shall set the motion for a criminal prosecution of the offender.

XV. ENFORCEMENT MEASURES RR 16-2005: Administrative and Penal Provisions. — (a) Suspension of business operations. — In addition to other administrative and penal sanctions provided for in the Tax Code and implementing regulations, the Commissioner of Internal Revenue or his duly authorized representative may order suspension or closure of a business establishment for a period of not less than five (5) days for any of the following violations: (1) Failure to issue receipts and invoices. (2) Failure to file VAT return as required under the provisions of Sec. 114 of the Tax Code. (3) Understatement of taxable sales or receipts by 30% or more of his correct taxable sales or receipt for the taxable quarter. (4) Failure of any person to register as required under the provisions of Sec. 236 of the Tax Code. (b) Surcharge, interest and other penalties. — The interest on unpaid amount of tax, civil penalties and criminal penalties imposed in Title XI of the Tax Code shall also apply to violations of the provisions of Title IV of the Tax Code. XVI. BAR EXAM QUESTIONS ON VAT

1998 BAR EXAM State whether the following transactions are a) VAT exempt, b) subject to VAT at 10% or c) subject to VAT at 0%: 1. 2. Sale of fresh vegetables by Aling Ining at the Pamilihang Bayan ng Trece Martirez Services rendered by Jake’s Construction Company, a contractor to the World Health Organization in the renovation of its offices in Manila Sale of tractors and other agricultural implements by Bungkal Incorporated to local farmers Sale of RTW by Cely’s Boutique, a Filipino dress designer, in her dress shop and other outlets Fees for lodging paid by students to BahayBahayan Dormitory, a private entity operating a student dorm (monthly fee of P1,500)

3. 4. 5.

SUGGESTED ANSWERS: 1. VAT Exempt. Sale of agri products, such as fresh veggies, in their original state, of a kind generally used as, or producing foods for human consumption is exempt from VAT. (§106c) 2. VAT at 0%. Since Jake’s Construction has rendered services to the WHO which is an entity exempted from taxation under

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international agreements to which the Philippines is a signatory, the supply of services is subject to zero percent rate. (§108B3) VAT at 12%. Tractors and other agri implements fall under the definition of goods which include all tangible objects which are capable of pecuniary estimation. (§106A1) VAT at 12%. This transaction also falls under the definition of goods which include all tangible objects which are capable of pecuniary estimation. (§106A1) VAT Exempt. The monthly fee paid by each student falls under the lease of residential units with a monthly rental per unit not exceeding Php8,000 (now Php 10,000), which is exempt from VAT regardless of the amount of aggregate rentals received by the lessor during the year.

PERCENTAGE TAXES
TAX ON PERSONS EXEMPT FROM VAT  3% of gross quarterly sales or receipts. Q: Who are liable? GENERAL RULE: Any person who are exempt from VAT (gross annual sales and receipts does not exceed P1.5M) and who is not a VAT-registered person. EXCEPTION:  Cooperatives shall be exempt from the 3% GRT.  Those earning LESS THAN P100,000 which is neither covered by percentage tax nor by VAT. TAX ON DOMESTIC CARRIERS AND KEEPERS OF GARAGES  3% of quarterly gross receipts  Gross receipts of common carriers derived from INCOMING and OUTGOING freight is NOT subject to local taxes under the Local Gov’t Code. Q: Who are covered? 1. Cars for rent or hire driven by lessee; 2. Transportation contractors, including persons who transport passengers for hire; 3. Other domestic carriers by LAND; 4. Keepers of garages. EXCEPT: 1. Owners of bancas 2. Owners of animal-drawn two-wheeled vehicles  Minimum quarterly gross receipts: Jeepneys Manila and other cities Provincial Public Utility Bus Not exceeding 30 passengers > 30 but not > 50 passengers Exceeding 50 passengers Taxis Manila and other cities Provincial Car for hire (with chauffeur) Car for hire (w/o chauffeur) P2,400 P1,200 P3,600 P6,000 P7,200 P3,600 P2,400 P3,000 P1,800

3.

4.

5.

TAX ON INTERNATIONAL CARRIERS  3% of their quarterly gross receipts.  To be subject to this percentage tax, they MUST BE DOING BUSINESS IN THE PHILIPPINES. Q: Who are liable? 1. International air carriers 2. International shipping carriers 3.  Amendment introduced by RA 9337 (July 2005):
Common carrier By land By sea Transporting Persons Goods/cargo Whether transporting persons or goods/cargo Kind carrier Domestic Domestic Domestic of Tax Liability 3%, Sec. 117 12% VAT Domestic trip 12% VAT International trip – zero-rated 3%, Sec. 118 Domestic flight 12% VAT

By air

International Domestic

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Percentage Taxes Taxation Law 2
International flight – zerorated 3%, Sec. 118

International

TAX ON FRANCHISES Q: Who are liable? 1. Radio and broadcasting companies whose annual gross receipts of the preceding year does not exceed P10M – 3% of gross receipts derived from business covered by law granting the franchise. Note: The franchisee has the option to register as VAT taxpayer and pay the VAT instead. However, once option is exercised, it is IRREVOCABLE. 2. Electric, gas and water utilities – 2% of gross receipts derived from business covered by the law granting the franchise. * Under RA 9337, electric companies are now subject to VAT and not percentage tax. OVERSEAS COMMUNICATIONS TAX   10% of the amount paid for the services. Levied upon EVERY overseas dispatch, message or conversation TRANSMITTED FROM THE PHILIPPINES by: telephone telegraph telewriter exchange wireless other communication equipment services.

Quasi-banking Activities refer to the borrowing of funds from 20 or more personal or corporate lenders at any one time through the issuance, endorsement or acceptance of debt instruments of any kind other than deposits for the borrower’s own account, or through issuance of certificates of assignment or similar instruments for purposes of relending or purchasing receivables and other similar obligations. HOWEVER, if borrowing of funds if for LIMITED PURPOSE of financing their own needs or the needs of their agents or dealers, it shall not be considered as performing quasi banking functions. RATES: 1. interest, commissions, discounts from lending activities and financial leasing bases on remaining maturities of instruments: - maturity period is 5yrs or less 5% - maturity period is more than 5yrs 1% 2. dividends and equity shares in net income of subsidiaries 0% 3. royalties, rentals of property (real/personal), profits from exchange and all other items treated as gross income under sec. 32 7% 4. net trading gains on foreign currency, debt securities, derivatives and other similar financial instruments 7% [Note: rates in #s 3 & 4 are as amended by RA 9337] COMPUTING FOR THE NET TRADING GAINS: The figure to be reported in the monthly percentage tax return shall be the CUMMULATIVE TOTAL of the net trading gain/loss since the first month of the applicable taxable year LESS the figures already reflected in the previous months of the same year. The net trading loss may only be deducted from the net trading gain and not from any other items of gross receipt to arrive at the total gross receipts tax due. The net trading loss cannot be deducted on net trading gain earned on any taxable year other than the year it was incurred and may not be carried over to the succeeding taxable year. RULE ON PRETERMINATION: In case the maturity period of an instrument is shortened by pretermination, the maturity period shall be reckoned to end as of the date of pretermination for purposes of classifying the transaction and applying the correct rate of tax. Illustration (from RR 09-04): Mr. A executede on Nov. 10, 2003 a long-term loan from Bank B in the amount of P5M payable within 10yrs with the first installment due on or before Nov. 10, 2004 and the succeeding yearly installment on the same date of the subsequent years. Assume that on Nov. 10, 2008, the loan was preterminated and the interest paid and other fees received from 2004 up to 2008, amounting to P100T annually, were received and declared by Bank B correctly and the applicable gross receipts taxes were paid as follows: Year Remaining Interest Tax GRT

Q: Who are liable? It shall be payable by the person paying for the services rendered to the person rendering the service, who will in turn pay the taxes at the end of the quarter. Q: Who are exempted? 1. Government and any of its political subdivisions and instrumentalities; 2. Diplomatic services (any embassy and consular offices of a foreign gov’t) 3. International Organizations (if bases in the Phils. and enjoying privileges, exemptions and immunities pursuant to an international agreement) 4. News services (which deals EXCLUSIVELY with the collection of news and dissemination to the public) TAX ON BANKS AND NON-BANK FINANCIAL INTERMEDIARIES PERFORMING QUASIBANKING FUNCTIONS  tax on gross receipts derived from sources within the Philippines by all banks and nonbank financial intermediaries

Definitions (from RR 09-04): Non-bank Financial Intermediaries refer to persons or entities whose principal functions include the lending, investing or placement of funds or evidences of indebtedness or equity deposited with them, acquired by them or otherwise coursed through them, either for their own account or for the account of others.

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Percentage Taxes Taxation Law 2
Maturity 2004 9 100,000 2005 8 100,000 2006 7 100,000 2007 6 100,000 2008 5 100,000 GROSS RECEIPTS TAX Rate 1% 1% 1% 1% 5% 1,000 1,000 1,000 1,000 5,000 9,000  5% of total premiums collected (whether in money, notes, credits or any substitute for money.

In 2008, upon pretermination, the loan agreement shall be reclassified and correct gross receipts tax, including prior years, shall be computed on the basis of the new category as shown: Remaining Interest Maturity 2004 4 100,000 2005 3 100,000 2006 2 100,000 2007 1 100,000 2008 <1 100,000 GROSS RECEIPTS TAX Less: GRT previously paid GRT AS RECOMPUTED Year Tax Rate 5% 5% 5% 5% 5% GRT 5,000 5,000 5,000 5,000 5,000 25,000 9,000 16,000

Q: Who are liable? GENERAL RULE: Every person, company or corporation DOING LIFE INSURANCE BUSINESS OF ANY SORT IN THE PHILIPPINES. Purely cooperative companies or EXCEPTION: associations. Cooperative companies or associations are such as are comducted by the members thereof with the money collected from among themselves and solely for their own protection and NOT for profit. PREMIUMS NOT INCLUDED IN THE TAXABLE RECEIPTS: 1. Premiums refunded within 6 months after payment on account of rejection of risks or returned for other reason to a person insured. 2. Premiums paid upon reinsurance by a company that has already paid the tax. 3. Premiums collected or received by any branch of a domestic corporation, firm or association doing business OUTSIDE the Phils. on account of any life insurance of the insured who is a NON-RESIDENT, if any tax on such premiums is imposed by the foreign country where the branch is established. 4. Premiums collected or received on account of any reinsurance, if the insured of personal insurance, RESIDES OUTSIDE THE PHILS., if any tax on such premiums is imposed by the foreign country where the original insurance has been issued or perfected. 5. Portions of premiums collected or received by insurance companies on VARIABLE CONTRACTS in excess of the amounts necessary to insure the lives of variable contract owners. Variable Contracts (as defined by PD612)—benefits under the contract vary as to reflect investment results of any segregated portfolios of investments. CASE LAW: CIR v. Insular Life Assurance (CA GR SP 46516) – MUTUALIZED LIFE INSURANCE COMPANY is not subject to premium tax or DST on policies as cooperatives. If a mutualized life insurance company satisfies all the elements of ‘cooperative’ [1. managed by members; 2. operated with money collected from members; 3. has for its main purpose the mutual protection of members and not for profit] as defined in Sec. 123, it shall not be subject to premiums tax. TAX ON AGENTS COMPANIES  OF FOREIGN INSURANCE

CASE LAW: China Bank v. CTA (GR 146749, June 10, 3003) – The 20% withholding tax on interest income shall form part of the gross receipts in computing gross receipts tax on banks. ‘Gross Receipts’ is commonly understood as the entire receipts without any deductions. Deducting any amount will change its meaning to net receipts. GRT is collected based on gross receipts which cover all receipts without deductions. TAX ON OTHER INTERMEDIARIES  NON-BANK FINANCE

tax on gross receipts derived by other nonbank finance intermediaries, DOING BUSINESS IN THE PHILIPPINES, from: interest commissions discounts from lending activities financial leasing  tax is based on the remaining maturities of the instruments from which receipts are derived maturity period is 5 yrs or less 5% maturity period is more than 5 yrs 3% [Note: The same rule on pretermination applies.] CASE LAW: CIR v. Lhuiller (GR 15094, July 15, 2003) – The SC has ruled that pawnshops, although are engaged in the business of lending money, are not subject to percentage tax since they are not ‘lending investors’. They are subject to different tax treatments, thus, the 5% percentage tax only applies to lending investors and not to pawnshops. However, RR 10-2004 has subsequently classified pawnshops as under “NON-BANK FINANCIAL INTERMEDIARIES”, thus are now subject to 5% gross receipts tax. The revenue regulation also required pawnshops to register, from VAT taxpayers, as percentage taxpayers. TAX ON LIFE INSURANCE PREMIUMS

10% of total premiums collected.

Q: Who are liable? GENERAL RULE: Tax shall be levied upon every FIRE, MARINE OR MISCELLANEOUS INSURANCE AGENT authorized to procure policies of insurance as he may have previously been legally authorized to transact on risks located in the Phils FOR COMPANIES NOT AUTHORIZED TO TRANSACT BUSINESS IN THE PHILS. EXCEPTION: Premiums paid on reinsurance.

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Percentage Taxes Taxation Law 2
 where an owner of property obtains insurance DIRECTLY from foreign insurance companies NOT authorized to transact insurance business in the Phils., he shall pay a tax of 5% on the premiums paid.  ½ of 1% of the GROSS SELLING PRICE or GROSS VALUE IN MONEY (GSP/GVM) of the shares of stocks sold, bartered, exchanged or otherwise disposed of through the local stock exchange OTHER THAN THE SALE BY A DEALER IN SECURITIES. Tax shall be paid by seller or transferor.

AMUSEMENT TAXES Q: Who are liable? The proprietor, lessee or operator of cockpits, cabarets, night or day clubs, boxing exhibitions, professional basketball games, Jai-Alai and racetracks.  Rates: 1. 2. 3. 4. return should be filed and tax paid within 20 days after the end of every quarter B.

18% for cockpits 18% for cabarets, night or day clubs 10% for boxing exhibitions 15% for professional basketball games in lieu of all other percentage taxes 5. 30% for Jai-Alai and racetracks (whether or not they charge for admissions) EXEMPTION: If boxing exhibition is a World or Oriental Championship in any division featuring at least 1 Filipino contender and promoted by a Filipino or by a corporation with at least 60% Filipino equity.

Through IPO  covers sale, barter, exchage of shares of stock of CLOSELY HELD CORPORATIONS  tax shall be paid by the issuing corporation in the primary offering or by the seller in the secondary offering  tax base is the GSP/GVM  levied in accordance with the proportion of shares sold, bartered, exchanged or disposed, to the total outstanding shares after the listing in the local stock exchange: - up to 25% of all shares 4% GSP/GVM - >25% but not over 33.33% 2% GSP/GVM - over 33.33% 1% GSP/GVM

Closely Held Corporation—any corporation at least 50% in value of the outstanding capital stock or at least 50% of the total combined voting power of all classes of stock entitled to vote is owned directly or indirectly by or for not more than 20 individuals. Rules to be applied to determine whether the corporation is closely held: 1. Stock owned directly or indirectly by corporations, partnerships, estates or trusts shall be considered as actually owned by its stockholders, partners or beneficiaries in proportion to their shares as individuals. 2. An individual is considered the constructive owner of the stock owned by members of his family (includes only brothers and sisters— whole/half-blood, spouse, ancestors and lineal descendants) 3. A person having an option to acquire stock is considered the actual owner of such stock C. Return on Capital Gains realized from sale of Shares of Stocks 1. return on capital gains realized from sale of shares of stock listed and traded in the local stock exchange  it is the duty of every stockbroker who effected the sale to collect the tax and remit it to the BIR within 5 banking days from date of collection and to submit to the secretary of the stock exchange a true and complete return 2.  return on public offerings of shares of stocks the corporate issuer shall file the return and pay the tax within 30days from the date of listing of the shares in the local stock exchange.

Tax Base: GROSS RECEIPTS  it embraces all the receipts of the proprietor, lessee or operator of the amusement place; including income from TV, radio and motion picture rights. RMC 08-88 transferred the EXCLUSIVE JURISDICTION to levy tax on gross receipts from ADMISSIONS to places of amusement to the local government. TAX ON WINNINGS Q: Who are liable? 1. every person who wins in horse races 2. owners of winning race horses Rates: a. 10% of winnings or dividends (bases on the actual amount paid to winner for every winning ticket AFTER deducting the cost of the ticket) b. 4% of winnings from double, forecast/quinella and trifecta bets c. 10% of prizes, in case of owners of race horses   tax shall be WITHHELD by the operator, manager or person in charge of the horse races before paying the dividends or prizes return shall be filed and tax paid within 20 days from the date tax was deducted and withheld

TAX ON SALE, BARTER OR EXCHANGE OF SHARES OF STOCK LISTED AND TRADED THROUGH THE LOCAL STOCK EXCHANGE OR THROUGH INITIAL PUBLIC OFFERING (IPO) A. Through the Local Stock Exchange

[Note: Both IPOs and sales of stock through the local exchange are EXEMPT from capital gains tax and from regular individual or corporate income tax. Also, such tax is not deductible from income tax.] PAYMENT OF PERCENTAGE TAXES Q: When to file return and pay?

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Percentage Taxes Taxation Law 2
Persons subject to percentage taxes shall file a QUARTERLY RETURN and PAY the tax due within 25 days after the end of each taxable quarter. However, RR 6-2001 has changed the period from 25 days after end of quarter to 10 days after end of the month.  Persons whose VAT registration is cancelled and become liable under Sec 116 shall be liable for the tax due from the date of cancellation of registration. Persons retiring from business must file a return and pay within 20 days from closing of the business.

EXCISE TAX
Goods Subject to Excise Tax (Sec. 129, NIRC)  Goods manufactured or produced in the Philippines for domestic sale or consumption or other disposition  Things imported NOTE:   Excise tax is imposed in addition to VAT. The tax attaches even on articles illicitly made, or the production of which is prohibited or punished by law.

Q: Where to file? At the option of the person liable, he may file a separate return for each branch or place of business, or a consolidated return with authorized agent bank, Revenue District Office, Collection Agent or City/Mun. Treasurer where the business or principal place of business is located.   The Commissioner may prescribe rules and regulations altering the time and manner of payment prescribed herein. The Commissioner may prescribe a minimum amount of gross receipts where it is found that a person: 1. has failed to issue receipts or invoices 2. does not file a return, or 3. if records of the books of accounts do not correctly reflect the declarations in the return.

Two Classifications of Excise Tax:  Specific tax- tax is based on weight or volume capacity or other physical unit of measurement  Ad valorem tax - tax is based on selling price or other specified value of the good Purpose and justification of excise taxes: 1. To curtail consumption of certain commodities, excessive or indiscriminate use of which is considered harmful to the individual or community. Taxes of this kind are sumptuary in nature and are exemplified by the taxes on alcoholic beverages and tobacco products 2. To protect a domestic industry the products of which face competition from similar imported articles To distribute the tax burden in proportion to the benefit derived from a particular government service. Examples are the excise taxes on gasoline, lubricating oils and denatured alcohol for motive power, and To raise revenue

3.

4.

When Excise Taxes Accrue  As to domestic products – They accrue or attach as soon as the articles are produced, or come into existence as in the case of distilled spirits (Sec. 141) and manufactured and other fuel oils (Sec. 148)  As to imported articles – They accrue as soon as the articles are brought into the Philippine jurisdiction with the intention to unload them here.

Filing of Return and Payment of Excise Tax on DOMESTIC Products (Sec. 130) (A) Persons liable to file a return, filing of return on removal and payment of tax 1. Person Liable to File a Return such person shall file a separate return for each place of production setting forth, among others: o Description and quantity or volume of products removed o Applicable tax base o Tax due

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Excise Tax Taxation Law 2
in the case of indigenous petroleum, natural gas or liquefied natural gas  excise tax shall be paid by first buyer, purchaser or transferee for local sale, barter or transfer export products  excise tax shall be paid by owner, lessee, concessionaire or operator of the mining claim should domestic products be removed from the place of production without the payment of tax, the owner or possessor shall be liable for the tax due  file and pay at the Revenue District Office having jurisdiction in the locality where it was mined, extracted or quarried (B) Determination of Gross Selling Price of Goods Subject to Ad Valorem Tax Gross Selling Price= Price - VAT where Price is: That at which the goods are sold at wholesale in the place of production or through their sales agents to the public If the goods are sold in another establishment where the manufacturer is the owner or in the profits of which he has an interest, wholesale price there NOTE: if price < cost of manufacture + expenses incurred until the goods are finally sold  a proportionate margin of the profit (which is not less than 10% of such manufacturing costs + expenses) shall be added to the GSP (C) Manufacturer’s or Producer’s Sworn Statement It shall show: different goods and products manufactured or produced, their corresponding GSP or market value Costs of manufacture or production + expenses incurred or to be incurred until goods are sold (D) Credit for Excise Tax on Goods Actually Exported In case goods produced or manufactured are removed and actually exported without returning to the Philippines: GENERAL RULE  any excise tax paid shall be credited or refunded upon submission of proof of actual exportation and upon receipt of the foreign exchange payment EXCEPTION (i.e., NOT credible): mineral products o EXCEPTION TO EXCEPTION: coal and coke Payment of Excise Tax on IMPORTED Articles (Sec. 131) (A) Persons Liable Paid by:  owner or importer to the Customs Officers before release from the customhouse, OR  person found in possession of articles which are exempt from excise taxes other than those legally entitled to exemption In case tax-free articles brought in by exempted persons or entities or agencies are subsequently sold, transferred or exchanged in the Philippines  purchaser or recipients shall be considered importers and shall be liable for duty and internal revenue tax due Importation of cigar, cigarettes, distilled spirits and wines even if destined to tax and duty-free shops shall be subject to all applicable taxes, EXCEPT:

-

-

2.

Time of Filing of Return and Payment of Tax GENERALLY: return shall be filed and excise tax shall be paid by the manufacturer or producer before removal of the domestic products from place of production unless otherwise specifically allowed HOWEVER, IN CASE OF:  nonmetallic mineral or mineral products and quarry sources due and payable upon removal of such products from locality where mined and extracted  locally produced or extracted metallic mineral or mineral products: o file return and pay tax within 15 days after end of the calendar quarter when such products were removed subject to conditions prescribed by rules and regulations to be promulgated by Secretary of Finance, upon recommendation of the Commissioner o taxpayer shall file bond ≈ amount of excise tax due  IMPORTED mineral or mineral products, whether metallic or nonmetallic  paid before their removal from customs duty Place of Filing of Return and Payment of Tax (GENERAL RULE)  any authorized agent bank or Revenue Collector Officer, or  duly authorized City or Municipal Treasurer Exceptions (TO GENERAL RULE SET OUT ABOVE) IN GENERAL: Sec of Finance, upon recommendation of Commissioner, may by rules and regulations prescribe: a. b. time of filing the return at intervals for a particular class or classes of taxpayer manner and time of payment under a tax prepayment, advance deposit and other similar schemes IN THE SPECIFIC CASES of:  minerals, mineral products or quarry resources where the place of extraction is different from the place of processing or production, or  metallic minerals processed abroad,

3.

4.

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Excise Tax Taxation Law 2
1. such are brought directly into Subic Special Economic and Freeport Zone; Cagayan Special Economic Zone and Freeport; Zamboanga City Special Economic Zone and not transshipped to any other port in the Philippines b. wines – all alcoholic beverages produced by fermentation without distillation from the juice of any kind of fruit; and fortified beverages fermented liquor – alcoholic beverages produced by fermentation without distillation of grain or malt (beer, lager, ale, porter)

c.

importation done by government-owned and operated duty free shop like DFP, PROVIDED such products are labeled ‘tax and duty free’ and ‘not for resale’  if such products are eventually introduced to Philippine customs territory, then such articles shall be deemed imported into Phil and be subject to all import and excise taxes  HOWEVER, removal and transfer from one Freeport to another Freeport shall not be deemed an introduction to Phil territory. cigar, cigarettes, distilled spirits and wines in duty free shops which are NOT LABELED AS REQUIRED, as well as those articles obtained from duty free shops and subsequently FOUND IN NON DUTY FREE SHOPS FOR RESALE  confiscated and perpetrator punished  tax due on any such goods, products, machinery, equipment and other similar articles shall constitute a lien on the article itself which shall be superior to all other liens (B) Rate and Basis of the Excise Tax on Imported Articles Unless otherwise specified, imported articles shall be subject to the same rate and basis of excise taxes applicable to locally manufactured articles Exemption / Conditional Tax-Free Removal of Certain Articles a. denatured wine/spirits for treatment of tobacco leaf b. domestic denatured alcohol rendered unfit for oral intake, but VAT should be paid c. petroleum products sold to:  international carriers (Philippine or foreign carriers) on their use or consumption outside the Philippines, provided there is reciprocity  exempt entities covered by tax treaties, conventions, international agreements, provided there is reciprocity  entities which are by law exempted from direct & indirect taxes d. removal of spirits under bond for rectification e. removal of fermented liquors to bonded warehouse f. removal of damaged liquors g. removal of tobacco products entirely unfit for chewing/smoking Tax on Alcohol Products Definition a. distilled spirits – substance known as ethyl alcohol, ethanol or spirits of wine including whiskey, brandy, rum, gin and vodka, from whatever source, by whatever process produced

2.

Sec. 141 Distilled Spirits (Rates of tax  as per RR 3-2006) P11.65/ proof liter produced from sap of nipa, coconut, cassava, camote buri palm or juice, syrup or sugar cane  provided, materials are produced commercially in the country where they are processed produced in a pot still or similar primary distilling apparatus  distiller not producing >100L/day, containing <50% alcohol

P4.48/ proof liter

 if produced from raw materials other than those above, tax is in accordance with the net retail price (NRP) (excluding VAT + excise tax) per 750 ml bottle: P126.00/ NRP < P250 proof liter P252.00/ proof liter P504.00/ proof liter NRP: P250 – P675 NRP >P675

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Medicinal preparations, flavoring extracts, other preparations except toilet preparations, wherein distilled products form chief ingredient  same tax as chief ingredient tax shall proportionally increase for any strength of spirit taxed over proof spirits. Tax shall attach as soon as it is in existence whether it is subsequently separated as pure or impure spirits or transformed into any other substance either in the process of original production or by any subsequent process.

Sec. 142 Wines (Rates of tax  as per RR 3-2006) P145.60 sparkling wines/champagne regardless of proof if NRP <P500/bottle P436.80 sparkling wines/champagne regardless of proof if NRP >P500 P17.47 still wines 14% of alcohol by vol or less P34.94 still wines 14% - 25% of alcohol by vol Fortified wines containing more than 25% of alcohol by volume natural wines to which distilled spirits are added to increase their alcoholic strength taxed as distilled spirits

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Excise Tax Taxation Law 2
Sec. 143 Fermented Liquor (Rates of tax  as per RR 3-2006) Beer, lager beer, ale. Porter and other fermented liquor except tuba, basi, tapuy and similar domestic fermented liquors P8.27/L NRP <P14.50 P12.30/L P16.33/L P16.33/L NRP P14.50 – P22 NRP >P22 those brewed and sold at microbreweries or micro brew pubs P25.00/pack cigarettes packed by machine NRP >P10 P10.35/pack cigarettes packed by machine NRP P6.50 – P10 P6.35/pack P2.00/pack cigarettes packed by machine NRP P5 – P6.50

PENAL PROVISIONS: Brewer or importer who knowingly misdeclares or misrepresents in his sworn statement any pertinent data or information  summary cancellation or withdrawal of his permit. Corporation, association or partnership  fined treble the amount of deficiency taxes + surcharges + interest person liable for acts or omissions prohibited under this section  criminally liable and penalized under Sec 254 those who willfully abet or aid in the commission of such act or omission  liable same as principal offender not citizen of Phil  deported after service of sentence Tax on Tobacco Products Definition a. cigar – all rolls of tobacco or any substitute wrapped in leaf tobacco b. cigarette – all rolls of finely-cut leaf tobacco or any substitute wrapped in paper or any other material Sec. 144 Tobacco Products (Rates of tax  as per RR 3-2006) P1.00/kg tobacco twisted by hand or reduced into a condition to be consumed in any manner other than the ordinary mode of drying and curling those prepared or partially prepared with or without use of any machine or instruments or without being pressed or sweetened fine-cut shorts and refused, scraps, clippings, cutting, stems and sweepings of tobacco P0.79/kg specially prepared for chewing so as to be unsuitable for use in any other manner Sec. 145 Cigars and Cigarettes (Rates of tax  as per RR 3-2006) 10% of NRP cigars NRP (excluding excise tax and VAT) < P500 P50 + 15% of NRP in excess of P500 P2.00/pack cigars NRP (excluding excise tax and VAT) > P500 cigarettes packed by hand

cigarettes packed by machine NRP <P5 PENAL PROVISIONS: Brewer or importer who knowingly misdeclares or misrepresents in his sworn statement any pertinent data or information  summary cancellation or withdrawal of his permit. Corporation, association or partnership  fined treble the amount of deficiency taxes + surcharges + interest person liable for acts or omissions prohibited under this section  criminally liable and penalized under Sec 254 those who willfully abet or aid in the commission of such act or omission  liable same as principal offender not citizen of Phil  deported after service of sentence Tax on Petroleum Products Sec. 148 Manufactured Oils and other Fuels (Rates of tax  1997 NIRC, as amended by RA 9337 [2005])
P4.50/Kg or L Lubricating oil and greases (kg), and additives for lubricating oil and greases (L) P0.05/L Processed Gas

P3.50/kg waxes and petrolatum P0.50/L P4.35/L P0.00/L denatured alcohol for motive power naphtha, regular gasoline and similar products of distillation other

naphtha, used either as raw material in the production of petrochemical products or as replacement fuel for natural-gas-fired-combined cycle power plant leaded premium gasoline unleaded premium gas aviation turbo jet fuel kerosene kerosene used as aviation fuel diesel fuel oil and similar oils with same generating power liquefied petroleum gas asphalt bunker fuel oil and similar oils with same generating power

P5.35/L P4.35/L P3.67/L P0.00/L P3.67/L P0.00/L P0.00/L P0.56/kg P0.00/L

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Excise Tax Taxation Law 2
20% based on wholesale price or value of importation of: 1. jewelry, real or imitation 2. pearls, precious and semi precious stones and imitations thereof 3. goods made of or ornamented, mounted or fitted with precious metals or imitations, or ivory EXCEPT: - surgical and dental instruments - silver plated wares - frames or mounting for frames or spectacles - used in filling, mounting or fitting of the teeth 4. perfumes and toilet waters 5. yachts and other vessels intended for pleasure Tax on Miscellaneous Articles On Automobiles (Sec. 148 of the NIRC, as amended by RA 9224) NATURE: Ad valorem tax on automobiles based on manufacturer’s or importer’s selling price (net excise tax and VAT) NET SELLING PRICE Up to P600T P600T – P1.1M P1.1M – P2.1 M over P2.1M RATE 2% P12,000 + 2% in excess of P600T P112T + 40% in excess of P1.1M P512T + 60% in excess of P2.1M 3% of fair international market price on the first taxable sale, barter, exchange or similar transaction to be paid by buyer before removal from place of production

NOTE:   Sec 150

imported cars NOT for sale, tax shall be based on total landed value + transaction value + customs duty + other charges cars used exclusively in Freeport zones are exempt Non Essential Goods

Tax on Mineral Products Sec. 151 Mineral Products P10/ metric ton coal and coke 2% MV non metallic minerals and quarry resources 2% locally extracted natural gas and liquefied natural gas 2% MV gold and chromite copper and other metallic minerals: 1% MV 1st 3 years after effectivity of RA 7729 1 ½% MV 4th-5th years 2% 6th year and thereafter indigenous petroleum:

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Documentary Stamp Tax Taxation Law 2

DOCUMENTARY STAMP TAX
General Principles  DEFINITION: Tax on documents, instruments and papers evidencing the acceptance, assignment, sale or transfer of an obligation, right or property thereto  NATURE: It is an excise or privilege tax because it is imposed on the privilege to enter into the transaction rather than the document. It is only paid once.  The amount of DST depends on the nature of the document and the value appearing upon its face.  If the transaction is subsequently annulled or invalidated, the tax may be refunded since the law presupposes a valid transaction. Q: Who are required to file the Documentary Stamp Tax Declaration Return? a) In case of constructive affixture of documentary stamps, by the persons making, signing, issuing, accepting or transferring documents, instruments, loan agreements and papers, acceptances, assignments, sales and conveyances of the obligation, right or property incident thereto wherever the document is made, signed, issued, accepted or transferred when the obligation or right arises from Philippine sources or the property is situated in the Philippines at the same time such act is done or transaction had; By metering machine user who imprints the Documentary Stamp Tax due on the taxable documents; and By Revenue Collection Agent, for remittance of sold loose documentary stamps.

b)

c)

NOTE: Wherever one party to the taxable document enjoys exemption from the tax imposed, the other party who is not exempt will be the one directly liable to file Documentary Stamp Tax Declaration and pay the applicable stamp tax. Q: What are the implications of failure to stamp taxable documents?  The untaxed document will not be recorded, nor will it or any copy thereof or any record of transfer of the same be admitted or used in evidence in court until the requisite stamp or stamps have been affixed thereto and cancelled No notary public or other officer authorized to administer oaths will add his jurat or acknowledgment to any document subject to Documentary Stamp Tax unless the proper documentary stamps are affixed thereto and cancelled

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TAX RATES APPLICABLE (1997 NIRC, as amended by RA 9243 [2004]) Tax Due Per Document Taxable Unit Unit Debentures and Certificates of DELETED by RA 9243 Indebtedness Original Issue of Shares P200.00 or fraction 1.00 thereof of Stock with par value9 Original Issue of Shares of Stock without par value Stock Dividends Sales, Agreements to Sell, Memoranda of Sales, Deliveries or Transfer of Due-bills, Certificate of Obligation, or Shares or Certificates of Stock10 In the case of stocks without par value Bonds, Debentures, Certificate of Stock or Indebtedness issued in foreign Countries Certificate of Profits or Interest in Property or Accumulation Bank Checks, Drafts, Certificate of Deposit not bearing interest and other Instruments Original issue of debt instruments For such debt instruments with terms of less than one year P200.00 or fraction thereof P200.00 or fraction thereof On each Document P200.00 or fraction thereof P200.00 or fraction thereof P200.00 or fraction thereof 1.00 1.00 0.75 Taxable Base

Par value of shares of stocks actual consideration for issuance of shares of stocks the

Actual value represented by each share Par value of such due-bills, certificate of obligation or stocks

25% of the DST paid upon the original issue of said stock 1.50

Par value of such bonds, debentures or Certificate of Stocks Face value of such certificate / memorandum

0.50 1.50

P200.00 or fraction thereof

1.00 Shall be of a proportional amount in accordance with the ration of its term in number of days to 365 days .30

Issue price instrument

of

any

such

debt

Bills of exchange (between points within the Philippines) and drafts Bills of Exchange or order drawn in foreign country but payable in the Philippines Foreign Bills of Exchange
9

P200.00 or fraction thereof P200.00 or fraction thereof P200.00 or fraction

Face value of the bill of exchange or draft Face value of such bill of exchange or order or the equivalent of such value, if expressed in foreign currency Face value of such bill of exchange

.30

.30

When are shares considered issued?  Upon the acquisition of the stockholder of the attributes of ownership over the shares (the right to vote, the right to receive dividends, the right to dispose, etc., notwithstanding that restrictions on the exercise of any of these rights may be imposed by the Corporation’s Articles and/or by-laws, the SEC, stockholder agreement, court order, etc.) which acquisition of such attributes of ownership shall be manifested by the acceptance by the Corporation of the stockholder’s subscription to its shares of stock. The delivery of the certificates of stock to the stockholders is NOT essential for the DST to accrue. [RR 13-2004] What is the basis of DST?  The entire shares of stock subscribed are considered issued for purposes of DST, even if not fully paid. [RR 13-2004]
10

When is a sale or exchange of shares taxable?  There must be actual or constructive transfer of beneficial ownership of shares of stock from one person to another. This may be manifested by: a) the clear exercise of attributes of ownership over such stocks by the transferee, or b) by an actual entry of a change in the name appearing in the certificate of stock or in the stock and transfer book of the corporation or by any entry indicating transfer of beneficial ownership in any form of registry including those of a duly authorized scripless registry, such as those maintained for or by the Philippine Stock Exchange. [RR 13-2004]

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and Letter of Credit Life Insurance Policies Policies Of Insurance upon Property Fidelity Bonds and other Insurance Policies Policies of Annuities, Annuity or other instruments Pre-Need Plans Indemnity Bonds Certificates of Damage or otherwise and Certificate or document issued by any customs officers, marine surveyor, notary public and certificate required by law or by rules and regulations of a public office Warehouse Receipts (except if value does not exceed P200.00) Jai-alai, Horse Race Tickets, lotto or Other Authorized Number Games thereof P200.00 or fraction thereof P4.00 premium or fraction thereof P4.00 premium or fraction thereof P200.00 or fraction thereof P200.00 or fraction thereof P4.00 or fraction thereof Each Certificate .50 .50 .50 0.50 .20 .30 15.00 or order or the equivalent of such value, if expressed in foreign currency Amount of premium collected Premium charged Premium charged Amount of premium or installment payment of contract price collected Premium or contribution collected Premium charged

Each Receipt P1.00 cost of ticket and Additional P0.10 on every P1.00 or fraction thereof if cost of ticket exceeds P1.00 >P100 not > P1000 >P1000 Each Proxy Each Document First 2,000 For every P1,000 or fractional part thereof in excess of the first P2,000 for each year of the term of the contract or agreement First 5,000 On each P5,000 or fractional part thereof in excess of 5,000 First 1,000 For each additional P1,000 or fractional part thereof in excess of P1,000 1,000 below tons and

15.00 .10 Cost of the ticket

Bills of Lading or Receipts (except charter party) Proxies Powers of Attorney Lease and other Hiring agreements of memorandum or contract for hire, use or rent of any land or tenements or portions thereof Mortgages Pledges of lands, estate, or property and Deeds of Trust Deed of Sale, instrument or writing and Conveyances of Real Property (except grants, patents or original certificate of the government) Charter parties and Similar Instruments

1.00 10.00 15.00 5.00 3.00 1.00

20.00 10.00

Amount Secured Amount Secured

15.00 15.00

Consideration or Fair Market Value, whichever is higher (if government is a party, basis shall be the consideration)

1,001 tons

to

10,000

P500.00 for the first 6 months PlusP50 each month or fraction thereof in excess of 6 months

Tonnage contract

and

duration

of

the

P1,000

for

the

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Over 10,000 tons first 6 months Plus P100 each month or fraction thereof in excess of 6 months P1,500 for the first 6 months Plus P150 each month or fraction thereof in excess of 6 months At the same rate as that imposed on the original instrument

Assignment or transfer of any mortgage, lease or policy of insurance Renewal of any agreement/ contract

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Documents and Papers Not Subject to Stamp Tax a. Policies of insurance or annuities made or granted by a fraternal or beneficiary society, order, association or cooperative company, operated on the lodge system or local cooperation plan and organized and conducted solely by the members thereof for the exclusive benefit of each member and not for profit. b. Certificates of oaths administered to any government official in his official capacity or of acknowledgment by any government official in the performance of his official duties, written appearance in any court by any government official, in his official capacity; certificates of the administration of oaths to any person as to the authenticity of any paper required to be filed in court by any person or party thereto, whether the proceedings be civil or criminal; papers and documents filed in courts by or for the national, provincial, city or municipal governments; affidavits of poor persons for the purpose of proving poverty; statements and other compulsory information required of persons or corporations by the rules and regulations of the national, provincial, city or municipal governments exclusively for statistical purposes and which are wholly for the use of the bureau or office in which they are filed, and not at the instance or for the use or benefit of the person filing them; certified copies and other certificates placed upon documents, instruments and papers for the national, provincial, city or municipal governments, made at the instance and for the sole use of some other branch of the national, provincial, city or municipal governments; and certificates of the assessed value of lands, not exceeding Two hundred pesos (P200) in value assessed, furnished by the provincial, city or municipal Treasurer to applicants for registration of title to land. Borrowing and lending of securities executed under the Securities Borrowing and lending Program of a registered exchange, or in accordance with regulations prescribed by the appropriate regulatory authority: Provided, however, That any borrowing or lending of securities agreement as contemplated hereof shall be duly covered by a master securities borrowing and lending agreement acceptable to the appropriate regulatory authority, and which agreements is duly registered and approved by the Bureau of Internal Revenue. (BIR). Loan agreements or promissory notes, the aggregate of which does not exceed Two hundred fifty thousand pesos (P250,000), or any such amount as may be determined by he Secretary of Finance, executed by an individual for his purchase on installment for his personal use or that of his family and not for business or resale, barter or hire of a house, lot, motor vehicle, appliance or furniture: Provided, however, That the amount to be set by the Secretary of Finance shall be in accordance with a relevant price index but not to exceed ten percent (10%) of the current amount and shall remain in force at least for three (3) years. e. Sale, barter or exchange of shares of stock listed and traded through the local stock exchange for a period of five (5) years from the effectivity of this Act. Assignment or transfer of any mortgage, lease or policy of insurance, or the renewal or continuance of any agreement, contract, charter, or any evidence of obligation or indebtedness, if there is no change in the maturity date or remaining period of coverage from that of the original instrument. Fixed income and other securities traded in the secondary market or through an exchange. Derivatives: Provided, That for purposes of this exemption, repurchase agreements and reverse repurchase agreements shall be treated similarly as derivatives. Interbranch or interdepartmental advances within the same legal entity. All forebearances arising from sales or service contracts including credit card and trade receivables: Provided, That the exemption be limited to those executed by the seller or service provider itself. Bank deposit accounts without a fixed term or maturity. All contracts, deeds, documents and transactions related to the conduct of business of the Banko Sentral ng Pilipinas. Transfer of property pursuant to Section 40(c)(2) of the National Internal Revenue Code of 1997, as amended. Interbank call loans with maturity of not more than seven (7) days to cover deficiency in reserves against deposit liabilities, including those between or among banks and quasibanks.

f.

g.

h.

i.

j.

k.

l.

m.

c.

n.

d.

One-Transaction Rule: Where only one instrument was prepared, made signed and executed to cover a loan agreement/promissory note, pledge/mortgage, the documentary stamp tax shall be paid and computed on the full amount of the loan or credit granted. In this regard, the instrument shall be treated as covering only one taxable transaction, subject to the higher documentary stamp tax. (RR 9-94, Sec. 8) Payment of Documentary Stamp Tax (Sec 200) WHERE: filed and paid at  authorized agent bank within territorial jurisdiction of Revenue District Officer which had jurisdiction over residence or principal place of business of taxpayer

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 Revenue District Officer, collection agent, duly authorized treasurer of municipality or city where the taxpayer has his residence or principal place of business

REMEDIES
STAGES IN BIR AUDIT (Framework of discussion) EXAMINATION

EXCEPTION: Tax may be paid thru purchase and actual affixture or imprinting the stamp thru documentary stamp metering machine as prescribed by the pertinent rules and regulations. WHEN: 5 days after close of the month when the taxable document was made, signed issued, transferred or accepted. (RR 6-01) [Note: 10-day rule provided in Sec. 200(B) of the NIRC no longer applicable) Applicability Documents: of DST Law on Electronic

Audit Stage/Issuance of Letter of Authority  Pre-Assessment Stage  Formal Assessment Stage  Collection Letter/Warrants  Compromise and Abatement

I.

The DST rates shall be applicable on all documents not otherwise expressly exempted by the law, notwithstanding that they are in electronic form. As provided for in RA 8792 (Electronic Commerce Act), electronic documents are the functional equivalent of a written document under existing laws, and the issuance thereof is therefore tantamount to the issuance of a written document, and therefore subject to DST. (RR 13-04, Sec. 10)

AUDIT STAGE Authority) A.

(Issuance

of

Letter

of

Powers of the Commissioner Relative to the Audit Process 1. Authority to EXAMINE RETURNS and DETERMINE TAX DUE (§5) the Commissioner may authorize the examination of any taxpayer and the assessment of the correct amount of tax, WON a return has been filed by such taxpayer. NOTE: Any return filed with the Commissioner shall not be withdrawn, BUT the taxpayer may MODIFY, CHANGE or AMEND such return within three (3) years from the date of filing, provided that no notice for audit or investigation of such return has been actually served on the taxpayer. Authority to conduct INVENTORYTAKING, SURVEILLANCE and to prescribe presumptive gross sales and Inventory-taking receipts (§6C) may be conducted at any time during the taxable year, for the purpose of determining the correct tax liabilities. Surveillance is done if there is reason to believe that the taxpayer is not declaring his correct income, sales or receipts for tax purposes. The prescribe Commissioner may presumptive gross sales and receipts if:  It is found that the taxpayer has failed to issue receipts and invoices, or  When there is reason to believe that the books of accounts or other records do not correctly reflect the declarations made by the taxpayer Authority to terminate TAXABLE PERIOD The Commissioner may (§6D) terminate taxable period and order the immediate payment of the tax for the terminated period and any remaining tax that is unpaid, under the following circumstances:

2.

3.

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  When a taxpayer is retiring from business subject to tax, or When the taxpayer is intending to leave the Philippines or to remove his property therefrom or to hide or conceal his property When the taxpayer is performing any act tending to obstruct the proceedings for the collection of the tax for the past or current quarter or year or to render the same totally or partially ineffective unless such proceedings are begun immediately basis, from any person OTHER THAN the person whose tax liability is subject to audit or investigation, or from any office or officer of the national and local governments, government agencies or instrumentalities, including BSP and GOCCs, any information such as, but not limited to, costs and volumes of production, receipts or sales and gross incomes of taxpayers, and the names addresses, and financial statements of corporations, mutual fund companies, insurance companies etc. NOTE: This is known as the Third Party Information Rule. 9. Power to INTERPRET TAX LAWS and to DECIDE TAX CASES (§4) shall be under the exclusive and original jurisdiction of the Commissioner, subject to review by the Secretary of Finance.

4.

Authority to prescribe REAL PROPERTY VALUES (§6E) The Commissioner is authorized to divide the Philippines into different zones or areas, and shall determine the FMV of real properties in each zone or area, upon consultation with competent appraisers from private and public sectors. For the purpose of computing any internal revenue tax, the value of the property shall be WHICHEVER IS HIGHER OF:  The fair market value as determined by the Commissioner, or  The fair market value as shown in the schedule of values of the provincial and city assessors Authority to inquire into BANK DEPOSIT Notwithstanding ACCOUNTS (§6F)  any contrary provision of R.A. 1405 (Bank Secrecy Law) and other general or special laws, the Commissioner is authorized to inquire into bank deposits of:  A decedent to determine his gross estate, and  Any taxpayer who has filed an application for compromise of tax liability by reason of financial the taxpayer must incapacity waive in writing his privilege under R.A. 1405 and other relevant laws, before the Commissioner may inquire into his bank accounts Authority to accredit and register TAX AGENTS (§6G)  The Commissioner shall accredit and register tax agents (may be individuals or general professional partnerships) based on the following criteria:  Professional competence  Integrity  Moral fitness Authority to prescribe additional PROCEDURAL OR DOCUMENTARY REQUIREMENTS (§6H)  in relation to the manner of compliance of any requirement in connection with the submission or preparation of financial statements accompanying the tax returns. The ACCESS LETTER (§5B) Commissioner may obtain on a regular 

5.

RMC 44-01 A ruling by the BIR Commissioner shall be presumed VALID unless modified, reversed or superseded by the Secretary of Finance. A taxpayer who receives an adverse ruling from the Commissioner may, within thirty (30) days from the date of receipt of such ruling, seek its review by the Secretary of Finance, either by himself/itself or though his/its duly authorized representative. A reversal or modification of the BIR ruling shall terminate its effectivity upon the receipt by the taxpayer or the BIR of written notice of reversal or modification, whichever came earlier. NOTE:  DOF Order 7-02 added that the Secretary of Finance may review the rulings MOTU PROPRIO. Section 246, NIRC: Non-retroactivity of Rulings Any revocation, modification or reversal of…any of the rulings or circulars promulgated by the Commissioner shall not be given retroactive application if the revocation, modification or reversal will be prejudicial to the taxpayers, EXCEPT in the following cases: a) Where the taxpayer deliberately misstates or omits material facts from his return or any document required of him the BIR; Where the facts subsequently gathered by the BIR are materially different from the facts on which the ruling is based; or Where the taxpayer acted in bad faith. Letter of Authority

6.

b)

c) B.

7.

Q: What is a letter of authority? The Letter of Authority is an official document that empowers a Revenue Officer to examine and scrutinize a taxpayer’s books of accounts and other accounting records, in order to determine the taxpayer’s correct internal revenue tax liabilities. Q: Who issues the Letter of Authority? Commissioner for those units reporting directly to him

8.

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 Regional directors for taxpayers covered by his particular region. If the Commissioner has already issued an LA to investigate a particular taxpayer, the Regional director shall desist from issuing another LA for the same taxpayer. Q: What are the cases which need not be covered by a valid LA? Cases involving civil/criminal tax fraud which fall under the jurisdiction of the tax fraud division of the Enforcement Services, and Policy cases under audit by the special teams in national offices II. PRE-ASSESSMENT STAGE A. Step 1: Issuance of Notice of Informal Conference What is a notice of informal conference? A notice of informal conference is a written notice informing a taxpayer that the findings of the audit conducted on his books of accounts and accounting records indicate that additional taxes or deficiency assessments have to be paid. If, after the culmination of an audit, a Revenue Officer recommends the imposition of deficiency tax assessments, this recommendation is communicated by the Bureau to the taxpayer concerned during an informal conference called for this purpose. The taxpayer shall then have fifteen (15) days from the date of his receipt of the Notice for Informal Conference to explain his side. B. Step 2: Informal Conference What matters are taken up during the informal conference? 1. Discussion on the merits of the assessment 2. Attempt of taxpayer to convince the examiner to conduct a re-investigation and/or re-examination 3. Evaluate if submission of the waiver of the statute of limitations is necessary because evaluation may extend beyond three years 4. Taxpayer to advise the examiner if position paper will be submitted What is a jeopardy assessment? A jeopardy assessment is a tax assessment made by an authorized Revenue Officer without the benefit of complete or partial audit, in light of the RO’s belief that the assessment and collection of the deficiency tax will be jeopardized by delay caused by the taxpayer’s failure to: i. Comply with audit and investigation requirements to present his books of accounts and/or pertinent records ii. Substantiate all or any of the deductions, exemptions or credits claimed in his return. It is usually issued when statutory prescriptive periods for the assessment or collection of taxes are about to lapse due principally to the taxpayer’s fault. C. Step 3: Notice Issuance of Pre-Assessment

What is a pre-assessment notice (PAN)? The Pre-Assessment Notice is a communication issued by the Regional Assessment Division or any other concerned BIR office, informing a taxpayer who has been audited of the findings of the Revenue Officer, following the review of these findings. The assessment shall be in writing, and should inform the taxpayer of the law and the facts on which the assessment is made; otherwise, the assessment shall be void. (Sec. 228) If the taxpayer disagrees with the findings in the PAN, he has fifteen (15) days from his receipt of the PAN to file a written reply contesting the proposed assessment. Under what circumstances is a PAN no longer required? (a) When the finding for any deficiency tax is the result of MATHEMATICAL ERROR in the computation of the tax as appearing on the face of the return; or (b) When a DISCREPANCY has been determined between the TAX WITHHELD and the amount ACTUALLY REMITTED by the withholding agent; or (c) When a taxpayer who opted to claim a refund or tax credit of excess creditable withholding tax for a taxable period was determined to have carried over and automatically applied the same amount claimed against the estimated tax liabilities for the taxable quarter or quarters of the succeeding taxable year; OR (d) When the EXCISE TAX due on excisable articles has not been paid; or (e) When an article locally purchased or imported by an exempt person, such as, but not limited to, vehicles, capital equipment, machineries and spare parts, has been sold, traded or transferred to a non-exempt person. (§228) III. FORMAL ASSESSMENT STAGE What is a Notice of Assessment (Final Assessment Notice “FAN” or Formal Letter of Demand)? A notice of assessment is a declaration of deficiency taxes issued to a taxpayer who fails to respond to a pre-assessment notice within the prescribed period of time, or whose reply to the PAN was found to be without merit. This is commonly known as the Final Assessment Notice (FAN). An assessment contains not only a computation of tax liabilities, but also a demand for payment within a prescribed period. The ultimate purpose of assessment is to ascertain the amount that each taxpayer is to pay. An assessment is a notice to the effect that the amount therein stated is due as tax and a

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demand for payment thereof. (Tupaz v. Ulep, 1999) The formal letter of demand shall be issued by the Commissioner or his duly authorized representative. The letter of demand calling for the payment of the taxpayer’s deficiency taxes shall state the FACTS, the LAW, RULES and REGULATIONS or JURISPRUDENCE on which the assessment is based, OTHERWISE, the formal letter of demand or assessment notice shall be VOID. (RR 12-99) NOTE:  A follow-up letter/demand letter for payment of taxes is considered a notice of assessment. [REPUBLIC vs. CA and NIELSON & CO. (April 30, 1987)]  Where the taxpayer is appealing on the ground that the assessment is erroneous, it is incumbent upon him to prove what is the correct and just liability by a full and fair disclosure of all pertinent data. Tax assessments by tax examiners are presumed correct and made in good faith. The taxpayer has the duty to prove otherwise. [Bonifacio Sy Po v. CTA] Within what time may the Commissioner issue a notice of assessment? If the taxpayer filed a return internal revenue taxes shall be assessed within three years after the last day prescribed by law for the filing of the return. If a return is filed beyond the period prescribed by law, the three-year period shall be counted from the day the return was filed. A return filed before the last day prescribed by law for filing shall be considered as filed on the last day. (§203) ILLUSTRATION: The income tax return of an individual shall be filed on or before the fifteenth day of April of each year covering income of the previous taxable year. If X files his 2003 income tax return on 1 April 2004, what is the last day for issuing a notice of assessment? ANSWER: 16 April 2007. The three-year period is counted from 15 April 2004, since X filed his return earlier than the date prescribed by law.  NOTE: In short, the period for assessment is within three years from the time the return is filed or from the time the return is due, WHICHEVER IS LATER.   If the taxpayer DID NOT file a return internal revenue taxes shall be assessed within ten years after the discovery of the failure to file the return (§222a) alleged and proved in the court below. The finding of the trial court as to its existence and non-existence is final and cannot be reviewed by the Supreme Court unless clearly shown to be erroneous. [CIR V. Ayala Securities (1976)] Q: Are there tax returns which are false but not fraudulent?  YES. There must be a distinction between false returns (due to mistakes, carelessness or ignorance) and fraudulent returns (with intent to evade taxes). The fraud contemplated by law is actual and not constructive, and must amount to intentional wrongdoing with the sole object of avoiding the tax. [Aznar v. CTA (1974)] Q: What constitutes prima facie evidence of a false or fraudulent return?  substantial underdeclaration of taxable sales, receipts or income, OR a substantial overstatement of deductions (§248b) Q: What circumstances constitute substantial underdeclaration of sales, receipts or income, and overstatement of deductions, respectively?  failure to report sales, receipts or income in an amount exceeding thirty percent (30%) of that declared per return, and a claim of deductions in an amount exceeding (30%) of actual deductions (§248b)  WAIVER: The taxpayer and the Commissioner may agree in writing, before the expiration of the time prescribed in Sec. 203, to extend the period of assessment (§222b) The waiver of prescription must be executed properly per RMO 20-90, otherwise, invalid and results to prescription of the right to assess/collect. [PHIL JOURNALISTS INC. v. CIR (December 16, 2004)] Requirements under RMO 20-90: 1. definite agreed date, 2. date of acceptance indicated, and 3. taxpayer must be furnished with a copy of the waiver.

o

o

Q: What is the nature of prescription on the right to assess? The law on prescription, being a remedial measure, should be LIBERALLY CONSTRUED in order to afford protection. As a corollary, the exceptions to the law on prescription should be clearly construed. Hence, negligence or oversight on the part of the BIR cannot prejudice taxpayers, considering that the prescriptive period was precisely intended to give them peace of mind. [CIR v. Goodrich Philippines (1999)]

o

If the taxpayer filed a false or fraudulent return with intent to evade tax internal revenue taxes shall be assessed within ten years after the discovery of the falsity or fraud (§222a) Fraud or falsity on the return with intent to evade payment of tax is a question of fact and the circumstances constituting fraud must be 

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RMC No. 48-90 Counting of the Prescriptive Periods (April 23, 1990)  When the period covers a leap year, it shall be understood that years are of 365 days each as provided in Article 13 of the New Civil Code. Consequently, a 3-year prescriptive period for assessment or collection purposes shall have an aggregate number of 1,095 days (365 days X 3 years) reckoned from the date of filing of the return (in case of assessment) or from the issuance of the assessment (in case of collection). In other words, the 3-year prescriptive period expires on the 1,095th day, notwithstanding the fact that within the period, there is a leap year which is of 366 days. This principle applies to ALL prescriptive periods under the Code.  applied in ASIABANK v. CIR, CTA Case No.6095, October 9, 2001 NEED OF ADDITIONAL EVIDENCE. It may involve both question of fact or of law or both REINVESTIGATION – refers to a plea of re-evaluation of an assessment on the basis of NEWLY-DISCOVERED EVIDENCE that a taxpayer intends to present in the reinvestigation. It may also involve a question of fact or law or both.

What are the characteristics of a valid protest? A protest is considered validly made if it satisfies the following conditions: 1) 2) it is made in writing, and addressed to the Commissioner of Internal Revenue it contains the information the following information (from RR 12-85):  name of the taxpayer and address for the immediate past three taxable years  nature of request whether reinvestigation or reconsideration specifying newly-discovered evidence he intends to present if it is a request for reinvestigation  the taxable periods covered  assessment number  date of receipt of assessment notice or letter of demand  itemized statement of the findings to which the taxpayer agrees as a basis for computing the tax due, which amount should be paid immediately upon the filing of the protest. For this purpose, the protest shall not be deemed validly filed unless payment of the agreed portion of the tax is paid first  the itemized schedule of the adjustments with which the taxpayer does not agree  a statement of facts and/or law in support of the protest. It states the FACTS, applicable LAW, RULES and REGULATIONS or JURISPRUDENCE on which his protest is based, otherwise the protest shall be considered void and without force and effect. It is filed within the period prescribed by law

When is an assessment deemed made? An assessment is deemed made when the demand letter or notice is RELEASED, MAILED OR SENT by the BIR to the taxpayer. The law does not require that the taxpayer receive the notice within the three-year or ten-year period. [CIR vs. BAUTISTA (May 27, 1959)] So, even if the taxpayer actually received the assessment after the expiration of the prescriptive period, provided the release thereof was effected before prescription sets in, the assessment is deemed made on time. If the taxpayer does not agree with the assessment, what is his REMEDY? The taxpayer has the right to contest an assessment, and he may do so by filing a letter of PROTEST stating in detail his reasons for contesting the assessment. When no protest is seasonably made by the taxpayer, the assessment shall become final and unappealable, and thus the tax shall be collectible. Q: What is the nature of an assessment when it is final and executory? It is in the nature of an enforcement judgment such that no inquiry can be made thereon on the merits of the original case. Within what time may the taxpayer protest the assessment? An assessment may be protested administratively by filing a request for reconsideration or reinvestigation within thirty (30) days from receipt of the assessment. Within sixty (60) days from filing of the protest, all relevant supporting documents must be submitted, otherwise the assessment shall become final. (§228) What is the difference between a reconsideration and reinvestigation? (RR 12-85)  RECONSIDERATION – refers to a plea of re-evaluation of the assessment on the basis of existing records WITHOUT

3)

4)

What should the taxpayer do if his protest is denied or is not acted upon by the Commissioner?  Situation 1: If the Commissioner DENIES THE PROTEST filed by the taxpayer the taxpayer may appeal to the Court of Tax Appeals within thirty days from receipt of the decision denying the protest (§228)

Where there is a request for reconsideration, final demand letter from BIR is considered a decision on a disputed or protested assessment which is therefore appealable to the CTA. [CIR v. ISABELA CULTURAL CORP. (July 11, 2001)]

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 Situation 2: If the Commissioner did NOT ACT UPON THE PROTEST within one hundred and eighty days from the time the documents were submitted the taxpayer may either: o Appeal to the CTA within thirty days from the lapse of the 180day period OR o Wait until the Commissioner decides before he elevates the case to the CTA If the taxpayer is not satisfied with the decision of the CTA en banc, what is his REMEDY? A party adversely affected by a decision or ruling of the CTA en banc may file with the Supreme Court a verified petition for review on certiorari pursuant to Rule 45 of the 1997 Rules of Court. (Sec. 19, RA 1125 as amended by RA 9282 [2004])11 EFFECTS OF RA JURISDICTION: The CTA shall exercise: a. 1. 9282 ON THE CTA’S

NOTE: If Situation 1 occurs and the taxpayer does not file a protest within the prescribed period, the assessment becomes FINAL, EXECUTORY and DEMANDABLE. But if the Situation 2 occurs and the taxpayer does not file a protest within the prescribed period, the assessment DOES NOT become FINAL, EXECUTORY and DEMANDABLE. In cases of inaction by the Commissioner, Section 228 of the Tax Code merely gave the taxpayer an OPTION: first, he may appeal to the Court of Tax Appeals within thirty days from the lapse of the 180-day period, or second, he may wait until the Commissioner decides on his protest before he elevates his case. The taxpayer was given this option so that in case his protest is not acted upon within 180 days, he may be able to seek immediate relief and need not wait for an indefinite period of time for the Commissioner to decide. But if he chooses to wait for a positive action on the part of the Commissioner, then the same could not result in the assessment becoming final, executory and demandable. [LASCONA LAND Co vs. CIR (January 4, 2000)]

EXCLUSIVE APPELLATE review by appeal:

JURISDICTION

to

Decisions of the Commissioner of Internal Revenue in cases involving disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties in relation thereto, or other matters arising under the National Internal Revenue or other laws administered by the Bureau of Internal Revenue; Inaction by the Commissioner of Internal Revenue in cases involving disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties in relations thereto, or other matters arising under the National Internal Revenue Code or other laws administered by the Bureau of Internal Revenue, where the National Internal Revenue Code provides a specific period of action, in which case the inaction shall be deemed a denial; Decisions, orders or resolutions of the Regional Trial Courts in local tax cases originally decided or resolved by them in the exercise of their original or appellate jurisdiction; Decisions of the Commissioner of Customs in cases involving liability for customs duties, fees or other money charges, seizure, detention or release of property affected, fines, forfeitures or other penalties in relation thereto, or other matters arising under the Customs Law or other laws administered by the Bureau of Customs; Decisions of the Central Board of Assessment Appeals in the exercise of its appellate jurisdiction over cases involving the assessment and taxation of real property originally decided by the provincial or city board of assessment appeals; Decisions of the Secretary of Finance on customs cases elevated to him automatically for review from decisions of the Commissioner of Customs which are adverse to the Government under Section 2315 of the Tariff and Customs Code;

2.

3. When does the 30-day period to appeal in Situation 1 commence to run? The 30-day period starts when the taxpayer receives the decision of the Commissioner denying the protest. The decision of the Commissioner must categorically state that his action on the disputed assessment is final, otherwise period to appeal will not commence to run. The appealable decision is the decision of the Commissioner denying the protest, NOT the warrants of distraint or levy. [ADVERTISING ASSOCIATES vs. CA (December 26, 1984)]  NOTE:  A Division of the CTA shall hear the appeal. (Sec. 11, RA 1125 as amended by RA 9282 [2004]) If the taxpayer is not satisfied with the CTA Division’s ruling, what is his REMEDY?  FIRST, he may file a motion for reconsideration before the same Division of the CTA within fifteen (15) days from notice thereof. (Sec. 11, RA 1125 as amended by RA 9282 [2004])  THEN, a party adversely affected by a resolution of a Division of the CTA on a motion for reconsideration may file a petition for review with the CTA en banc. (Sec. 18, RA 1125 as amended by RA 9282 [2004])

4.

5.

6.

11 RA 9282, which amended RA 1125, expanded the jurisdiction of the CTA and elevated it to the level of the Court of Appeals. Q: Is the CTA a special court or a regular court?  It is a regular court with special jurisdiction.

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7. Decisions of the Secretary of Trade and Industry, in the case of nonagricultural product, commodity or article, and the Secretary of Agriculture in the case of agricultural product, commodity or article, involving dumping and countervailing duties under Section 301 and 302, respectively, of the Tariff and Customs Code, and safeguard measures under Republic Act No. 8800, where either party may appeal the decision to impose or not to impose said duties. Jurisdiction over OFFENSES: 1. cases involving CRIMINAL Metropolitan Trial Court and Regional Trial Court. 2. a. EXCLUSIVE APPELLATE JURISDICTION in tax collection cases: Over appeals from the judgments, resolutions or orders of the Regional Trial Courts in tax collection cases originally decided by them, in their respective territorial jurisdiction. Over petitions for review of the judgments, resolutions or orders of the Regional Trial Courts in the Exercise of their appellate jurisdiction over tax collection cases originally decided by the Metropolitan Trial Courts, Municipal Trial Courts and Municipal Circuit Trial Courts, in their respective jurisdiction.

b.

b.

EXCLUSIVE ORIGINAL JURISDICTION over all criminal offenses arising from violations of the National Internal Revenue Code or Tariff and Customs Code and other laws administered by the Bureau of Internal Revenue or the Bureau of Customs:  EXCEPTION: That offenses or felonies where the principal amount of taxes and fees, exclusive of charges and penalties, claimed is less than One million pesos (P1,000,000.00) or where there is no specified amount claimed shall be tried by the regular Courts and the jurisdiction of the CTA shall be appellate. NOTE: Any provision of law or the Rules of Court to the contrary notwithstanding, the criminal action and the corresponding civil action for the recovery of civil liability for taxes and penalties shall at all times be simultaneously instituted with, and jointly determined in the same proceeding by the CTA, the filing of the criminal action being deemed to necessarily carry with it the filing of the civil action, and no right to reserve the filling of such civil action separately from the criminal action will be recognized. EXCLUSIVE APPELLATE JURISDICTION 2. in criminal offenses: Over appeals from the judgments, resolutions or orders of the Regional Trial Courts in tax cases originally decided by them, in their respected territorial jurisdiction. Over petitions for review of the judgments, resolutions or orders of the Regional Trial Courts in the exercise of their appellate jurisdiction over tax cases originally decided by the Metropolitan Trial Courts, Municipal Trial Courts and Municipal Circuit Trial Courts in their respective jurisdiction. Jurisdiction over TAX COLLECTION CASES:

IV. COLLECTION LETTER/WARRANTS A. Collection of Deficiency Taxes Within what time period must collection of internal revenue taxes be made? Return filed NOT false fraudulent was or No return filed, or the return was false or fraudulent. Collection with PRIOR ASSESSMENT should be made within five years from the date of assessment (based on §222c)  by distraint or levy, or by judicial proceedings

Collection with PRIOR ASSESSMENT should be made within three years from the date of assessment of the tax.  by distraint or levy, or by judicial proceedings

a)

b)

Collection WITHOUT PRIOR ASSESSMENT – should be made within three years from the date of filing of return or date return is due, whichever is LATER (based on §203)  by judicial proceedings 

Collection WITHOUT PRIOR ASSESSMENT – should be made within ten years after the discovery of the falsity, fraud or omission to file a return.  by proceedings judicial

c. 1.

EXCLUSIVE ORIGINAL JURISDICTION in tax collection cases involving final and executory assessments for taxes, fees, charges and penalties.  EXCEPTION: Collection cases where the principal amount of taxes and fees, exclusive of charges and penalties, claimed is less than One million pesos (P1,000,000.00) shall be tried by the proper Municipal Trial Court,

If tax was assessed within the different period agreed upon by the Commissioner and the taxpayer, it may be collected by distraint or levy or by a proceeding in court within the period agreed upon in writing before the expiration of the 5-yr period. (§222d)

When shall the period for assessment or collection of taxes be suspended? (§223) The running of the statute of limitations provided in §203 and §222 shall be suspended for the period:

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1. During which the commissioner is PROHIBITED from making the assessment or beginning distraint or levy or a proceeding in court, and for sixty (60) days thereafter When the taxpayer requests for a REINVESTIGATION which is granted by the Commissioner CIR vs. WYETH CASE LAWS: (September 30, 1991)  The statutory period of limitation for collection may be interrupted when, by the taxpayer’s repeated requests or positive acts, the government has been, for good reasons, persuaded to postpone collection to make him feel the demand was not unreasonable or that no harassment or injustice was meant by government.  Value of internal revenue stamps when they are returned in good condition by the purchaser Unused stamps that have been rendered unfit for use (Commissioner may redeem, change or refund their value upon proof of destruction) Any sum alleged to have been excessively or in any manner wrongfully collected

2.

Q: What is the nature of a claim for refund? It partakes of the nature of an exemption and is strictly construed against the claimant. The burden of proof is on the taxpayer claiming the refund that he is entitled to the same. [CIR v. Tokyo Shipping (1995)] Q: When are there erroneously paid, or illegally assessed or collected taxes? Taxes are erroneously paid when a taxpayer pays under a mistake of fact, such as, he is not aware of an existing exemption in his favor at the time that payment is made. Taxes are illegally collected when payments are made under duress. Q: What is the difference between a tax credit and refund? They are essentially modes of recovering taxes that have been either erroneously or illegally paid to the government. REFUND takes place when there is actual reimbursement. TAX CREDIT takes place upon the issuance of a tax certificate or tax credit memo, which can be applied against any sum that may be due and collected from the taxpayer. Q: Is payment under protest necessary in claims for refund? No. Section 229 of the NIRC is specific on this point when it provides that a suit or proceeding for tax refund may be maintained “whether or not such tax, penalty or sum has been paid under protest or duress.” What is the procedure for obtaining a refund or tax credit? First, the taxpayer must file a claim for refund before the Commissioner within two years from the date of payment. (§229) [GENERAL RULE] o EXCEPTIONS to the rule requiring a claim for refund:  When on the face of the return upon which payment was made, such payment appears clearly to have been erroneously paid (e.g. mathematical errors), the Commissioner may refund or credit the tax even without a written claim therefor. NOTE: A return filed showing an overpayment shall be considered as a written claim for credit or refund. (§204C)

RR 12-85  RECONSIDERATION – refers to a plea of re-evaluation of the assessment on the basis of existing records WITHOUT NEED OF ADDITIONAL EVIDENCE. It may involve both question of fact or of law or both  REINVESTIGATION – refers to a plea of reevaluation of an assessment on the basis of NEWLY-DISCOVERED EVIDENCE that a taxpayer intends to present in the reinvestigation. It may also involve a question of fact or law or both. PHIL GLOBAL COMMUNICATION vs. A reCIR (October 31, 2006)  evaluation of existing records which results from a request for reconsideration does not toll the running of the prescription period for the collection of an assessed tax. The law distinctly limits the suspension of the running of the statute of limitations to instances when reinvestigation is requested by a taxpayer and is granted by the CIR. 3. When the taxpayer CANNOT BE LOCATED IN THE ADDRESS given by him in the return filed upon which a tax is being assessed or collected, but if the taxpayer informs the Commissioner of any change in address, the running of the statute of limitations shall not be suspended When the warrant of distraint or levy is duly served upon the taxpayer, his authorized representative, or a member of his household with sufficient discretion, and NO PROPERTY is located When the taxpayer is OUT OF THE PHILIPPINES Remedies of the taxpayer against a tax erroneously or illegally paid When may taxes be refunded or credited? Taxes may be refunded or credited in the following cases:  Taxes erroneously or illegally assessed or collected  Penalties imposed without authority

4.

5.

o B.

 But how shall the date of payment be determined? i. If the income tax is withheld at source the taxpayer is deemed to have paid his tax liability at the end of the taxable year. CASE LAW: GIBBS vs. COMMISSIONER (November 29, 1965)  A taxpayer who

o

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contributes to the withholding tax system, does so not really to deposit an amount to CIR, but, in truth, to perform and extinguish his tax obligation for the year concerned. He is paying his tax liabilities for that year. Consequently, a taxpayer whose income is withheld at the source will be deemed to have paid his tax liability when the same falls due at the end of the tax year. It is from this latter date then, or when the tax liability falls due, that the 2-year prescriptive period starts to run with respect to payments effected thru the withholding tax system. ii. If the income is paid on a quarterly basis the two-year period is counted from the time of filing the final adjustment return. CASE LAW: CIR vs. TMX SALES (January 16, 1992)  When a tax is paid in installments, the prescriptive period should be counted from the date of final payment or the last installment. This rule proceeds from the theory that there is no payment until the entire tax liability is completely paid. Further, it is only upon the filing of the Final Adjustment Return would the taxpayer be able to ascertain if he still has to pay additional income tax or if he is entitled to a refund. The filing and payment of quarterly income tax should only be considered as mere installments of the annual tax due. It should be treated as advances or portions of the annual tax due. A refund check or warrant must be claimed or cashed within five years from the date such warrant or check was mailed or delivered, otherwise it shall be forfeited in favor of the government and the amount thereof shall revert to the general fund. What can be done with a Tax Credit Certificate? Tax credit certificates (TCCs) can be applied against all internal revenue taxes, excluding withholding tax.  TCCs which remain unutilized after five years from the date of issue shall be considered as invalid, unless revalidated. If not revalidated, the amount covered by the TCC shall revert to the general fund C. Remedies of the State for Collection of Taxes GENERALLY, the remedies of distraint, levy or civil or criminal action may be pursued SIMULTANEOUSLY. (§205) Remedies of distraint and levy may be repeated if necessary until the full amount due, including all expenses, is collected. (§217) o HOWEVER, the remedies of distraint and levy shall not be available where the amount of the tax involved is not more than One hundred pesos. o Q: When may the government avail of the remedies of collection?  When the assessment shall have become final, executory and demandable.

o

What should the taxpayer do if his claim for refund is denied or is not acted upon by the Commissioner? o SITUATION 1: The Commissioner denies the claim for refund the taxpayer may appeal to the CTA within thirty (30) days from the receipt of the Commissioner’s decision AND within two years from the date of payment. (Note that §229 states that ‘no such suit or proceeding shall be filed after the expiration of the 2-year period regardless of any supervening cause that may arise after payment’) SITUATION 2: The Commissioner does not act on the claim, and the two-year period is about to lapse the taxpayer must file a claim before the CTA before the 2-year period lapses, otherwise he may no longer file a claim before the CTA in case the Commissioner renders an adverse decision beyond the 2-year period.  NOTE HOWEVER! Is the two-year period jurisdictional with respect to the CTA? NO. Even if the two-year period had already lapsed, the same is not a jurisdictional defect which, upon grounds of justice and equity, may be set aside by the court. [(COMMISSIONER vs. PHILAMLIFE (May 29, 1995)] If the Commissioner grants the refund, within what time must it be claimed?

NOTE: A court MAY NOT GRANT AN INJUNCTION to restrain the collection of any national internal revenue tax, fee or charge imposed under the NIRC. (§218) o EXCEPTION: Under Section 11 of RA 1125, as amended by RA 9282, suspension is allowed when the following conditions concur: 1. it is an appeal to the CTA from a decision of the Commissioner of Internal Revenue or Commissioner of Customs or the Regional Trial Court, provincial, city or municipal treasurer or the Secretary of Finance, the Secretary of Trade and Industry and Secretary of Agriculture, as the case may be, and in the opinion of the Court of Tax Appeals, the collection may jeopardize the interest of the Government and/or the taxpayer.  Q: In case of suspension, what may the taxpayer be required to do?  Either to deposit the amount claimed or to file a surety bond for not more than double the amount with the Court. Q: What are tax liens? (Sec. 219, NIRC) When a taxpayer neglects or refuses to pay his internal revenue tax liability after demand, the amount so demanded shall be a lien in favor of the government from the time the assessment was made by the CIR until paid with interest, penalties, and costs that may accrue in

o

2.

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addition thereto upon ALL PROPERTY AND RIGHTS TO PROPERTY BELONGING to the taxpayer. o HOWEVER, the lien shall not be valid against any mortgagee, purchaser or judgment creditor until NOTICE of such lien shall be filed by the Commissioner in the Office of the Register of Deeds of the province or city where the property of the taxpayer is situated or located. Q: What is the difference between seizure under forfeiture an a seizure to enforce a tax lien?  There is a great difference between a seizure under forfeiture and a seizure to enforce a tax lien. In the former all the proceeds derived from the sale of the thing forfeited are turned over to the Collector of Internal Revenue; in the latter, the residue of such proceeds over and above what is required to pay the tax sought to be realized, including expenses, is returned to the owner of the property. [BPI v. Trinidad]  The officer serving the warrant of distraint shall make an account of the goods, chattels, effects or other personal property distrained. A copy shall be left with the person from whom the goods were taken, or at the dwelling or place of business of such person with someone of suitable age and discretion. The account shall also contain a statement of the sum demanded and the time and place of sale of the distrained property. (§208)

o

How are different kinds of personal property distrained?  Stocks and other securities  by serving a copy of the warrants of distraint on the taxpayer, AND upon the president, manager, treasurer or other responsible officer of the corporation, company or association which issued the stocks or securities. Debts and credits  by leaving with the person owing the debts or having in his possession or under his control such credits, or with his agent, a copy of the warrant of distraint. The person owing the debts shall then pay the Commissioner instead of his creditor (taxpayer) on the strength of such warrant. Bank accounts  by serving a warrant of garnishment upon the taxpayer AND upon the president, manager, treasurer or other responsible officer of the bank. The bank shall then turn over to the Commissioner so much of the bank accounts as may be sufficient to satisfy the claim of the Government. (NOTE: distraint of bank accounts is called GARNISHMENT)

 ADMINISTRATIVE REMEDIES 1. Distraint What is distraint of personal property? Distraint involves the SEIZURE by the Government of PERSONAL PROPERTY, tangible or intangible, to enforce the payment of taxes; followed by the PUBLIC SALE of such property, if the taxpayer fails to pay the taxes voluntarily. What are the kinds of distraint? 1. 2. Actual Distraint – resorted to when there is ACTUAL delinquency in tax payment Constructive Distraint – is a preventive remedy which aims at forestalling a possible dissipation of the taxpayer’s assets when delinquency sets in. Hence, no actual delinquency in payment is necessary.

How is ACTUAL distraint of personal property effected?  When the taxpayer fails to pay the delinquent tax at the time required, the proper officer shall SEIZE and DISTRAINT any GOODS, CHATTELS, or EFFECTS, and the PERSONAL PROPERTY, including STOCKS and other SECURITIES, DEBTS, CREDITS, BANK ACCOUNTS and INTERESTS in and RIGHTS to personal property of the taxpayer in sufficient quantity to satisfy the tax, expenses of distraint and the cost of the subsequent sale. Who is the proper officer authorized to issue the warrant of distraint?  Commissioner or his duly authorized representative – if the amount involved is in EXCESS of One million pesos (P1,000,000)  Revenue District Officer – if the amount involved is One million pesos (P1,000,000) or LESS. (§207A)

What is the remedy of the taxpayer once the Commissioner or other proper officer issues the warrant of distraint? The taxpayer may request that the warrant be lifted. The commissioner may, in his discretion, allow the lifting of the order of distraint. He may ask for a bond as a condition for the cancellation of the warrant. (§207) If the taxpayer does not ask for the lifting of the warrant, what shall be done with the seized properties? The properties will be SOLD in a PUBLIC SALE, and the procedure shall be as follows: (1) The Revenue District Officer or his duly authorized representative (not the officer who served the warrant), shall cause a notification of the public sale to be posted in not less than two (2) public places in the municipality or city (one of which is the Office of the Mayor) where the distraint was made. The notice shall specify the time and place of the sale. The time of sale shall not be less than twenty (20) days after notice to the owner and the publication or posting of such notice. (2) At the time of the public sale, the revenue officer shall sell the goods, chattels, or effects, or other personal property, including stocks and other securities so distrained at

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a PUBLIC AUCTION, to the HIGHEST BIDDER for CASH or with the approval of the Commissioner, through a DULY LICENSED COMMODITY or STOCK EXCHANGES. (3) Any residue over and above what is required to pay the entire claim, including expenses of sale and distraint, shall be RETURNED to the owner of the property sold. Expenses shall be limited to actual expenses of SEIZURE and PRESERVATION of the property pending the sale, no charge shall be imposed for the services of the local internal revenue officer or his deputy. (§209) (4) If the amount offered by the highest bidder is not equal to the amount of the tax or is very much less than the actual market value of the articles offered for sale, the Commissioner or his deputy may purchase the same in behalf of the National Government for the amount of taxes, penalties and costs due thereon. The property so purchased may thereafter be resold by the Commissioner or his deputy. (§212) (5) If the proceeds from the sale of the distrained properties is not sufficient to satisfy the tax delinquency, the Commissioner or his duly authorized representative shall within thirty (30) days after execution of the distraint, proceed with the levy on the taxpayer’s real property. (§207B) May the taxpayer recover his property prior to consummation of the sale? YES. If at any time prior to the consummation of the sale all proper charges are paid to the officer conducting the sale, the goods or effects distrained shall be restored to the owner. (§210) How is CONSTRUCTIVE distraint effected? Constructive distraint is effected by requiring a taxpayer or any person in possession or control of such property to SIGN a RECEIPT covering the property distrained and obligate himself to PRESERVE THE SAME INTACT and UNALTERED and NOT TO DISPOSE of the same in any manner whatever, without the Commissioner’s authority. If the taxpayer or person in possession or control refuses to sign the receipt, the revenue officer shall prepare a list of the property and leave a copy of such list in the premises where the properties are located, in the presence of two (2) witnesses. Q: When may property of the taxpayer be placed in constructive distraint? The property of a taxpayer may be placed in constructive distraint, if in the Commissioner’s opinion:  the taxpayer is retiring from any business subject to tax  the taxpayer is intending to leave the Philippines  the taxpayer is intending to remove his property from the Philippines or to hide or conceal his property  the taxpayer is planning to perform any act tending to obstruct the proceedings 2) for collecting the tax due or which may be due from him (§206) NOTE: In constructive distraint, the property is not actually confiscated or seized by the revenue officer 2. Levy What is Levy of Real Property? Levy of real property refers to the same act of seizure as in distraint, but in this case, of real property, an interest in or rights to such property in order to enforce the payment of taxes. The real property under levy shall be sold in a public sale, if the taxes involved are not voluntarily paid following such levy. How is levy of real property effected? 1) After the expiration of time required to pay the delinquent tax, real property may be levied upon, BEFORE, SIMULTANEOUSLY or AFTER the distraint of personal property belonging to the delinquent. The IR officer designated by the Commissioner or his duly authorized representative shall prepare a DULY AUTHENTICATED CERTIFICATE showing the name of the taxpayer and the amounts of tax and penalty due from him. This certificate shall operate with the force of LEGAL EXECUTION throughout the Philippines. The certificate shall contain a description of the property upon which levy is made. At the same time, written notice of the levy shall be mailed to or served upon the Register of Deeds of the province or city where the property is located and upon the taxpayer (if he is absent from the Philippines, to his agent or manager of business in respect to which the liability arose or to the occupant of the property in question) Within twenty (20) days after the levy, the officer conducting the proceedings shall proceed to advertise for SALE the property or a portion thereof as may be necessary to satisfy the claim and costs of sale. Such advertisement shall cover a period of at least thirty (30) days. The notice shall be posted at the main entrance of the city or municipal all AND in a public and conspicuous place in the barrio or district where the real property lies. The notice must also be published in a newspaper of general circulation in the place where the property is located, once a week for three (3) weeks.  CONTENTS of notice: statement of amount of taxes, and penalties due, time and place of sale, name of taxpayer, short description of property. The sale shall be held either at the main entrance of the municipal or city hall or on the premises to be sold. Property will be awarded to the highest bidder. In case the proceeds of the sale exceeds the claim and costs of sale, the excess shall be turned over to the owner of the property. (§213)

3)

4)

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5) If there is no bidder for the real property OR if the highest bid is not sufficient to pay the taxes, penalties and costs, the IR Officer conducting the sale shall declare the property FORFEITED to the GOVERNMENT in satisfaction of the claim. (§215) The Commissioner may resell the property at a public auction after the giving of not less than twenty (20) days notice. (§216) required tax return. [CIR v. Pascor Realty (June 29, 1999)]

V. 1.

COMPROMISE AND ABATEMENT Compromise (to reduce the amount of tax payable) On what grounds may the commissioner compromise the payment of internal revenue tax (civil compromise)? The Commissioner may compromise the payment of any internal revenue tax in the following cases: 1) 2) A REASONABLE DOUBT as to the validity of the claim against the taxpayer exists; or The financial position of the taxpayer demonstrates a clear inability to pay the assessed tax. (FINANCIAL INCAPACITY)

May the taxpayer recover his property prior to consummation of the sale? YES. At any time before the day fixed for the sale, the taxpayer may discontinue all proceeding by paying the taxes, penalties and interest. (§213) May the taxpayer recover his property after the consummation of the sale? YES. Within one (1) year from the date of sale, the taxpayer or anyone for him, may pay to the Revenue District Officer the total amount of the following:  public taxes  penalties  interest from the date of delinquency to the date of sale  interest on said purchase price at the rate of fifteen percent (15%) per annum from the date of sale to the date of redemption. (NOTE: if the property was forfeited in favor of the government, the redemption price shall include only the taxes, penalties and interest plus costs of sale – no interest on purchase price since the Gov’t did not “purchase” the property anyway, it was forfeited) NOTE: The taxpayer-owner shall not be deprived of possession of the said property and shall be entitled to rents and other income until the expiration of the period for redemption JUDICIAL PROCEEDINGS Civil and criminal action and proceedings instituted in behalf of the Government under the authority of this Code or other law enforced by the BIR  shall be BROUGHT IN THE NAME OF THE GOVERNMENT of the Philippines  shall be CONDUCTED BY LEGAL OFFICERS OF THE BIR No civil or criminal action for the recovery of taxes or the enforcement of any fine, penalty or forfeiture under the NIRC shall be filed in court without the APPROVAL OF THE COMMISSIONER approval of the Commissioner. (§220) Q: How is a criminal action a collection remedy? The judgment in the criminal case shall not only impose the penalty but shall also order payment of the taxes subject of the criminal case as finally decided by the Commissioner. (§205) Q: Is an assessment necessary before filing a criminal charge for tax evasion? No, an assessment is not necessary before a criminal charge can be filed. The criminal charge need only be proved by a prima facie showing of a willful attempt to file taxes, such as failure to file a

What are the limits of the Commissioner’s power to compromise?  For cases of financial incapacity a minimum compromise rate equivalent to ten percent (10%) of the basic assessed tax  For other cases a minimum compromise rate equivalent to forty percent (40%) of the basic assessed tax  NOTE: When the basic tax involved exceeds One Million Pesos (P1,000,000), or where the settlement offered is less than the prescribed minimum rates, the compromise must be approved by the Evaluation Board (composed of the Commissioner and 4 deputy commissioners) May the Commissioner compromise cases of criminal violations? Generally, ALL CRIMINAL VIOLATIONS may be compromised, EXCEPT: a) those cases already filed in court b) those involving fraud 2. Abatement (to cancel the entire amount of tax payable) When may the Commissioner abate or cancel a tax liability? The Commissioner may abate or cancel a tax liability when: 1) 2) the tax or any portion thereof appears to be UNJUSTLY or EXCESSIVELY ASSESSED; or the ADMINISTRATION and COLLECTION COSTS do not justify the collection of the amount due. (costs of collection > amount of tax due)

VI. STATUTORY OFFENSES AND PENALTIES A. 1. Additions to the Tax Civil Penalties

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Surcharge, defined  Surcharge is a civil penalty imposed by law as an addition to the main tax required to be paid. It is not a criminal penalty but a civil administrative sanction provided primarily as a safeguard for the protection of the State revenue and to reimburse the government for the expenses of investigation and the loss resulting from the taxpayer’s fraud. A surcharge added to the main tax is subject to interest. Rates of Surcharge: There shall be imposed a penalty equivalent to twenty-five percent (25%) of the amount due, in the following cases:  FAILURE TO FILE ANY RETURN and PAY THE TAX DUE THEREON on the date prescribed; or  Filing a return with an internal revenue officer than those with whom the return is required to be filed (except when authorized by the Commissioner); or  FAILURE TO PAY THE DEFICIENCY TAX within the time prescribed for its payment in the notice of assessment  FAILURE TO PAY THE FULL OR PART of the amount of tax shown on any return required to be filed, or the full amount of tax due for which no return is required to be filed, on or before the date prescribed for its payment. (§248A) The penalty shall be fifty percent (50%) of the tax or of the deficiency tax, in the following cases:  WILLFUL NEGLECT to FILE THE RETURN within the period prescribed  A FALSE OR FRAUDULENT RETURN is willfully made (§248B)  Prima-facie evidence of false or fraudulent return:  substantial underdeclaration of taxable sales, receipts or income (failure to report sales, receipts or income in an amount exceeding 30% of that declared per return)  substantial overstatement of deductions (a claim of deduction in an amount exceeding 30% of actual deductions) 2. Interest There shall be assessed and collected an interest at 20% per annum on any unpaid amount of tax or higher rate prescribed by rules and regulations from the date prescribed for payment until the amount is fully paid.  Deficiency interest – the term ‘deficiency’ means the amount by which the taxed imposed under the Code exceeds the amount shown on the return filed (§249B)  Delinquency Interest. - In case of failure to pay:  tax due on any return required to be filed, or  tax due for which no return is required, or  a deficiency tax, or any surcharge or interest thereon on the due date appearing in the notice and demand of the Commissioner, there shall be assessed and collected on the unpaid amount, interest at the rate prescribed until the amount is fully paid, which interest shall form part of the tax. (§249C) B. 1.  Crimes, Other Offenses and Forfeitures General Provisions Any person convicted of a crime under the Code shall, in addition to being liable for the payment of the tax, be subject to the penalties imposed under the Code. Payment of the tax due after a case has been filed shall not constitute a valid defense in any prosecution for violation of the provisions under the Code. Any person who willfully aids or abets in the commission of a crime penalized under the Code or who causes the commission of any such offense by another shall be liable in the same manner as the principal. If the offender is not a citizen of the Philippines, he shall be deported immediately after serving the sentence. If the offender is a public officer or employee, the maximum penalty prescribed for the offense shall be imposed on him, and he shall be dismissed from public office, and perpetually disqualified from holding any public office, to vote and to participate in any election. If the offender is a CPA, his license shall be automatically revoked or cancelled once he is convicted. In cases of corporations, associations, partnerships etc. the penalty shall be imposed on the partner, president, general manager, branch manager, treasurer, officerin-charge and employees responsible for the violation. The fines imposed for any violation of the Code shall not be lower than the fines imposed herein or twice the amount of taxes, interests and surcharges due from the taxpayer, whichever is higher. (§253) All violations of any provision of the Code shall prescribe after five (5) years. Criminal Offenses Who liable is

2. Tax Code Secti on 254

Offense Willful attempt to evade or defeat tax.

Penalty Fine - P30,000 or 100,000; and Imprisonment - 2 to 4 years; Plus other penalties

Any person who willfully attempts in any manner to evade or defeat any tax or the payment thereof.

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255 Failure to File Return, Supply Correct and Accurate Informatio n, Pay Tax, Withhold and Remit Tax and Refund Excess Taxes Withheld on Compensa tion Any person required to pay any tax, make a return, keep any record, or supply correct and accurate information Fine - P10,000 or more; and Imprisonment - 1 to 10 years; Plus other penalties A person engaged in the business of distilling, rectifying, repacking, compoundin g or manufacturi ng any article subject to excise tax. Any person who knowingly undertakes the collection of foreign payments under Sec. 67 without a license or without complying with the implementin g rules and regulations. Any person, manufacture r or importer of cigar or cigarettes Fine - P30,000 - 50,000; and Imprisonment - 1 to 2 years

259

Illegal Collection of Foreign Payments

Fine - P20,000 - 50,000; and Imprisonment - 1 to 2 years

257

Making false entries, records, or reports, or using falsified or fake accountab le forms.

258

Unlawful pursuit of business

Any person who attempts to make it appear for any reason that he or another has in fact filed a return or statement, or actually files a return or statement and subsequentl y withdraws the same return or statement Any financial officer or Independent Certified Public Accountant engaged to examine and audit books of accounts of taxpayers under Sec.232 (A) and any person under his direction. Any person who carries on any business for which in annual registration fee is imposed without paying the tax as required by law.

Fine - P10,000 - 20,000; and Imprisonment - 1 to 3 years; Plus other penalties

260

Unlawful Possessio n of Cigarette Paper in Bobbins or Rolls, Etc.

Fine - P20,000 - 100,000; and Imprisonment - 6 years 1 day to 12 years

Fine - P50,000 - 100,000; and Imprisonment - 2 to 6 years

Fine - P5,000 20,000; and Imprisonment - 6 months to 2 years

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261 Unlawful Use of Denatured Alcohol Any person who for the purpose of manufacturi ng any beverage, uses denatured alcohol or alcohol specially denatured to be used for motive power or withdrawn under bond for industrial uses or alcohol knowingly misrepresent ed to be denatured to be unfit for oral intake or who knowingly sells or offers for sale such preparations containing as an ingredient such alcohol. Any person who unlawfully recovers or attempt to recover by distillation or other process any denatured alcohol or who knowingly sells or offers for sale, conceals or otherwise disposes of alcohol as recovered or redistilled Any person who ships, transports or removes Fine - P20,000 - 100,000; and Imprisonment - 6 years 1 day to 12 years 263 Imitation of any Existing or Otherwise Known Product Name or Brand Unlawful Possessio n or Removal of Articles Subject to Excise Tax Without Payment of the Tax

Any person who owns or is found in possession of these articles

Value of goods not > P1,000: Fine – not < than P1,000 not > P2,000, imprisonment of not < 60 days, not > 100 days Value of goods > P1,000, not > than P50,000: Fine – not < than P10,000 not > P20,000, imprisonment of not < 2 yrs, not > 4 years Value of goods > P50,000, not > than P150,000: Fine – not < than P30,000 not > P60,000, imprisonment of not < 4 yrs, not > 6 years Value of goods > P150,000: Fine – not < than P50,000 not > P100,000, imprisonment of not < 10 yrs, not > 12 years

262

Shipment or Removal of Liquor or Tobacco Products under False Name or Brand or as an

Fine - P20,000 - 100,000; and Imprisonment - 6 years 1 day to 12 years

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264 Failure or Refusal to Issue Receipts or Sales or Commerci al Invoices, Violations Related to the Printing of Such Receipts or Invoices and Other Violations Offenses Relating to Stamps Failure to Obey Summons Any person who, being required under Section 237 to issue receipts or sales or commercial invoices Fine - P 1,000 - 50,000; and Imprisonment - 2 to 4 years Property Used in Unlicense d Business or Dies Used for Printing False Stamps, Etc. Forfeiture of Goods Illegally Stored or Removed conducts an unlicensed business

265

266

267

Declaratio n under Penalties of Perjury

268

Misdeclara tion or Misrepres entation of Manufactu rers Subject to Excise Tax Forfeiture of

Any person who being duly summoned to appear to testify, or to appear and produce books of accounts, records, memoranda or other papers, or to furnish info. as required under the pertinent provisions of this Code. Any person who willfully files a declaration, return or statement containing information which is not true and correct as to every material matter Any manufacture r subject to excise tax

Fine P 20,000 50,000; and Imprisonment - 4 to 8 yrs Fine - P 5,000 - 10,000; and Imprisonment - 1 to 2 yrs

Any person subject to excise tax who fails to store the goods in proper place, or removes goods without payment of excise tax

Forfeiture

274

275

Penalty for Second and Subseque nt Offenses Violation of Other Provisions of the Tax Code or Rules or Regulation s in General

Maximum of the penalty prescribed for the offense Any person who violates any provision of this Code or any rule or regulation promulgated by the Department of Finance for which no specific penalty is provided by law Any taxpayer, whose property has been placed under constructive distraint Fine: not more than P 1,000 or Imprisonment: not more than 6 months, or both

Perjury under the Revised Penal Code

276

Summary cancellation or withdrawal of the permit to engage in business as a manufacturer of articles subject to excise tax Forfeiture

Penalty for Selling, Transferri ng, Encumberi ng or in any way disposing of property Placed under Constructi ve Distraint

Fine: not less than twice the value of the property but not less than P 5,000 or Imprisonment: 2 yrs 1 day - 4 yrs or both

Any who

person

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277 Failure to Surrender Property Placed under Distraint and Levy Any person having in his possession or under his control any property or rights to property, upon which a warrant of constructive distraint or actual distraint and levy has been issued Any person who causes or procures an officer or employee of the Bureau of Internal Revenue to divulge any confidential information regarding the business, income or inheritance of any taxpayer, knowledge of which was acquired by him in the discharge of his official duties, and which it is unlawful for him to reveal, and any person who publishes or prints in any manner whatever, not provided by law, any income, profit, loss or expenditure appearing in any income tax return Fine: P 5,000 or more or Imprisonment: 6 months 1 day - 2 years, or both a) b) extort or willfully oppress under color of law; knowingly demand other or greater sums than are authorized by law or receive any fee, compensation or reward, except as by law prescribed, for the performance of any duty; willfully neglect to give receipts, as by law required, for any sums collected in the performance of duty, or who willfully neglect to perform any of the duties enjoined by law; conspire or collude with another or others to defraud the revenues or otherwise violate the law; willfully make opportunity for any person to defraud the revenues, or who do or omit to do any act with intent to enable any other person to defraud the revenues; negligently or by design permit the violation of the law by any other person; make or sign any false certificate or return in any case where the law requires the making by them of such entry, certificate or return; having knowledge or information of a violation of any provision of the Code or of any fraud committed on the revenues collectible by the BIR, fail to report such knowledge or information to their superior officer, or to report as otherwise required by law; or without the authority of law, demand or accept or attempt to collect, directly or indirectly, as payment or otherwise, any sum of money or other thing of value for the compromise, adjustment or settlement of any charge or complaint for any violation or alleged violation of law. (§235)

c)

d) Fine: not more than P 2,000 or Imprisonment: 6 months - 5 years, or both

278

Procuring Unlawful Divulgenc e of Trade Secrets

e)

f) g)

h)

i)

VII. COMPLIANCE REQUIREMENTS What records are required to be kept by taxpayers? (1) taxpayers with gross quarterly sales, earnings, receipts or output of P50,000 or less a simplified form of bookkeeping records duly authorized by the Secretary of Finance, wherein all transactions and results of operations are shown and from which all taxes due may be readily and accurately ascertained and determined at ant time of the year. (§232) (2) taxpayers with gross quarterly sales, earnings, receipts or output exceeding P50,000 but not more than P150,000 a journal and ledger or their equivalent. (§232)

3.

Penalties Imposed on Public Officers The law imposes a fine of not less than P50,000 nor more than P100,000 or imprisonment for not less than 10 years nor more than fifteen years on every official, agent or employee of the BIR or of any agency or employee of the Government charged with the enforcement of the Tax Code, who shall:

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(3) taxpayers with gross quarterly sales, earnings, receipts or output exceeding P150,000 books of accounts, examined and audited by an independent CPA and their income tax return shall be accompanied by  certified balance sheets  profit and loss statements  list of income-producing properties and other relevant data (§232) NOTES:  Taxpayers may also keep other subsidiary books at their option, as the needs of their business may require. If subsidiary books are kept, they shall form part of the accounting system of the taxpayer. (§233)  Books or records shall be kept in a native language, English or Spanish. The keeping of books and records in any language other than the three mentioned is prohibited, unless the taxpayer makes a true and complete translation of all the entries in the said books and records. (§234)  All the books and records shall be kept by the taxpayer until the period for making an assessment under Sections 203 and 222 have prescribed. (§235)  Examination and inspection of all books and records shall be made only once in a taxable year, EXCEPT in these cases:  Fraud, irregularity or mistakes, as determined by the Commissioner  The taxpayer requests reinvestigation  Verification of compliance with withholding tax laws and regulations  Verification of capital gains tax liabilities  In the exercise of the Commissioner’s power to issue an access letter. (§235) Who are required to register with the BIR? Every person subject to any internal revenue tax shall register once with the appropriate Revenue District Officer:  Within ten (10) days from date of employment, or  On or before the commencement of business, or  Before payment of any tax due, or  Upon filing of a return, statement or declaration as required under the Code (§236) What shall the BIR do after the taxpayer registers? The BIR shall assign a Taxpayer Identification Number (TIN) which the taxpayer shall indicate in every return, statement or document filed with the BIR. Only one TIN shall be given a person. Any person who secures more than one TIN shall be criminally liable. (§236) VIII. INFORMER’S REWARD (Sec. 282 of the NIRC)  To whom given  persons instrumental in the discovery of violations of the NIRC and in discovery and seizure of smuggled goods. Conditions to qualify for the reward: 1. 2. Person is not an internal revenue official or employee, public official, or employee or relative within 6 th degree of consanguinity Voluntarily gives definite and sworn information: a) Not yet in the possession of BIR b) Leading to discovery of frauds c) Resulting in: i. the recovery of revenues, surcharges and fees and/or ii. conviction of the guilty party. d) Not refer to a case already pending or previously investigated or examined by the Commissioner or his agents or the SOF or his agents.

 

Amount of reward: 10% of the revenues, surcharges or fees recovered and/or fine/penalty imposed, or P1,000,000, whichever is LOWER.  The same amount shall be given if the offender offered to compromise and such offer has been accepted and collected by the Commissioner.  If no revenue, surcharge or fees be actually collected, such person is not entitled to a reward  For discovery and seizure of SMUGGLED GOODS  The cash reward is 10% of the FMV of the smuggled and confiscated goods, or P1,000,000, whichever is LOWER. The cash rewards shall be subject to income TAX at the rate of 10%. Rule of construction  Statutes offering rewards must be liberally construed in favor of informers and with regard to the purpose for which they are intended, with mere technicality yielding to the substantive purpose of the law. [Penid v. Virata]

IX. 1.

PROBLEMS Mr. Sebastian is a Filipino seaman employed by a Norwegian company which is engaged exclusively in international shipping. He and his wife, who manages their business, filed a joint income tax return for 1997 on 15 March 1998. After an audit of the return, the BIR issued on 20 April 2001 a deficiency income tax assessment for the sum of P250,000 inclusive of interest and penalties. For failure of the couple to pay the tax within the period stated in the notice of assessment, the BIR issued on 19 August 2001 a warrant of distraint and levy to enforce collection of the tax. If you are the lawyer of the couple, what possible defense or defenses will you raise in behalf of your clients against the action of the BIR in enforcing collection of the tax by the summary remedies of warrants of distraint and levy? Explain your answer. (2002 Bar) Answer: I will raise the defense of prescription. The right of the BIR to assess prescribes after three years from the last day prescribed by law for filing the return. The

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last day for filing the 1997 ITR is on 15 April 1998. Since 20 April 2001 is more than 3 years from that date, BIR’s right to assess had already prescribed. 2. TY Corporation filed its final adjusted IT return for 1993 on 12 April 1994 showing a net loss from operations. After investigation, the BIR issued a pre-assessment notice on 30 March 1996. A final notice and demand letter dated 15 April 1997 was issued, personally delivered to and received by the company’s chief accountant. For willful refusal and failure of TY Corporation to pay the tax, warrants of distraint and levy on its properties issued and served upon it. On 10 January 2002, a criminal charge for violation of the Tax Code was instituted in the RTC with the approval of the Commissioner. The company moved to dismiss the complaint on the ground that an act for violation of any provision of the Tax Code prescribes after five years and in this case, the period commenced to run on 30 March 1996 when the PAN was issued. How will you resolve the motion? (2002 Bar) Answer: The MTD should not be granted. It is only when the assessment has become final and unappealable that the 5-year period to file a criminal action commences to run. The PAN is not a final assessment which is enforceable by the BIR. IT is the issuance of the final notice and demand letter dated 15 April 1997 and the failure of the taxpayer to protest within 30 days from receipt that made the assessment final and unappealable. The earliest date that the assessment has become final is 16 May 1997, and since the criminal charge was instituted on 10 January 2002, the same was timely filed. 3. In the investigation of the withholding tax returns of AZ Medina Security Agency for the taxable years 1997 and 1998, a discrepancy between the taxes withheld from its employees and the amounts actually remitted to the government was found. Accordingly, before the period of prescription commenced to run, the BIR issued an assessment and a demand letter calling for the immediate payment of the deficiency withholding taxes in the total amount of P250,000. Counsel for AZ Medina protested the assessment for being null and void on the ground that no PAN had been issued. However, the protest was denied. Counsel then filed a petition for prohibition with the CTA to restrain the collection of the tax. Is the contention of the counsel tenable? Will the special civil action for prohibition brought before the CTA under Sec. 11 of RA 1125 prosper? Discuss your answer. (2002 Bar) Answer: No, the contention of the counsel is untenable. Section 228 of the Tax Code expressly provides that no PAN shall be required when a discrepancy has been determined between the tax withheld and the amount actually remitted by the withholding agent. Since the amount assessed relates to deficiency withholding taxes, the BIR is correct in issuing the assessment and demand letter calling for the immediate payment of the deficiency withholding taxes. Moreover, the special civil action for prohibition will not prosper, because the CTA has no jurisdiction to entertain the same. The power to issue writ of injunction provided for under Section 11 of RA 1125 is only ancillary to its appellate jurisdiction. The CTA is not vested with original jurisdiction to issue writs of prohibition or injunction independently of and apart from an appealed case. The remedy is to appeal the decision of the BIR (Collector vs. Yuseco 3 SCRA 313) 4. Mr. Chan, a manufacturer of garments, was investigated for failure to file tax returns and to pay taxes for the taxable year 1997. Despite subpoena duces tecum issued to him, he refused to present and submit his books of accounts and allied records. Investigators, therefore, raided his factory and seized several bundles of manufactured garments, supplies and unpaid imported textile materials. After his apprehension and based on the testimony of a former employee, deficiency income and business taxes were assessed against Mr. Chan on April 15, 2000. It was then that he paid the taxes. Criminal action was nonetheless instituted against him in the RTC for violation of the Tax Code. Mr. Chan moved to dismiss the criminal case on the ground that he had already paid the taxes assessed against him. He also demanded the return of the garments and materials seized from his factory. How will you resolve Mr. Chan’s motion? (2002 Bar) Answer: The MTD should be denied. The satisfaction of the civil liability is not one of the grounds for the extinction of criminal action. Likewise, the payment of the tax due after apprehension shall not constitute a valid defense in any prosecution for violation of any provision of the Tax Code (Sec. 253a). However, the garments and materials seized from the factory should be ordered returned because the payment of the tax had released them from any lien that the Government has over them. 5. A taxpayer is suspected not to have declared his correct income in the return filed for 1997. The examiner requested the Commissioner to authorize him to inquire into the bank deposits of the taxpayer so that he could proceed with the net worth method of investigation to establish fraud. May the examiner be allowed to look into the taxpayer’s bank deposits? (2000 Bar) Answer: NO, as this would be violative of RA 1405, the Bank Secrecy Law. The Commissioner or his representative is allowed to inquire into the bank deposits of a taxpayer only in these three cases:

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For the purpose of determining the gross estate of a decedent Where the taxpayer has filed an application for compromise of his tax liability on the ground of financial incapacity Where the taxpayer has signed a waiver authorizing the Commissioner to inquire into his bank deposits

-

6.

A Co. a Philippine corporation, is a big manufacturer of consumer goods and has several suppliers of raw materials. The BIR suspects that some of the suppliers are not properly reporting their income on sales to A Co. The CIR therefore: Issued an access letter to A Co. to furnish the BIR with information on sales and payments to its suppliers Issued an access letter to X bank to furnish the BIR on deposits of some suppliers of A C. on the alleged ground that the suppliers are committing tax evasion. A Co., X Bank and the suppliers have not been issued by the BIR letter of authority to examine. A Co. and X Bank believe that the BIR is on a fishing expedition and come to you for counsel. What is your advice? (2000 Bar) Answer: I will advise A Co. and X Bank that the BIR is justified only in getting information from the former but not from the latter. The BIR is authorized to obtain information from other persons other than those whose tax liability is subject to audit or investigation. However, this power shall not be construed as granting the Commissioner the authority to inquire into bank deposits. (Section 5, NIRC)

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LOCAL TAXATION
III. BASIC CONCEPTS A. Local Government Unit - 1987 CONSTI, ART X, SECTION 1. The territorial and political subdivisions of the Republic of the Philippines are the provinces, cities, municipalities, and barangays. There shall be autonomous regions in Muslim Mindanao and the Cordilleras as hereinafter provided. B. Scope of Local Taxation – The provisions in LGC shall govern the exercise by PROVINCES, CITIES, MUNICIPALITIES, and BARANGAYS of their taxing and other revenue-raising powers. (Sec 128 LGC) Power to Create Sources of Revenue -Each local government unit shall exercise its power to create its own sources of revenue and to levy taxes, fees, and charges subject to the provisions herein, consistent with the basic policy of local autonomy. Such taxes, fees, and charges shall accrue exclusively to the local government units. (SEC. 129, LGC) Fundamental Principles -- The following fundamental principles shall govern the exercise of the taxing and other revenueraising powers of local government units: (a) Taxation shall be uniform in each local government unit; NOTE: the uniformity required is only within the territorial jurisdiction of an LGU. (IRR) (b) Taxes, fees, charges and other impositions shall: (1) be equitable and based as far as practicable on the taxpayer's ability to pay; (2) be levied and collected only for public purposes; be unjust, excessive, (3) not oppressive, or confiscatory; (4) not be contrary to law, public policy, national economic policy, or in the restraint of trade; (c) The collection of local taxes, fees, charges and other impositions shall in no case be let to any private person; (d) The revenue collected pursuant to the provisions of this Code shall inure solely to the benefit of, and be subject to the disposition by, the local government unit levying the tax, fee, charge or other imposition unless otherwise specifically provided herein; and,  E.

(e) Each local government unit shall, as far as practicable, evolve a progressive system of taxation. (SEC. 130, LGC) Local Taxing Authority. - shall be exercised by the SANGGUNIAN of the local government unit concerned through an appropriate ordinance. (SEC. 132, LGC) HOWEVER, the local chief executive of the LGUs (except the punong barangay) possesses veto powers, as laid out in Sec. 55 of the LGC: SEC. 55. Veto Power of the Local Chief Executive. – (a) The local chief executive may veto any ordinance of the sangguniang panlalawigan, sangguniang panlungsod, or sangguniang bayan on the ground that it is ultra vires or prejudicial to the public welfare, stating his reasons therefor in writing. (b) The local chief executive, except the punong barangay, shall have the power to veto any particular item or items of an appropriations ordinance, an ordinance or resolution adopting a local development plan and public investment program, or an ordinance directing the payment of money or creating liability. In such a case, the veto shall not affect the item or items which are not objected to. The vetoed item or items shall not take effect unless the sanggunian overrides the veto in the manner herein provided; otherwise, the item or items in the appropriations ordinance of the previous year corresponding to those vetoed, if any, shall be deemed reenacted. (c) The local chief executive may veto an ordinance or resolution only once. The sanggunian may override the veto of the local chief executive concerned by twothirds (2/3) vote of all its members, thereby making the ordinance effective even without the approval of the local chief executive concerned.

C.

D.

IV. Common Limitations on the Taxing Powers of Local Government Units (Sec 133) Unless otherwise provided, the exercise of the taxing powers of provinces, cities, municipalities, and barangays shall NOT EXTEND to the levy of the following: (a) Income tax, except when levied on banks and other financial institutions; (b) Documentary stamp tax; (c) Taxes on estates, inheritance, gifts, legacies and other acquisitions mortis causa, except as otherwise provided herein;

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(d) Customs duties, registration fees of vessel and wharfage on wharves, tonnage dues, and all other kinds of customs fees, charges and dues except wharfage on wharves constructed and maintained by the LGU concerned; (e) Taxes, fees, and charges and other impositions upon goods carried into or out of, or passing through, the territorial jurisdictions of local government units in the guise of charges for wharfage, tolls for bridges or otherwise, or other taxes, fees, or charges in any form whatsoever upon such goods or merchandise; (f) Taxes, fees or charges on agricultural and aquatic products when sold by marginal farmers or fishermen; TAX A. PROVINCES Tax on Transfer of Real Property Ownership - tax on sale, donation or on any other mode of transferring ownership NOTE:  sale, transfer or other disposition pursuant to RA 6657 shall be EXEMPT from this tax.  the Register of Deeds shall require the presentation of evidence of payment of this tax, BEFORE registering any deed.  the Provincial Assessor shall also make the same requirement BEFORE cancelling an old tax declaration and issuing a new one.  it shall be the DUTY of the seller, donor,transfer or,executor/ad minis-trator to pay the tax herein imposed within 60 days from the date of execution of the deed or from the date of decedent’s death. TAX RATE AND TAX BASE Not more than fifty percent (50%) of the one percent (1%) of the total consideration involved in the acquisition of the property or of the fair market value in case the monetary consideration involved in the transfer is not substantial, whichever is higher NOTE: the FMV used here shall be that reflected in the prevailing schedule of FMVs enacted by the sanggunian concerned. (IRR)

(g) Taxes on business enterprises certified to by the Board of Investments as pioneer or non-pioneer for a period of six (6) and four (4) years, respectively from the date of registration; (h) Excise taxes on articles enumerated under the NIRC, as amended, and taxes, fees or charges on petroleum products; (i) Percentage or VAT on sales, barters or exchanges or similar transactions on goods or services except as otherwise provided herein; Taxes on the gross receipts of transportation contractors and persons engaged in the transportation of passengers or freight by hire and common carriers by air, land or water, except as provided in this Code;

(j)

(k) Taxes on premiums paid by way or reinsurance or retrocession; (l) Taxes, fees or charges for the registration of motor vehicles and for the issuance of all kinds of licenses or permits for the driving thereof, except tricycles;

(m) Taxes, fees, or other charges on Philippine products actually exported, except as otherwise provided herein; (n) Taxes, fees, or charges, on Countryside and Barangay Business Enterprises and cooperatives duly registered under the "Cooperative Code of the Philippines"; and (o) Taxes, fees or charges of any kind on the National Government, its agencies and instrumentalities, and local government units. V. Specific Provisions on the Taxing and Other Revenue-Raising Powers of LGUs

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Tax on Business of Printing and Publication - imposed on business of persons engaged in the printing and/or publication of books, cards, posters, leaflets, handbills, certificates, receipts, pamphlets, and others of similar nature In the case of a newly started business and - In the succeeding calendar year, regardless of when the business started to operate NOTE: receipts from the printing and/or publishing of books or other reading materials prescribed by DECS as school texts or references shall be EXEMPT from this tax. Franchise Tax imposed on businesses enjoying a franchise (notwithstanding any exemption granted by any law or other special law) “business enjoying a franchise” – shall not include holders of certificates of public convenience for the operation of public for utility vehicles reason that such certificates are NOT considered as franchises. (IRR) In the case of a newly started business and - In the succeeding calendar year, regardless of when the business started to operate Tax on Sand, Gravel and Other Quarry Resources NOTE: The permit to extract sand, gravel and other quarry resources shall be issued EXCLUSIVELY by provincial the governor, pursuant to the ordinance of the sangguniang panlalawigan. lands or from the beds of seas, lakes, rivers, streams, creeks, and other public waters within its territorial jurisdiction

Not exceeding fifty percent (50%) of one percent (1%) of the gross annual receipts for the preceding calendar year

Not exceed onetwentieth (1/20) of one percent (1%) of the capital investment Based on the gross for the receipts preceding calendar year, or any fraction thereof

Not exceeding fifty percent (50%) of one percent (1%) of the gross annual receipts for the preceding calendar year based on the incoming receipt, or realized, within its territorial jurisdiction

Not exceed onetwentieth (1/20) of one percent (1%) of the capital investment Based on the gross for the receipts preceding calendar year, or any fraction thereon

Not more than ten percent (10%) of FMV in the locality per of cubic meter ordinary stones, sand, gravel, earth, and other quarry resources, extracted from public

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Professional Tax on each person engaged in the exercise or practice of his profession requiring government examination (ie bar or any board exam conducted by PRC) NOTE:  Where to pay the tax? a.) where he practices his profession; or b.) where he maintains his principal office in case he practices in several places PROVIDED, that such person who has paid the professional tax shall be entitled to practice his profession in any part of the Phil without being subjected to any other national or local tax, license, or fee for the practice of such profession.  Any employer employing a person subject to this tax shall require such payment BEFORE the employment and annually thereafter.  A line of profession does NOT become exempt even if conducted with some other profession for which the tax has been paid.  Professionals EXCLUSIVELY employed in the government shall be EXEMPT. Amusement Tax - collected from the proprietors, lessees, or At such amount and reasonable classification as the sangguniang panlalawigan may determine but shall in no case exceed Three hundred pesos (P300.00) operators of theaters, cinemas, concert halls, circuses, boxing stadia, and other places of amusement NOTE:  In case of theaters or cinemas, the tax shall first be deducted and withheld by their proprietors, lessees or operators and paid to the provincial treasurer BEFORE the gross receipts are divided between said proprietors, lessees, or operators, and distributors of cinematographic films.  The holding of operas, concerts, dramas, recitals, painting and art exhibitions, flower shows, musical programs, literary and oratorical presentations, EXCEPT pop, rock or similar concerts shall be EXEMPT from this tax. (30%) of the receipts admission fees. gross from

at a rate of not more than thirty percent

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Annual Fixed Tax For Every Delivery Truck or Van of Manufacturers or Producers, Wholesalers of, Dealers, or Retailers in, Certain Products - for every truck, van or any vehicle used by manufacturers, producers, wholesalers, dealers or retailers in the delivery or distribution of distilled spirits, fermented liquors, soft drinks, cigars and cigarettes, and other products as may be determined by the sangguniang panlalawigan, to sales outlets, or consumers, whether directly or indirectly, within the province NOTE: the manufacturers, producers, wholesalers, dealers and retailers referred above shall be EXEMPT from the tax on peddlers described elsewhere in LGC. B. MUNICIPALITIES SCOPE municipalities may levy taxes, fees, and not charges otherwise levied by (SEC. provinces. 142,LGC) Tax on Business 1. On manufacturers, assemblers, repackers, processors, brewers, distillers, rectifiers, and compounders of liquors, distilled spirits, and wines or manufacturers any article of of commerce of whatever kind or nature, in accordance with the schedule (refer to Sec 143) NOTE: the rates in Sec 143 (a) shall apply ONLY to amount of DOMESTIC sales. (IRR) 2. On wholesalers, distributors, or dealers article of in any commerce of whatever kind or nature in accordance with the schedule (Sec

in an amount not exceeding Five hundred pesos (P500.00)

Not exceeding one-half (½) of the rates prescribed under subsection (a), (b) and (d) of Sec 143

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143 again) 3. On exporters, and on manufacturers , millers, producers, wholesalers, distributors, dealers or retailers of essential commodities -- such as: (1) Rice and corn; (2) Wheat or cassava flour, meat, dairy products, locally manufactured, processed or preserved food, sugar, salt and other agricultural, marine, and fresh water products, whether in their original state or not; (3) Cooking oil and cooking gas; (4) Laundry soap, detergents, and medicine; (5) Agricultural implements. equipment and post-harvest facilities, fertilizers, pesticides, insecticides, herbicides and other farm inputs; (6) Poultry feeds and other animal feeds; (7) School supplies; and (8) Cement. 4. On retailers: With gross sales or for the receipts preceeding CY of: P400,000 or less More than P400,000 Provided, however, That barangays shall have the exclusive power to levy taxes, as provided under Section 152 hereof, on gross sales or receipts of the preceding calendar year of P50,000 or less, in the case of cities, and P30,000 or less, in the case of municipalities. 5. On contractors and other independent contractors 6. On banks and other financial institutions NOTE: all other income and receipts of banks and financial intitutions NOT otherwise enumerated shall be () EXCLUDED from the taxing authority of the LGU.(IRR)

per annum 2% 1%

7. On peddlers engaged in the sale of any merchandise or article of commerce in accordance with the schedule (Sec 143) Not exceeding fifty percent (50%) of one percent (1%) on the gross receipts of the preceding calendar year derived from interest, commissions and discounts from lending activities, income from financial leasing, dividends, rentals on property and profit from exchange or sale of property, insurance premium. Not exceeding Fifty pesos (P50.00) per peddler annually. 8. On any business, not otherwise specified in the preceding paragraphs, which the sanggunian concerned may deem proper to tax: Provided, That on any business subject to the excise, value-added or percentage tax under the NIRC, as amended, the rate of tax shall not exceed two percent (2%) of gross sales or receipts of the preceding calendar year. (this is the catchall provision) NOTE: The sanggunian concerned may prescribe a schedule of graduated tax rates but in no case to exceed the rates prescribed in the LGC. Rates of Tax within the Metropolitan Manila Area The municipalities within the Metropolitan Manila Area may levy taxes at rates which shall not exceed by fifty percent (50%) the maximum rates prescribed in Sec 143. (SEC. 144, LGC) Retirement of Business A business subject to tax pursuant to Sec 143 shall, upon termination thereof, submit a sworn statement of its gross sales or receipts for the current year. If the tax paid during the year be LESS THAN the tax due on said gross sales or receipts of the current year, the difference shall be paid before the business is considered officially retired. (Sec 145) Payment of Business Taxes  The taxes imposed in sec 143 shall be payable for EVERY SEPARATE OR DISTINCT ESTABLISHMENT or PLACE where business subject to tax is conducted.  One line of businees does NOT become exempt by being conducted with some other businesses for which such tax has been paid.  The tax on a business must be paid by the person conducting the same.  In cases where a person conducts or operates

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2 or more businesses mentioned in Sec 143 – a.) which are subject to THE SAME tax rate  tax shall be computed on the COMBINED TOTAL GROSS SALES/RECEIPTS b.) which are subject to DIFFERENT tax rates  the gross sales/receipts shall be SEPARATELY REPORTED for the computation of taxes.  Condominium corporations are not business entities, thus not subject to local business tax. The procurement of profit does not fall within the scope of permissible corporate purposes of a condominium corporation under the Condominium Act. Even though the corporation is empowered to levy assessments or dues from the unit owners, these amounts are not intended for the incurrence of profit by the corporation, but to shoulder the multitude of necessary expenses for maintenance of the condominium. [YAMANE vs. LEPANTO CONDO CORP. (October 25, 2005)] Provided, finally, That the sanggunian concerned shall have the authority to prosecute any violation of the provisions of applicable fishery laws. C. CITIES SCOPE --- Except as otherwise provided in this Code, the city, may levy the taxes, fees, and charges which the province or municipality may impose: Provided, however, That the taxes, fees and charges levied and collected by highly urbanized and independent component cities shall accrue to them and distributed in accordance with the provisions of LGC. NOTE: The rates of taxes that the city may levy may exceed the maximum rates allowed for the province or municipality by not more than fifty percent (50%) except the rates of professional and amusement taxes. IRR:  The city may levy and collect a percentage tax on ANY business NOT otherwise specified in the LGC or the IRR, at rates NOT exceeding 3% of the gross sales or receipts of the preceding calendar year. The rates of the following taxes shall be uniform for the city and the province: a. Professional tax – shall not exceed P300 b. Amusement tax – the rate shall not be more than 30% of the gross receipts from admission fees

Fees and Charges GENERAL: The municipality may impose and collect such reasonable fees and charges on business and occupation and on the practice of any profession or commensurate with the cost of calling, regulation, inspection and licensing BEFORE any person may engage in such business or occupation, or practice such profession or calling. SPECIFIC: 1. For Sealing and Licensing of Weights and Measures. at such reasonable rates as shall be prescribed by the sangguniang bayan. 2. Fishery Rentals, Fees and Charges. Municipalities shall have the exclusive authority to grant fishery privileges in the municipal waters and impose rentals, fees or charges thereon. The sangguniang bayan may: (1) Grant fishery privileges to erect fish corrals, oysters, mussels or other aquatic beds or bangus fry areas, within a definite zone of the municipal waters, as determined by it (2) Grant the privilege to gather, take or catch bangus fry, prawn fry or kawag-kawag or fry of other species and fish from the municipal waters by nets, traps or other fishing gears to marginal fishermen free of any rental, fee, charge or any other imposition whatsoever. (3) Issue licenses for the operation of fishing vessels of three (3) tons or less Provided, however, That the sanggunian concerned shall, by appropriate ordinance, penalize the use of explosives, noxious or poisonous substances, electricity, muro-ami, and other deleterious methods of fishing and prescribe a criminal penalty therefor in accordance with the provisions of the LGC 

The proceeds of the tax on sand, gravel, and other quarry resources in highly-urbanised cities shall be distributed as follows: highly urbanised city 60% barangay where the sand, gravel, etc are extracted 40% D. BARANGAYS SCOPE --- The barangays may levy taxes, fees, and charges, as provided in this Article, which shall exclusively accrue to them: (a) Taxes - On stores or retailers with fixed business establishments at a rate not exceeding one percent (1%) on such gross sales or receipts.  IN CASE OF CITIES -- with gross sales or receipts of the preceding calendar year of Fifty thousand pesos (P50,000.00) or less  IN CASE OF MUNICIPALITIES – with gross sales or receipts of Thirty thousand pesos (P30,000.00) or less (b) Service Fees or Charges - Barangays may collect reasonable fees or charges for services rendered in connection with the regulations or the use of barangay-owned properties or service facilities such as palay, copra, or tobacco dryers. (c) Barangay Clearance - No city or municipality may issue any license or permit for any business or activity unless a clearance is first obtained from the barangay where such business or activity is located or conducted.

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For such clearance, the sangguniang barangay may impose a reasonable fee. (d) Other fees and Charges. - The barangay may levy reasonable fees and charges: (1) On commercial breeding of fighting cocks, cockfights and cockpits; (2) On places of recreation which charge admission fees; and NOTE: “places of recreation” – include places of amusement where one seeks admission to entertain himself by seeing or viewing the show or performance or those where one amuses himself by direct participation. (3) On billboards, signboards, neon signs, and outdoor advertisements. QUICK GLANCE
TYPE OF TAX Sec. 135 – Tax on Transfer of Real Property Ownership Sec. 136 – Tax on Business of Printing and Publication Sec. 137 – 12 Franchise Tax Sec. 138 – Tax on Sand, Gravel and Other Quarry 13 Resources Sec. 139 – Professional Tax Sec. 140 – Amusement Tax Sec. 141 –Annual Fixed Tax For Every Delivery Truck or Van of Manufacturers or Producers, Wholesalers of, Dealers, or Retailers in, Certain Products Sec. 143 – Tax on Business Sec. 147 – Fees and charges on regulation/licensing of business and occupation (except professional taxes) Sec. 148 – Fees for Sealing and Licensing of Weights and Measures Sec. 149 – Fishery Rentals, Fees and Charges Sec. 156 – Community Tax Sec. 152(a) – Tax on Gross Sales or Receipts of SmallScale Stores/Retailers Sec. 152(b) – Service Fees on the use of Barangay-owned properties Sec. 152(c) – Barangay Clearance Sec. 152(d) – Other Fees and Charges (on commercial breeding of fighting cocks, cockfights, cockpits; places of recreation which charge admission fees; outside ads) Sec. 153 – Service PROVINCE X MUNICIPALITY CITY X BARANGAY Fees and Charges Sec. 154 – Public 14 Utility Charges Sec. 155 – Toll 15 Fees or Charges Sec. 232 – Real Property Tax X X X X X XX X X X X X

Legend: X  Authorized to impose the tax XX  Only if the municipality is within the Metro Manila Area VI. SITUS OF TAX RULE 1: In case of persons maintaining/operating a branch or sales outlet making the sale or transaction, the tax shall be recorded in said branch or sales outlet and paid to the municipality/city where the branch or sales outlet is located. RULE 2: Where there is NO branch or sales outlet in the city/municipality where the sale is made, the sale shall be recorded in the principal office and the tax shall be paid to such city/municipality. RULE 3: In the case of manufacturers, contractors, producers, and exporters having factories, project offices, plants, and plantations, the ff sales allocation shall be observed:  30% of sales recorded in the principal office shall be made taxable by the city/municipality where the principal office is located  70% shall be taxable by the city/municipality where the factory, project office, plant, or plantation is located Illustration of Rule 1 to 3: A company has a principal office in Mandaluyong, while its sales office and factory are in Sta Rosa  sales made in Sta Rosa, will be recorded in Sta Rosa  sales made in Los Baños, Calamba or Cabuyao (ie delivered to customers located in those places), will be recorded in Mandaluyong  aside from sales made in Sta Rosa, Sta Rosa also gets 70% of sales recorded in Mandaluyong, pursuant to Rule 3

X

X

X X

X X

X X X

X X X

X X

X X

X

X

X X

X X X

X

X X

RULE 4: In case the plantation is located in a place other than the place where the factory is located, the 70% portion in Rule 3 will be divided as follows:  60% to the city/municipality where the factory is located  40% to the city/municipality where the plantation is located RULE 5: In case of 2 or more factories, plantations, etc in different localities, the 70% shall be prorated where the factories, among the localities plantations, etc are located in proportion to their respective volume of production. NOTE: In case of manufacturers or producers which engage the services of an independent contractor to produce or
Applies to public utilities operated and maintained by them within their jurisdiction. 15 Applies to the use of any public road, pier, wharf, waterway, bridge, ferry or telecommunication system funded and constructed by the local government unit concerned. Exemptions: (1) officers and enlisted men of the Armed Forces of the Philippines and members of the Philippine National Police on mission, (2) post office personnel delivering mail, (3) physically-handicapped, and (4) disabled citizens who are sixty-five (65) years or older.
14

X

X

X

X

The franchise tax provided in Sec. 137 is intended to be in addition to the franchise tax imposed by the National Government. (de Leon, p. 463) 13 Note that under Sec. 138, the proceeds of this tax are allocated as follows: (1) Province - Thirty percent (30%); (2) Component city or municipality where the sand, gravel, and other quarry resources are extracted - Thirty percent (30%); and (3) barangay where the sand, gravel, and other quarry resources are extracted - Forty percent (40%).

12

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manufacture some of their products, these rules shall apply except that the factory or plant and warehouse of the contractor utilised for the production and storage of the manufacturers’ products shall be considered as the factory or plant and warehouse of the manufacturer. (IRR) NOTE: The city or municipality where the port of loading is located shall not levy and collect the reasonable fees unless the exporter maintains in said city or municipality its principal office, a branch, sales office, or warehouse, factory, plant or plantation in which case, the rule on the matter shall apply accordingly. (IRR) VII. COMMON REVENUE-RAISING POWERS A. Service fees and charges -- LGUs may impose such reasonable fees and charges for services rendered. Public Utility charges – LGUs may fix the rates for the operation of public utilities owned, operated and maintained by them within their jurisdiction. Toll fees or charges – LGUs, thru their sanggunian concerned, may fix the rates for the imposition of toll fees or charges for the use of any public road, pier, or wharf, waterway, bridge, ferry or telecommunication system funded and constructed by the LGU. PROVIDED, that no such toll fees or charges shall be collected from (1) officers and enlisted men of AFP and members of PNP on mission, (2) post office personnel delivering mail, (3) physically-handicapped, and disabled citizens who are 65 years or older. When public safety and welfare so requires, the sanggunian concerned may discontinue the collection of the tolls, and thereafter the said facility shall be free and open for public use. VIII. A. COMMUNITY TAX Who may levy  Cities or municipalities may levy a community tax NOTE: For purposes of enactment of a local tax ordinance levying a community tax, the conduct of a public hearing shall NO longer be required. B. Who are liable 1. Individuals -- every inhabitant of the Philippines eighteen (18) years of age or over  Who has been regularly employed on a wage or salary basis for at least thirty (30) consecutive working days during any calendar year, OR  Who is engaged in business or occupation, OR  Who owns real property with an aggregate assessed value of P1,000 or more, OR  Who is required by law to file an income tax return o shall pay  an annual community tax of Five pesos (P5.00) AND  an annual additional tax of One peso (P1.00) for every One thousand pesos (P1,000.00) of income regardless of whether from business, exercise of profession or from property which in no case shall exceed Five thousand pesos (P5,000.00). NOTE: In the case of husband and wife, EACH shall pay the basic tax of P5.00; but the additional tax herein imposed shall be based upon the total property owned by them and the total gross receipts or earnings derived by them. 2. Juridical Persons -- every corporation no matter how created or organized, whether domestic or resident foreign, engaged in or doing business in the Philippines  shall pay o an annual community tax of Five hundred pesos (P500.00) AND o an annual additional tax, which, in no case, shall exceed Ten thousand pesos (P10,000.00) in accordance with the following schedule: (1) For every P5,000 worth of real property in the Philippines owned by it during the preceding year based on the valuation used for the payment of real property tax under existing laws, found in the assessment rolls of the city or municipality where the real property is situated – P2; AND (2) For every P5,000.00 of gross receipts or earnings derived by it from its business in the Philippines during the preceding year – P2.00 NOTE: The dividends received by a corporation from another corporation however shall, for the purpose of the additional tax, be considered as part of the gross receipts or earnings of said corporation. C. Who are exempted (1) Diplomatic and consular representatives; and (2) Transient visitors when their stay in the Philippines does not exceed 3 months Manner of Payment PLACE OF PAYMENT -- community tax shall be paid in the place of residence of the

B.

C.

D. 

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individual, or in the place where the principal office of the juridical entity is located.  TIME OF PAYMENT – community tax shall accrue on the 1st day of January of each year which shall be paid not later than the last day of February of each year if a person reaches 18 or loses the benefit of exemption o ON OR BEFORE the LAST DAY OF JUNE  liable for the tax on the day he reaches 18 or loses exemption. o ON OR BEFORE the LAST DAY OF MARCH  he shall have 20 days to pay the community tax without becoming delinquent persons who become resident of Phil or reaches 18 or loses exemption ON OR AFTER the 1ST DAY OF JULY  shall NOT be subject to community tax for that year. corporations established and organised o ON OR BEFORE the LAST DAY OF JUNE  shall be liable for the tax for that year o ON OR BEFORE the LAST DAY OF MARCH  shall have 20 days to pay the tax without becoming delinquent o ON OR AFTER the 1ST DAY OF JULY  shall NOT be subject to community tax for that year  interest at the rate NOT exceeding 2% per month of the unpaid taxes, fees or charges INCLUDING surcharges, until the amount is fully paid NOTE: in no case shall the total interest exceed 36 months.

F.

Collecting Authority – All local taxes, fees and charges shall be collected by the provincial, city, municipal, or barangay treasurer, or their duly authorised deputies. Examination of Books – The local treasurer or his deputy duly authorised in writing, may examine the books, accounts and other pertinent records of any person, partnership, corporation, or association in order to ascertain, assess and collect the correct amount of tax. Such examination shall be made during the regular business hours, ONLY ONCE for every tax period, and shall be certified to by the examining official.

G.

X.

Civil Remedies (both LGU and taxpayer) A. Personal Property Exempt from Distraint or Levy – the following property shall be EXEMPT from distraint or levy for delinquency in the payment of any LOCAL tax, fee or charge:  tools and implements necessarily used by the deliquent taxpayer in his trade or employment  one horse, cow, carabao, or other beast of burden, such as the delinquent taxpayer may select and necessarily used by him in his ordinary occupatin  his necessary clothing, and that of all his family  househld furniture and utensils necessary for housekeeping and used for that purpose by the delinquent taxpayer, such as he may select, of a value not exceeding P10,000  provisions, including crops, actually provided for individual or family use sufficient for 4 months  the professional libraries of doctors, engineers, (ehem) lawyers and judges  one fishing boat and net, not exceeding the total value of P10,000 by the lawful use of which a fisherman earns his livelihood  any material or article forming part of a house or improvement of any real property Periods of Assessment and Collection of LOCAL Taxes Assessment shall be made GEN RULE: within 5 years from the date they become due, and collection shall be made within 5 years from the date of assessment by administrative or judicial action. EXCEPTION: In case of FRAUD, or INTENT TO EVADE PAYMENT OF TAX, the same may be assessed within 10 years from

NOTE: if the tax is not paid within the prescribed period, there shall be added to the unpaid amount an interest of 24% per annum from the due dte until it is paid. IX. COLLECTION OF TAXES A. Tax Period -- unless otherwise provided in this Code, the tax period of all local taxes, fees and charges shall be the calendar year. Manner of Payment -- Such taxes, fees and charges may be paid in quarterly installments. Accrual of Tax -- All local taxes, fees, and charges shall accrue on the first (1st) day of January of each year. However, new taxes, fees or charges, or changes in the rates thereof, shall accrue on the first (1st) day of the quarter next following the effectivity of the ordinance imposing such new levies or rates. Time of Payment -- All local taxes, fees, and charges shall be paid within the first twenty (20) days of January or of each subsequent quarter, as the case may be. (Jan 20, Apr 20, July 20, and Oct 20). The sanggunian concerned may, for a justifiable reason or cause, extend the time for payment of such taxes, fees, or charges without surcharges or penalties, but only for a period not exceeding six (6) months. Surcharges and Penalties  25% surcharge on taxes, fees or charges NOT paid on time, AND

B.

C.

D.

B.

E.

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discovery of fraud or intent to evade payment. C. When Running of Prescription of Above Periods is Suspended – The running of the periods of prescription above shall be suspended for the time during which:  the treasurer is legally prevented from making the assessment or collection  the taxpayer requests for a reinvestigation and executes a waiver in writing before expiration of the period within which to assess or collect  the taxpayer is out of the country or otherwise cannot be located Protest of Assessment STEP 1: When the local treasurer finds that the correct tax has NOT been paid, he shall issue a NOTICE OF ASSESSMENT stating the nature of tax, the amount of deficiency, the surcharge and interest. STEP 2: Within 60 days from the receipt of the notice of assessment, the taxpayer may file a WRITTEN PROTEST with the local treasurer; otherwise, the assessment shall become final and executory. STEP 3: The local treasurer shall decide the protest within 60 days from the time of filing. STEP 4: The local treasurer shall issue a NOTICE either denying the protest or cancelling wholly or partially the assessment. STEP 5: The taxpayer shall have 30 days from the receipt of notice, or from the lapse of 60-day period to appeal with the court of competent jurisdiction (regular courts); otherwise, the assessment becomes conclusive and unappealable. E. Claim for Refund or Tax Credit  No case or proceeding shall be maintained in any court for the recovery of any tax, fee, or charge erroneously or illegally collected until a WRITTEN CLAIM for refund or credit has been filed with the local treasurer.  No case or proceeding shall be entertained in any court AFTER the expiration of 2 years from the date of payment of such tax, or from the date the taxpayer is entitled to a refund or credit. Remedy for Illegal or Unconstitutional Tax Ordinance (Sec 187) Any question STEP 1: constitutionality or legality on of the tax ordinances or revenue measures may be raised on appeal within 30 days from the effectivity thereof to the Sec of Justice. STEP 2: The Sec of Justice shall decide within 60 days from the date of receipt of the appeal. However, this appeal shall not have the effect of suspending the effectivity of the ordinance and the accrual and payment of the tax levied therein. STEP 3: Within 30 days after receipt of the decision or the lapse of the 60-day period without the Sec of Justice acting upon the appeal, the aggrieved party may file appropriate proceedings with a court of competent jurisdiction. XI. Miscellaneous Provisions A. Power to Levy Taxes, Fees or Charges GEN RULE: LGU may exercise the power to levy taxes, fees or charges on ANY BASE OR SUBJECT not otherwise specifically enumerated in LGC or NIRC. EXCEPTION: It must NOT be unjust, excessive, oppressive, confiscatory or contrary to declared national policy. Requirements for a Valid Tax Ordinance 1. the ordinance shall only be enacted if there is a prior public hearing conducted for the purpose 2. within 10 days after the approval of the ordinance, it must be published in full for 3 consecutive days in a newspaper of local circulation, or if no such newspaper, it must be posted in at least 2 conspicuous and publicly accessible places.

D.

B.

CASE LAW: The requirement of publication in full for 3 consecutive days is MANDATORY for a tax ordinance to be valid. The tax ordinance will be null and void if it fails to comply with such publication requirement. [COCA-COLA vs. CITY OF MANILA (June 27, 2006)] C. Authority to Adjust Rates – LGU shall have the authority to adjust the tax rates prescribed in LGC NOT oftener than once every 5 years, but in no case shall such adjustment exceed 10% of the rates fixed. Authority to Grant Exemption – LGU may, through ordinances, grant tax exemptions, incentives or reliefs under such terms and conditions as they may deem necessary.

D.

XII.Problems 1. A municipality passed an ordinance imposing a tax of 1% on the consideration of all sales or other transfers of title of real property located within its boundaries. As a property owner affected by the tax, comment on its

F.

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legality or illegality, and if you disagree with it, what are your remedies, administrative and judicial? Answer: (Domondon) The tax is illegal because only provinces and cities may impose a tax on transfer of real property ownership. My first administrative remedy would be to question the legality of the ordinance within thirty (30) days from effectivity by appealing to the Secretary of Justice. If the Secretary rejects my appeal, I have thirty (30) days from receipt of the denial within which to file appropriate proceedings before a competent court. If the Secretary of Justice does not act within sixty (60) days, I would have thirty (30) days from the lapse of the 60-day time period during which the Secretary of Justice has to decide the case, within which to file suit with the appropriate court. 2. What is the nature of local taxation? Answer: Distinguished from the taxation power of the State, local taxation is not an inherent power – it is granted by the Constitution or statute. [Basco v. PAGCOR (1991)] 3. What is the preemption or exclusionary rule? Answer: It refers to the instance wherein the National Government elects to tax a particular area, impliedly withholding from the LGU the delegated power to tax the same field. 4. Do LGUs have the authority to grant tax exemptions? Answer: Yes, through an ordinance, by express provision of law in Section 192, LGC (but only those taxes within its powers). 5. What are the limitations on the LGUs’ power to tax? Answer: 1. LGUs cannot levy taxes that are unjust, excessive, oppressive, confiscatory or contrary to declared national policy. (Sec. 186, LGC) 2. The LGC enumerates those that cannot be taxed by LGUs, as follows: Sec. 133 Unless otherwise provided, the exercise of the taxing powers of provinces, cities, municipalities, and barangays shall NOT EXTEND to the levy of the following: Income tax, except when levied on banks and other financial institutions; Documentary stamp tax; Taxes on estates, inheritance, gifts, legacies and other acquisitions mortis causa, except as otherwise provided herein; Customs duties, registration fees of vessel and wharfage on wharves, tonnage dues, and all other kinds of customs fees, charges and dues except wharfage on wharves constructed and maintained by the LGU concerned; Taxes, fees, and charges and other impositions upon goods carried into or out of, or passing through, the territorial jurisdictions of local government units in the guise of charges for wharfage, tolls for bridges or otherwise, or other taxes, fees, or charges in any form whatsoever upon such goods or merchandise; Taxes, fees or charges on agricultural and aquatic products when sold by marginal farmers or fishermen; Taxes on business enterprises certified to by the Board of Investments as pioneer or non-pioneer for a period of six (6) and four (4) years, respectively from the date of registration; Excise taxes on articles enumerated under the NIRC, as amended, and taxes, fees or charges on petroleum products; Percentage or VAT on sales, barters or exchanges or similar transactions on goods or services except as otherwise provided herein; Taxes on the gross receipts of transportation contractors and persons engaged in the transportation of passengers or freight by hire and common carriers by air, land or water, except as provided in this Code; Taxes on premiums paid by way or reinsurance or retrocession; Taxes, fees or charges for the registration of motor vehicles and for the issuance of all kinds of licenses or permits for the driving thereof, except tricycles; Taxes, fees, or other charges on Philippine products actually exported, except as otherwise provided herein; Taxes, fees, or charges, on Countryside and Barangay Business Enterprises and cooperatives duly registered under the "Cooperative Code of the Philippines"; and Taxes, fees or charges of any kind on the National Government, its agencies and instrumentalities, and local government units.

d.

e.

f. g.

h. i.

j.

k. l.

m. n.

o.

a. b. c.

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REAL PROPERTY TAXATION
I. Kinds of Real Property Tax and Special Levies  Basic real property tax  Additional levy on real property for the Special Education Fund  Additional ad valorem tax on idle lands  Special levy by local government units

Improvement  It is a valuable addition made to a property or an amelioration in its condition amounting to more than a repair or replacement of parts involving capital expenditures and labor which is intended to enhance its value, beauty, or utility or to adopt it for new or further purposes. [Section 199(m), Local Government Code] Machinery  Machinery embraces machines, equipment, mechanical contrivances, instruments, appliances or apparatus, which may or may not be attached, permanently or temporarily, to the real property. It includes the physical facilities for production, the installations and appurtenant service facilities, those which are mobile, selfpowered or self-propelled, and those not permanently attached to the real property which are actually, directly, and exclusively used to meet the needs of the particular industry, business or activity and which by their very nature and purpose are designed for, or necessary to its manufacturing, mining, logging, commercial, industrial or agricultural purposes. [Section 199(o), Local Government Code]  NOTE: this definition of machinery is too allencompassing and broad in that everything that is used even indirectly for the needs of the industry can be classifies as machinery which is REAL property, which in turn means that it is subject to RPT; example would be a SCREWDRIVER being used in an office – since this is used by the office and indirectly contributes the to smooth functioning of the general business then this can be treated as real property  This was solved by the LGC IRR sec 290 (o) that now limits and qualifies this: this is known as the GENERAL PURPOSE RULE  This rule states that if it used in line or for the general purpose of the business but only indirectly, then it is NOT to be treated as real property. This means that a typewriter being used in the main office of a firm that manufactures cars is NOT real property as the typewriter is NOT used to actually make the car which is the main purpose of the company.

II. Basic Concepts Definition: Real property tax has been defined as “a direct tax on the ownership of lands and buildings or other improvements thereon not specially exempted, and is payable regardless of whether the property is used or not, although the value may vary in accordance with such factor.” It has also been defined as: an annual ad valorem tax imposed by local government units (provinces, cities, and Metro Manila municipalities) on real property within their jurisdiction, determined on the basis of a fixed proportion of the value of the property. (de Leon, p. 509)  NOTE: Real property tax is a fixed proportion of the assessed value of the property being taxed and requires, therefore, the intervention of assessors. Characteristics of real property tax  It is a direct tax on the ownership or use of real property.  It is an ad valorem tax. Value is the tax base.  It is proportionate because the tax is calculated on the basis of a certain percentage of the value assessed.  It creates a single, indivisible obligation.  It attaches on the property (i.e., a lien) and is enforceable against it. Nature and scope of power to impose realty tax The taxing power of local governments in real property taxation is a delegated power. Fundamental principles governing real property taxation 1. Real property shall be appraised at its current and fair market value. 2. Real property shall be classified for assessment purposes on the basis of its actual use. 3. Real property shall be assessed on the basis of a uniform classification within each local government unit. 4. The appraisal, assessment, levy and collection of real property tax shall not be let to any private person. 5. The appraisal and assessment of real property shall be equitable. [Section 197, Local Government Code] Real properties subject to tax Generally, Real Property Tax is imposed on lands, buildings, machineries and other improvements. The Local Government Code contains no definition of “real property”; however, the following terms are defined:

Generally the SC has held that Art 415 CC (which enumerates the kinds of real property) is an exclusive list as to what constitutes real property. BUT FOR TAX PURPOSES ONLY, it is common that certain properties be classified as real property even if according to the general principles of the CC, they would only be classified as personal property. LESSON: the NIRC and the LGC code prevail in classifying property for tax purposes.

Properties EXEMPT from real property taxes 1. Real property owned by the Republic of the Philippines or any of its political subdivisions except when the beneficial use thereof has been granted for consideration or otherwise to a taxable person.  Q: Are GOCCs covered by the exemption?  No. The tax exemption of “property owned by the Republic of the

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Philippines” refers to properties owned by the government and by its agencies which do not have separate and distinct personalities, as distinguished from GOCCs which have separate and distinct personalities. [National Development Company v. Cebu City]  Q: What is the scope of the exemption?  The exemption from tax of property owned by the government obtains even as to properties owned in a private, proprietary or patrimonial character. The law makes no distinction between property held in governmental capacity and those possessed in a proprietary capacity. [Board of Assessment Appeals of Laguna v. CTA]  CONFLICTING CASES: Mactan Airport Authority vs. Pres. Marcos (September 11, 1996) and Manila Int’l Airport Authority vs. CA (July 20, 2006) Both cases involves the following provisions: Sec 133(o), LGC: Unless otherwise provided herein, the LGUs are not allowed to levy… (o) taxes, fees or charges of any kind on the national gov’t, its agencies, instrumentalities and LGUs. Sec 234(a), LGC: Properties exempt from PPT (a) real properties owned by the Republic or any of its political subdivisions… MACTAN Case: The SC held that since Mactan Airport Authority is a GOCC and GOCCs are not among those enumerated as exempt, it is not exempted from RPT. Legislature in amending the law has specifically deleted GOCCS from the enumeration in Sec 234(a). MIAA Case: SC held that MIAA is not a GOCC since it is neither a stock corporation nor a non-stock corp as defined in the Administrative Code. Although not covered by the enumeration in Sec 234, MIAA is a public utility which falls under the term “instrumentality” outside the scope of LGS’s local taxing powers under Sec 133(o). NOTE: The MIAA Case may be argued to have superseded the previous case, being a more recent ruling decided by SC en banc. Charitable institutions, churches, parsonages, or convents appurtenant thereto, mosques, non-profit or religious cemeteries, and all lands, buildings, and improvements actually, directly and exclusively used for religious, charitable, or educational purposes. and no money inures to the benefit of persons managing or operating the institution. TEST: The test whether an enterprise is charitable or not is whether it exists to carry out a purpose recognized by law as charitable or whether it is maintained for gain, profit, or private advantage. EXTENT: The portions of Lung Center’s real property that are leased to private entities are NOT exempt from real property taxes as these are not actually, directly and exclusively used for charitable purposes. However, portions of the land occupied by the hospital and portions of the hospital used for its patients, whether paying or non-paying, are exempt from real property taxes. 3. All machineries and equipment that are actually, directly and exclusively used by local water utilities and government-owned or controlled corporations engaged in the supply and distribution of water and/or generation and transmission of electric power. All real property owned by duly registered cooperatives as provided for under Republic Act No. 6938. Machinery and equipment used for pollution control and environmental protection. [Section 234, Local Government Code]

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NOTE: A taxpayer claiming exemption must submit sufficient documentary evidence to the local assessor within thirty (30) days from the date of the declaration of real property; otherwise, it shall be listed as taxable in the Assessment Roll. III. Rates of levy [BASIC RPT] A province or city or a municipality within the Metro Manila area shall fix a uniform rate of basic real property tax applicable to their respective localities as follows: 1. In the case of a province, at the rate not exceeding 1% of the assessed value of real property; and 2. In the case of a city or a municipality within the Metro Manila area, at the rate not exceeding 2% of the assessed value of real property. [Section 233, Local Government Code] [ADDITIONAL LEVY ON REAL PROPERTY FOR THE SPECIAL EDUCATION FUND] A province, city or a municipality within the Metro Manila area may levy and collect an annual tax of one percent (1%) on the assessed value of real property which shall be in addition to the basic real property tax. The proceeds thereof shall exclusively accrue to the Special Education Fund created under Republic Act No. 5447. [Section 235, Local Government Code] [ADDITIONAL AD VALOREM TAX ON IDLE LANDS] A province or city or a municipality within the Metro Manila area may levy an annual tax on idle lands at the rate not exceeding five percent (5%) of the assessed value of the property which shall be in addition to the basic real property tax. [Section 236, Local Government Code]  What are considered idle lands?

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CASE LAW: LUNG CENTER of the PHILS vs. QUEZON CITY (June 29, 2004) As a general principle, a charitable institution does not lose its character as such and its exemption from taxes simply because it derives income from paying patients, whether out-patient or confined in the hospital, or receives subsidies from the government, so long as the money received is devoted or used altogether to the charitable object which it is intended to achieve,

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Sec 237. Idle Lands, Coverage. — idle lands shall include: (a) Agricultural lands more than one (1) hectare in area suitable for cultivation, dairying, inland fishery, and other agricultural uses  one-half (1/2) of which remain uncultivated or unimproved by the owner or person having legal interest. Agricultural lands planted to permanent or perennial crops with at least fifty (50) trees to a hectare shall NOT be considered idle lands. Lands actually used for grazing purposes shall likewise NOT be considered idle lands   (b) Lands other than agricultural  located in a city or municipality  more than one thousand (1,000) square meters in area  one-half (1/2) of which remain unutilized or unimproved by the owner or person having legal interest. Regardless of land area, this Section shall applies to residential lots in subdivisions duly, ownership of which has been transferred to individual owners, who shall be liable for the additional tax: Provided, however, That individual lots of such subdivisions, ownership of which has not been transferred to the buyer shall be considered as part of the subdivision, and shall be subject to the additional tax payable by subdivision owner or operator.  EXEMPTION from idle lands tax: Exemptions are given due to: a. force majeure; b. civil disturbance; c. natural calamity; or d. any cause or circumstance which physically or legally prevents the owner or person having legal interest from improving, utilizing or cultivating the same. ordinance imposing the levy. [Section 240, Local Government Code]

IV. Other Important Provisions APPRAISAL PROPERTY AND ASSESSMENT OF REAL

Sec 201. Appraisal of Real Property. — All real property, whether taxable or exempt, appraised at the current and fair market value prevailing in the locality where the property is situated Sec 202. Declaration of real Property by the Owner or Administrator. — shall be the duty of all persons (natural or juridical) or their duly authorized representative  owning or administering real property, including the improvements therein  to prepare and file with assessor, a sworn statement declaring the true value of their property, whether previously declared or undeclared, taxable or exempt, which shall be the current and fair market value of the property, as determined by the declarant  The sworn declaration of real property herein referred to shall be filed with the assessor concerned once every three (3) years during the period from January first (1st) to June thirtieth (30th) commencing with the calendar year 1992. Sec 203. Duty of Person Acquiring Real Property or Making Improvement Thereon. — duty of any person, or his authorized representative  acquiring at any time real property in any municipality or city  or making any improvement on real property,  to prepare and file with the a sworn statement declaring the true value of subject property  within sixty (60) days after the acquisition of such property or upon completion or occupancy of the improvement, whichever comes earlier. Sec 204. Declaration of Real Property by the Assessor. — any person, by whom real property is required to be declared under Section 202  refuses or fails for any reason to make such declaration within the time prescribed  assessor shall himself declare the property in the name of the defaulting owner, if known, or against an unknown owner, as the case may be, and shall assess the property for taxation Sec 205. Listing of Real Property in the Assessment Rolls.  In every province and city, municipalities within the Metropolitan Manila Area, there shall be prepared and maintained by the assessor  an assessment roll wherein shall be listed all real property, whether taxable or exempt, located within the local government unit; property shall be listed, valued and assessed in the name of the owner or administrator, or anyone having legal interest in the property.  undivided real property of a deceased person may be listed, valued and assessed in the name of the estate or of the heirs and devisees without designating them individually

[SPECIAL LEVY BY LOCAL GOVERNMENT UNITS] A province, city or municipality may impose a special levy on the lands comprised within its territorial jurisdiction specially benefited by public works projects or improvements by the LGU concerned. The special levy shall not exceed 60% of the actual cost of such projects and improvements, including the costs of acquiring land and such other real property in connection therewith.  It shall not apply to lands exempt from basic real property tax and the remainder of the land, portions of which have been donated to the LGU concerned for the construction of such projects or improvements.  Need for public hearing and publication before enactment of ordinance imposing special levy.  Special levy accrues on the first day of the quarter next following the effectivity of the

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BUT undivided real property other than that owned by a deceased may be listed, valued and assessed in the name of one or more co-owners: Provided, however, That such heir, devisee, or co-owner shall be liable severally and proportionately for all obligations imposed by this Title and the payment of the real property tax with respect to the undivided property. real property of a corporation, partnership, or association shall be listed, valued and assessed in the same manner as that of an individual. Real property owned by the Republic of the Philippines, its instrumentalities and political subdivisions, the beneficial use of which has been granted, for consideration or otherwise, to a taxable person, shall be listed, valued and assessed in the name of the possessor, grantee or of the public entity if such property has been acquired or held for resale or lease.   schedule of fair market values shall be published in a newspaper of general circulation in the province, city or municipality; in the absence thereof, shall be posted in the provincial capitol, city or municipal hall and in two other conspicuous public places

Sec 214. Amendment of Schedule of Fair Market Values.  assessor may recommend to the sanggunian amendments to correct errors in valuation in the schedule of fair market values  sanggunian shall, by ordinance, act upon the recommendation within ninety (90) days from receipt Sec 215. Classes of Real Property for Assessment Purposes. — For purposes of assessment, real property shall be classified: 1. residential 2. agricultural 3. commercial 4. industrial 5. mineral 6. timberland 7. special - Sec216. Special Classes of Real Property. —lands, buildings, and other improvements thereon  actually, directly and exclusively used  for hospitals, cultural, or scientific purposes  those owned and used by local water districts  government-owned or controlled corporations rendering essential public services in the supply and distribution of water and/or generation and transmission of electric power shall be classified as special. *The city or municipality within the Metropolitan Manila Area, through their respective sanggunian, shall have the power to classify lands as residential, agricultural, commercial, industrial, mineral, timberland, or special in accordance with their zoning ordinances. Sec 217. Actual Use of Real Property as Basis for Assessment. — Real property shall be classified, valued and assessed on the basis of its actual use  regardless of where located  regardless whoever owns it  regardless whoever uses it Sec 220. Valuation of Real Property. — In cases where: (a) real property is declared and listed for taxation purposes for the first time (b) there is an ongoing general revision of property classification and assessment (c) a request is made by the person in whose name the property is declared  assessor shall make a classification, appraisal and assessment or taxpayer's valuation  Provided, however, That the assessment of real property shall NOT be increased oftener than once every three (3) years

Sec 206. Proof of Exemption of Real Property from Taxation.  Every person who shall claim tax exemption for such property  shall file with assessor within thirty (30) days from the date of the declaration of real property sufficient documentary evidence in support of such claim…like corporate charters, contracts, titles, articles of incorporation etc…  If the required evidence is NOT submitted within the period prescribed, the property shall be listed as taxable in the assessment roll. However, if the property shall be proven to be tax exempt, shall be dropped from the assessment roll. Sec 208. Notification of Transfer of Real Property Ownership.  Any person who shall TRANSFER real property OWNERSHIP to another  shall notify the assessor concerned within sixty (60) days from the date of such transfer  The notification shall include the mode of transfer, the description of the property alienated, the name and address of the transferee. Sec 209. Duty of Registrar of Deeds to Appraise Assessor of Real Property Listed in Registry.  duty of the Registrar of Deeds to require every person who shall present for registration a document of transfer, alienation, or encumbrance of real property to accompany the same with a certificate to the effect that the real property subject has been fully paid of all real property taxes due. Failure to provide such certificate shall be a valid cause for the refusal of the registration of the document. Sec 212. Preparation of Schedule of Fair Market Values. — Before any general revision of property assessment is made  there shall be prepared a schedule of fair market values by the assessor of the provinces, within the cities and municipalities Metropolitan Manila Area for the different classes of real property situated in their respective local government units  for enactment by ordinance of the sanggunian

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 EXCEPT in case of new improvements substantially increasing the value of said property or of any change in its actual use. replacement, or reproduction cost for so long as the machinery is useful and in operation. ASSESSMENT APPEALS Sec 226. Local Board of Assessment Appeals. — Any owner or person having legal interest in the property NOT satisfied with the action of the assessor in the assessment of his property  May within sixty (60) days from the date of receipt of the written notice of assessment  appeal to the Board of Assessment Appeals of the provincial or city  by filing a petition under oath in the form prescribed for the purpose, together with copies of the tax declarations and such affidavits or documents submitted in support of the appeal. Sec 229. Action by the Assessment Appeals. — Local Board of

Sec 221. Date of Effectivity of Assessment or Reassessment.  All assessments/ reassessments made after the first (1st) day of January of any year shall take effect on the first (1st) day of January of the succeeding year  Provided, the reassessment of real property shall be made within ninety (90) days from the date if any such cause or causes occurred, and shall take effect at the beginning of the quarter next following the reassessment due to its:  partial or total destruction  major change in its actual use  great and sudden inflation or deflation of real property values  gross illegality of the assessment  any other abnormal cause Sec 222. Assessment of Property Subject to Back Taxes. — Real property declared for the FIRST TIME shall be assessed for taxes (back taxes) for the period during which it would have been liable but in no case of more than ten (10) years prior to the date of initial assessment  Provided, however, That such taxes shall be computed on the basis of the applicable schedule of values in force during the corresponding period.  If such taxes are paid on or before the end of the quarter following the date the notice of assessment was received by the owner – NO interest for delinquency shall be imposed thereon; otherwise, taxes shall be subject interest at the rate of two percent (2%) per month or a fraction thereof from the date of the receipt of the assessment until such taxes are fully paid. Sec 224. Appraisal Machinery. — (a) and Assessment of

(a) Board shall decide the appeal within one hundred twenty (120) days from the date of receipt of such appeal. The Board, after hearing, render its decision based on substantial evidence (b) In the exercise of its appellate jurisdiction, the Board shall have the power to summon witnesses, administer oaths, conduct ocular inspection, take depositions, and issue subpoena and subpoena duces tecum. The proceedings of the Board shall be conducted SOLELY for the purpose of ascertaining the facts without necessarily adhering to technical rules applicable in judicial proceedings. (c) secretary of the Board shall furnish the owner of the property or the person having legal interest therein and the assessor with a copy of the decision of the Board. In case the provincial or city assessor concurs in the revision or the assessment, it shall be his duty to notify the owner or the person having legal interest of such fact using the form prescribed. (d) The owner, the person having legal interest or the assessor who is NOT satisfied with the decision of the Board,  May within thirty (30) days after receipt of the decision of said Board appeal to the Central Board of Assessment Appeals decision of the Central Board shall be final and executory Sec 231. Effect of Appeal on the Payment of Real Property Tax. — Appeal on assessments of real property shall, in NO case, suspend the collection of the corresponding realty taxes on the property involved as assessed – but without prejudice to subsequent adjustment depending upon the final outcome of the appeal. SPECIAL LEVY BY LGUs Sec 241. Ordinance Imposing a Special Levy. — A tax ordinance imposing a special levy shall:  describe with reasonable accuracy the nature, extent, and location of the public

The fair market value of brand-new machinery shall be acquisition cost  In all other cases, the fair market value shall be determined by dividing the remaining economic life of the machinery by its estimated economic life and multiplied by the replacement or reproduction cost. If machinery imported, the acquisition cost includes freight, insurance, bank and other charges, brokerage, arrastre and handling, duties and taxes, plus charges at the present site

(b)

Sec225.Depreciation Allowance for Machinery. — depreciation allowance shall be made for machinery at a rate NOT exceeding five percent (5%) of its original cost or its replacement or reproduction cost, as the case may be, for each year of use  Provided, the remaining value for all kinds of machinery shall be fixed at NOT less than twenty percent (20%) of such original,

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works projects or improvements to be undertaken  state the estimated cost  specify the metes and bounds by monuments and lines  number of annual installments for the payment of the special levy which in no case shall be less than five (5) nor more than ten (10) years *The sanggunian shall NOT be obliged, in the apportionment and computation of the special levy, to establish a uniform percentage of all lands subject to the payment of the tax for the entire district. May fix different rates for different parts or sections thereof, depending on whether such land is more or less benefited by proposed work. Sec 242. Publication of Proposed Ordinance Imposing a Special Levy. — Before the enactment of an ordinance imposing a special levy, the sanggunian concerned shall:  conduct a public hearing  notify in writing the owners to be affected or the persons having legal interest as to the date and place thereof and afford the latter the opportunity to express their positions or objections relative to the proposed ordinance. Sec 244. Taxpayer's Remedies Against Special Levy. — Any owner of real property affected by a special levy or any person having a legal interest therein may, upon receipt of the written notice of assessment of the special levy, avail of the remedies provided for in Chapter 3, Title Two, Book II of this Code. Sec245. Accrual of Special Levy. — The special levy shall accrue on the first day of the quarter next following the effectivity of the ordinance imposing such levy. COLLECTION OF REAL PROPERTY TAX Sec 246. Date of Accrual of Tax. — real property tax for any year shall accrue on the first day of January  from that date it shall constitute a lien on the property  superior to any other lien, mortgage, or encumbrance of any kind whatsoever  extinguished only upon the payment of the delinquent tax. Sec 247. Collection of Tax. — The collection of the real property tax with interest thereon and related expenses, and the enforcement of the remedies = responsibility of the city or municipal treasurer.  treasurer may deputize the barangay treasurer to collect all taxes on real property located in the barangay:  Provided, the barangay treasurer is properly bonded for the purpose  Provided, further, That the premium on the bond shall be paid by the city or municipal government concerned. Sec 249. Notice of Time for Collection of Tax. — treasurer shall post the notice of the dates when the tax may be paid without interest publicly accessible place at the city or municipal hall + notice shall likewise be published in a newspaper of general circulation in the locality once a week for two (2) consecutive weeks.  on or before the thirty-first (31st) day of January each year in the case of the basic real property tax and the additional tax for the Special Education Fund (SEF)  or any other date to be prescribed by the sanggunian concerned in the case of any other tax levied under this title Sec 250. Payment of Real Property Taxes in Installments. — The owner or the person having legal interest may pay the basic real property tax and the additional tax for Special Education Fund (SEF) due without interest:  in four (4) equal installments;  the first installment to be due and payable on or before March Thirty-first (31st)  the second installment, on or before June Thirty (30)  the third installment, on or before September Thirty (30)  and the last installment on or before December Thirty-first (31st) *except the special levy the payment of which shall be governed by ordinance of the sanggunian concerned. *The date for the payment of any other tax imposed under this Title without interest shall be prescribed by the sanggunian concerned. *Payments of real property taxes shall first be applied to prior years delinquencies, interests, and penalties, if any, and only after said delinquencies are settled may tax payments be credited for the current period. Sec 251. Tax Discount for Advanced Prompt Payment. — If the basic real property tax and the additional tax accruing to the Special Education Fund (SEF) are paid in advance as provided under Section 250  sanggunian may grant a discount NOT exceeding twenty percent (20%) of the annual tax due. Sec 252. Payment Under Protest. (a) No protest shall be entertained unless the taxpayer first pays the tax.  There shall be annotated on the tax receipts the words "paid under protest"  The protest in writing must be filed within thirty (30) days from payment of the tax to treasurer who shall decide the protest within sixty (60) days from receipt. (b) The tax or a portion paid under protest, shall be held in trust by the treasurer concerned. (c) In the event that the protest is finally decided in favor of the taxpayer, the amount or portion of the tax protested shall be refunded to the protestant, or applied as tax credit against his existing or future tax liability. (d) In the event that the protest is denied or upon the lapse of the sixty day period prescribed in subparagraph (a), the taxpayer may avail of the remedies as provided for in Chapter 3, Title II, Book II of this Code.

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Sec 253. Repayment of Excessive Collections. — When an assessment of real property tax or any other tax under this Title found to be illegal or erroneous and the tax is accordingly reduced or adjusted  the taxpayer may file a written claim for refund or credit for taxes and interests with the treasurer within two (2) years from the date the taxpayer is entitled to such reduction or adjustment.  The provincial or city treasurer shall decide the claim for tax refund or credit within sixty (60) days from receipt thereof  In case the claim for tax refund or credit is denied, the taxpayer may avail of the remedies as provided in Chapter 3, Title II, Book II of this Code. Sec 254. Notice of Delinquency in the Payment of the Real Property Tax. — (a) When real property tax or other tax imposed under this Title becomes delinquent, treasurer shall immediately cause a notice of the delinquency to be posted at the main hall and in a publicly accessible and conspicuous place in each barangay of the local government unit concerned + notice of delinquency shall also be published once a week for two (2) consecutive weeks, in a newspaper of general circulation in the province, city, or municipality. (b) notice shall specify:  the date upon which the tax became delinquent  shall state that personal property may be distrained to effect payment  state that any time before the distraint of personal property, payment of the tax with surcharges, interests and penalties may be made in accordance with the next following Section  and unless the tax, surcharges and penalties are paid before the expiration of the year for which the tax is due except when the notice of assessment or special levy is contested administratively or judicially pursuant to the provisions of Chapter 3, Title II, Book II of this Code, the delinquent real property will be SOLD at public auction, and the title to the property will be vested in the purchaser, subject, however, to the right of the delinquent owner of the property or any person having legal interest therein to redeem the property within one (1) year from the date of sale. Sec 255. Interests on Unpaid Real Property Tax. — for failure to pay the basic real property tax or any other tax levied under this Title upon the expiration of the periods when due  subject the taxpayer to the payment of interest at the rate of two percent (2%) per month on the unpaid amount until the delinquent tax shall have been fully paid  Provided, in NO case shall the total interest on the unpaid tax or portion thereof exceed thirty-six (36) months. Sec 256. Remedies For The Collection Of Real Property Tax. — For collection of the real property tax and other tax levied under this Title, the local government unit concerned may avail of the remedies:  administrative action thru levy on real property  or by judicial action. Sec 257. Local Governments Lien. —real property tax and any other tax levied under this Title constitute a lien on the property subject to tax  superior to all liens, charges or encumbrances in favor of any person  irrespective of the owner or possessor thereof  enforceable by administrative or judicial action  and may only be extinguished upon payment of the tax and the related interests and expenses. Sec 258. Levy on Real Property. — After the expiration of the time required to pay real property tax or any other tax levied under this Title, real property subject to such tax may be levied through the issuance of a warrant  on or before, or simultaneously with, the institution of the civil action for the collection of the delinquent tax.  The warrant shall operate with the force of a legal execution throughout the province, city or a municipality, within the Metropolitan Manila Area.  The warrant shall be mailed to or served upon:  the delinquent owner or person having legal interest - in case he is out of the country or cannot be located, the administrator or occupant of the property.  At the same time, written notice of the levy with the attached warrant shall be mailed to or served upon the assessor who shall annotate it on the tax declaration  AND the Registrar of Deeds of the province, city or municipality within the Metropolitan Manila Area where the property is located who shall annotate the levy on the certificate of title of the property Sec 260. Advertisement and Sale. — Within thirty (30) days after service of the warrant of levy, the local treasurer shall proceed to publicly advertise for sale or auction the property or a usable portion thereof as may be necessary to satisfy the tax delinquency and expenses of sale  The advertisement shall be by posting a notice at the main entrance of the provincial, city or municipal building, and in a publicly conspicuous place in the barangay where the real property is located + by publication once a week for two (2) weeks in a newspaper of general circulation in the province, city or municipality where the property is located.  advertisement shall specify:  the amount of the delinquent tax  interest due thereon  expenses of sale  the date and place of sale  name of the owner of the or person having legal interest  description of the property to be sold. *At any time before the date fixed for the sale, the owner or person having legal interest may stay the proceedings by paying the delinquent tax + interest due + expenses of sale.

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*Proceeds of the sale in excess of the delinquent tax, the interest due thereon, and the expenses of sale shall be remitted to the owner of the real property or person having legal interest therein. Sec 261. Redemption of Property Sold. — Within one (1) year from the date of sale, the owner of the delinquent real property or person having legal interest or their representatives shall have the right to redeem the property upon payment to treasurer of the:  amount of the delinquent tax  interest due  expenses of sale - from the date of delinquency to the date of sale  plus interest of not more than two percent (2%) per month on the purchase price - from the date of sale to the date of redemption * payment shall invalidate the certificate of sale issued to the purchaser and the owner of the delinquent real property or person having legal interest shall be entitled to a certificate of redemption *From date of sale until the expiration of the period of redemption, the delinquent real property shall remain in possession of the owner or person having legal interest therein who shall be entitled to the income and other fruits *the property shall be free from lien of such delinquent tax, interest due thereon and expenses of sale. Sec 262. Final Deed to Purchaser. — In case the owner or person having legal interest fails to redeem the delinquent property, the treasurer shall execute a deed conveying to the purchaser said property, free from lien of the delinquent tax, interest due thereon and expenses of sale Sec 263. Purchase of Property By the Local Government Units for Want of Bidder. — In case there is NO bidder for the real property, the real property tax and the related interest and costs of sale  the treasurer conducting the sale shall purchase the property in behalf of the local government unit concerned to satisfy the claim  shall be the duty of the Registrar of Deeds to transfer the title of the forfeited property to the local government unit concerned without the necessity of an order from a competent court. *Within one (1) year from the date of such forfeiture, the taxpayer or any of his representative, may redeem the property by paying to the treasurer the full amount of the real property tax and the related interest and the costs of sale. If the property is not redeemed as provided herein, absolute ownership thereof shall be vested on the local government unit concerned. Sec 264. Resale of Real Estate Taken for Taxes, Fees, or Charges. — The sanggunian sell and dispose of the real property acquired under the preceding section at public auction; proceeds of the sale shall accrue to the general fund of the local government unit.  may by ordinance  upon notice of not less than twenty (20) days Sec 265. Further Distraint or Levy. — Levy may be repeated if necessary until the full amount due, including all expenses, is collected. Sec 266. Collection of Real Property Tax Through the Courts. — The local government unit concerned may enforce the collection of the basic real property tax or any other tax levied under this Title  by civil action in any court of competent jurisdiction - civil action shall be filed by the treasurer within the period prescribed in Section 270 of this Code. Sec 267. Action Assailing Validity of Tax Sale. — No court shall entertain any action assailing the validity or any sale at public auction of real property or rights until:  taxpayer shall have deposited with the court the amount for which the real property was sold, together with interest of two percent (2%) per month from the date of sale to the time of the institution of the action  amount so deposited shall be:  paid to the purchaser at the auction sale if the deed is declared invalid  shall be returned to the depositor if the action fails. *Neither shall any court declare a sale at public auction invalid by reason or irregularities or informalities in the proceedings - unless the substantive rights of the delinquent owner of the real property or the person having legal interest have been impaired. Sec 268. Payment of Delinquent Taxes on Property Subject of Controversy. — In any action involving the ownership or possession of, or succession to, real property, the court may, motu propio or upon representation of the treasurer award such ownership, possession, or succession to any party to the action  upon payment to the court of the taxes with interest due on the property and all other costs that may have accrued  subject to the final outcome of the action. Sec 270. Periods Within Which To Collect Real Property Taxes. — The basic real property tax and any other tax levied under this Title shall be:  collected within five (5) years from the date they become due  No action for the collection of the tax, whether administrative or judicial, shall be instituted after the expiration of such period  In case of fraud or intent to evade payment of the tax, such action may be instituted for the collection of the same within ten (10) years from the discovery of such fraud or intent to evade payment. The period of prescription within which to collect shall be suspended for the time during which: (1) The local treasurer is legally prevented from collecting the tax; (2) The owner of the property or the person having legal interest therein requests for reinvestigation and executes a waiver in writing before the expiration of the period within which to collect; and

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(3) The owner of the property or the person having legal interest therein is out of the country or otherwise cannot be located. DISPOSITION OF PROCEEDS Sec 271. Distribution of Proceeds. — proceeds of real property tax, including interest thereon + proceeds from the use, lease or disposition, sale or redemption of property acquired at a public auction shall be distributed as follows: (a) In the case of provinces: (1) Province — Thirty-five percent (35%) shall accrue to the general fund; (2) Municipality — Forty percent (40%) to the general fund of the municipality where the property is located; and (3) Barangay — Twenty-five percent (25%) shall accrue to the barangay where the property is located. (b) In the case of cities: (1) City — Seventy percent (70%) shall accrue to the general fund of the city; and (2) Thirty percent (30%) shall be distributed among the component barangays of the cities where the property is located in the following manner: (i) Fifty percent (50%) shall accrue to the barangay where the property is located; (ii) Fifty percent (50%) shall accrue equally to all component barangays of the city; and (c) In the case of a municipality within the Metropolitan Manila Area: (1) Metropolitan Manila Authority — Thirtyfive percent (35%) shall accrue to the general fund of the authority; (2) Municipality — Thirty-five percent (35% shall accrue to the general fund of the municipality where the property is located; (3) Barangays — Thirty percent (30%) shall be distributed among the component barangays of the municipality where the property is located in the following manner: (i) Fifty percent (50%) shall accrue to the barangay where the property is located; (ii) Fifty percent (50%) shall accrue equally to all component barangays of the municipality. (d) The share of each barangay shall be released, without need of any further action, directly to the barangay treasurer on a quarterly basis within five (5) days after the end of each quarter and shall not be subject to any lien or holdback for whatever purpose. Sec 272. Application of Proceeds of the Additional One Percent SEF Tax. — The proceeds from the additional one percent (1%) tax on real property accruing to the Special Education Fund (SEF):  shall be automatically released to the local school boards  Provided, in case of provinces, the proceeds shall be divided equally between the provincial and municipal school boards the proceeds shall be allocated for the:  operation and maintenance of public schools  construction and repair of school buildings, facilities and equipment  educational research  purchase of books and periodicals  sports development as determined and approved by the Local School Board.

Sec273.Proceeds of the Tax on Idle Lands. — proceeds of the additional real property tax on idle lands shall accrue to the:  respective general fund of the province or city where the land is located  In the case of a municipality within the Metropolitan Manila Area, the proceeds shall accrue equally to the Metropolitan Manila Authority and the municipality where the land is located. Sec274.Proceeds of the Special Levy. — The proceeds of the special levy on lands benefited by public works, projects and other improvements shall accrue to the general fund of the local government unit which financed such public works, projects or other improvements. SPECIAL PROVISIONS Sec276. Condonation or Reduction of Real Property Tax and Interest. —sanggunian by ordinance passed prior to the first (1st) day of January of any year + upon recommendation of the Local Disaster Coordinating Council, may condone or reduce, wholly or partially, the taxes and interest thereon for the succeeding year or years in the city or municipality affected by the calamity in cases of:  general failure of crops  substantial decrease in the price of agricultural or agribased products  calamity in any province, city or municipality Sec277.Condonation or Reduction of Tax by the President of the Philippines. —President may, when public interest so requires, condone or reduce the real property tax and interest for any year in any province or city or a municipality within the Metropolitan Manila Area. V. Problems 1. An Ordinance was passed by the Provincial Board of a Province in the North, increasing the rate of basic real property tax from 0.006% to 1% of the assessed value of the real property effective 1 January 2000. Residents of the municipalities of the said province protested the Ordinance on the ground that no public hearing was conducted and, therefore, any increase in the rate of real property tax is void. Is there merit in the protest? Explain.

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Answer: The protest is devoid of merit. No public hearing is required before the enactment of a local tax ordinance levying the basic real property tax (Art. 324, LGC Regulations)  Alternative Answer: Yes, there is merit in the protest provided that sufficient proof could be introduced for the non-observance of public hearing. By implication, the SC has recognized that public hearings are required to be conducted prior to the enactment of an ordinance imposing real property taxes. Although it was concluded by the SC that the presumption of validity of a tax ordinance can not be overcome by bare assertions of procedural defects on its enactment, it would seem that if the taxpayer had presented evidence to support the allegation that no public hearing was held, the Court should have ruled that the tax ordinance is invalid (Figuerres v. CA, March 25, 1999) City Board of Assessment Appeals. Is the Petition for Review proper? Explain. (1999 Bar) Answer: No. The CTA is devoid of jurisdiction to entertain appeals from the decision of the CBAA. Said decision is instead appealable to the CBAA, which under the LGC, has appellate jurisdiction over decisions of the LBAA.

2.

The real property of Mr. and Mrs. Angeles, situated in a commercial area in front of the public market, was declared in their tax declaration as residential because it had been used by them as their family residence from the time of its construction in 1990. However, since January 1997, when the spouses left for the US to stay there permanently with their children, the property has been rented to a single proprietor engaged in the sale of appliances and agriproducts. The Provincial Assessor reclassified the property as commercial for tax purposes starting January 1998. Mr. and Mrs. Angeles appealed to the Local Board of Assessment Appeals, contending that the tax declaration previously classifying their property as residential is binding. How should the appeal be decided? (2002 Bar) Answer: The appeal should be decided against Mr. and Mrs. Angeles. The law focuses on the actual use of the property for classification, valuation and assessment purposes regardless of ownership. Section 217 of the LGC provides that “real property shall be classified, valued, and assessed on the basis of its actual use regardless of where located, whoever owns it, and whoever uses it.”

3.

A Co, a Philippine corporation, is the owner of machinery, equipment and fixtures located at its plant in Muntinlupa city. The City Assessor characterized all these properties subject to the real property tax. A Co. appealed the matter to the Muntinlupa Board of Assessment Appeals. The Board ruled in favor of the city. In accordance with RA 1125, A Co. brought a petition for review before the CTA to appeal the decision of the

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TARIFF AND CUSTOMS CODE
I. ARTICLES SUBJECT TO DUTY A. B. Export (suspended except on logs) and import duties Meaning of importation Sec. 1201 All articles imported into the Philippines, whether subject to duty or not, shall be entered through the customhouse at a port of entry Sec. 1202 Importation BEGINS:  vessel or aircraft enters the jurisdiction of Philippines with intention to unlade TERMINATED: 1) payment of duties, taxes and other charges 2) secured to be paid and legal permit for withdrawal has been granted 3) articles have legally left the jurisdiction of customs C. 1. Classes of importation e.

indirectly information where, how or by whom human conception is prevented or unlawful abortion produced. Roulette wheels, gambling outfits, loaded dice, marked cards, machines, apparatus or mechanical devices used in gambling, or in the distribution of money, cigars, cigarettes or other articles when such distribution is dependent upon chance, including jackpot and pinball machines or similar contrivances. Lottery and sweepstakes tickets, advertisements thereof and lists of drawings therein.  except those authorized by the Philippine Government Any article manufactured in whole or in part of gold silver or other precious metal, or alloys thereof, the stamps brands or marks of which do not indicate the actual fineness or quality of said metals or alloys. Any adulterated or misbranded article of food or any adulterated or misbranded drug in violation of the provisions of the "Food and Drugs Act." Marijuana, opium poppies, coca leaves, or any other narcotics or synthetic drugs which are or may hereafter be declared habit forming by the President of the Philippines, any compound, manufactured salt, derivative, or preparation thereof,  except when imported by the Government of the Philippines or any person duly authorized by the Collector of Internal Revenue for medicinal purposes only. Opium pipes and parts thereof, of whatever material. All other articles the importation of which is prohibited by law.

f.

g.

h.

i.

Dutiable importation All articles, when imported from any foreign country into the Philippines, shall be subject to duty upon each importation, even though previously exported from the Philippines, except as otherwise specifically provided for in this Code or in other laws. (§100)

2.

Prohibited importations Sec. 101 a. Dynamite, gunpowder, ammunitions and other explosives, firearm and weapons of war, and detached parts thereof, except when authorized by law.

j. k.

b. Written or printed article in any form containing: 1) any matter advocating or inciting treason, rebellion, insurrection or sedition against the Government of the Philippines 2) forcible resistance to any law of the Philippines 3) containing any threat to take the life of or inflict bodily harm upon any person in the Philippines. c. Written or printed articles, photographs, engravings, lithographs, objects, paintings, drawings or other representation of an obscene or immoral character. Articles, instruments, drugs and substances designed, intended or adapted for preventing human conception or producing unlawful abortion, or any printed matter which advertises or describes or gives directly or

Sec. 1207 It is the duty of the Collector to exercise jurisdiction to - prevent importation (prohibited importation) or - secure compliance with legal requirements (articles that may be imported subject to conditions) 3. Conditionally-free importation ARTICLE Aquatic products CONDITIONS - Caught, gathered and imported by fishing vessels of Phil registry - Not have landed in foreign territory, or if landed, solely for transshipment bond = 1 ½ x of ascertained duties, taxes and charges must be exported within 6 months

d.

Equipment used for the salvage of vessels or aircraft not available locally

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Costs of repair made in foreign country of Phil vessels aircrafts Phil must not have adequate facilities to make repair Vessel was compelled by weather or casualty to go to foreign port for repair Excludes value of article used for repair to be re-exported bond = 1 ½ x of ascertained duties, taxes and charges must be exported within 6 months effects  belong to (1) persons coming to settle in Phil and (2) overseas Filipinos Articles used exclusively for public entertainment; display in public expos; exhibition or competition for prizes; devices for projecting picture Brought by foreign film producers for making or recording motion pictures on location in Phil Photographic and cinematographic films, undeveloped, exposed outside Phil by resident Filipinos or Phil producing companies Importations used by foreign embassies, legations, agencies of foreign gov’t Articles for personal or family use of members and attaches of foreign embassies, legations, consular officers and other reps of foreign gov’t Articles donated to or for account of relief organization Containers, holders and similar receptacles Supplies of vessel or aircraft privilege of free entry was never granted to them before or qualifies under LOI 105, 163, 210

Articles brought into Phil for repair, processing or reconditioning Trophies, prizes (medals, badges, cups) Those received as honorary distinction Personal and household effects of returning Phil residents

-

-

must file bond (1 ½ X) exported within 6 mos not exhibited for profit otherwise, confiscation+ penalty

-

-

-

-

Effects of travelers, tourist (wearing apparel, personal adornment, toiletries, portable tools and instruments, costumes) Personal and household effects, vehicles of foreign consultants and experts hired or rendering service to gov’t - including staff and families Professional instruments Tools of trade Wearing apparel Domestic animals Personal and household -

-

-

formally declared and listed before departure including those purchased abroad necessary and appropriate and used for comfort and convenience must have been using item abroad for more than 6 mos must accompany them or arrive within reasonable time not in commercial quantities total DV not exceed P2,000  in excess of P2,000  50% ad valorem returning resident has not previously availed of this benefit within 1 year if resident was abroad for less than 6 mos  50% ad valorem (DV <P2T) arrive with or at a reasonable time necessary and appropriate for wear and use according to nature of journey, comfort and convenience articles NOT for hire, sale, barter Collector may require: written commitment or bond accompany them or arrive at a reasonable time in quantities and kind necessary and suitable to the profession, rank or position for their own use, NOT for sale, barter, hire Collector may require: written commitment or bond in quantities and kind necessary and suitable to the profession, rank or position for their own use, NOT for sale, barter, hire change of residence is bona fide

-

must file bond (1 ½ X) exported within 6 mos (unless extended by Collector for another 6 mos) principal actors are Filipinos affidavit by importer that the exposed films are same films previously exported

-

-

Reciprocity: such foreign country must grant same privilege to Phil agencies

-

-

such privileges must be accorded in a special agreement between Phil and the foreign country privilege may be granted only upon specific instructions of Sec of Finance which will be given only upon request of DFA org not for profit for free distribution to the needy except those that are reusable for shipment or transportation of goods for use or consumption of passengers on board any surplus or excess shall be dutiable

-

-

-

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Articles and salvage after 2 years from filing protest Coffins or urns containing human remains, bones ashes Personal and household effects of deceased EXCEPT vehicles Samples - unsaleable - no appreciable commercial value - Models not for practical use vessels must have been wrecked or abandoned in Phil waters temporarily abroad solely for exhibition Foreign container used in packing exported Phil products Articles and supplies imported by and for use of scheduled airlines operating under congressional franchise (Aircraft, equipment and machinery, spare parts commissary and catering supplies, aviation gas, fuel and oil) machineries, equipment, tools for production, plants to convert mineral ores into saleable form, spare parts, supplies, materials, accessories, explosive, chemicals, transpo and communication facilities imported by and used by new mines and old mines aircrafts imported by agro industrial companies, spare parts and accessories Spare parts of vessels or aircrafts of foreign registry engaged in foreign trade Articles of easy identification exported from Phil for repair and subsequently reimported

-

not exceed P10,000

-

-

-

-

marked “sample sale punishable by law” for purpose of introducing new product imported by person duly registered and identified to be engaged in that trade importations authorized by Sec of Finance

such articles are not available locally in reasonable quantity, quality and price necessary or incidental to proper operations

Sample medicines Commercial samples -

authorized by DOH not available in Phil not exceed P10,000  in excess of P10,000, it may be entered in bond or for consumption bond (2x) conditioned on exportation within 6 mos

-

-

such articles are not available locally inn reasonable quantity, quality and price necessary or incidental to proper operations

Animals and plants  for scientific, experimental, propagation, botanical, breeding zoological and defense purposes Economic, technical, vocational, scientific, philosophical, historical and cultural books and publications Phil articles previously exported and returned without increasing value or improved condition Foreign articles previously exported when returned after having been exported and loaned for use

-

used in their agri industrial operations

and

Note that if a drawback or bounty was allowed to any Phil article under this subsection, upon re-importation article shall be subject to duty equal to the bounty or drawback

-

-

-

brought to Phil as replacement or for emergency repair spare parts utilized to secure safety, seaworthiness or airworthiness, enable it to continue voyage or flight cannot be repaired locally cost of repair made on article shall pay 30% ad valorem

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Trailer chassis imported by shipping companies for handling containerized cargo bond (1 ½ x) to cover 1 year must be properly identified and registered with LTO subject to customs supervision fee deposited in Customs zone when not in use upon expiration of period (1 yr or as extended by Commissioner) duties and taxes shall be paid Car must have been purchased or ordered before the mission or consulate received his order of recall the value of personal and household effects shall not exceed 30% of his total salary DRAWBACKS - in the nature of refund or tax credit a) Fuel used for Propulsion of Vessels engaged in trade with foreign countries or coastwide trade  refund or credit not exceeding 99% of duty imposed by law on such fuel petroleum oils and oils from bituminous minerals, crude oils imported by non electric utilities and then sold to electric utilities for generation of electric power  refund or credit not exceeding 50% of duty imposed by law exportation of articles manufactured or produced in Phil (including packing + covering + marking/labeling) of imported materials for which duties have been paid

b)

Personal and household effects (including one car) officer/ Ee of DFA, attaché, staff assigned to Phil diplomatic mission abroad personnel of Reparations Mission in Tokyo AFP military personnel in SEATO AFP military personnel accorded diplomatic rank on duty abroad  returning from regular assignment reassignment dies resigns retires

-

-

c)

CONDITIONS: 1. 2. 3. imported material was actually used in the production of article to be exported refund or credit shall not exceed 100% of duties paid on the imported material no determination by NEDA of the requirement for certification on non availability of locally produced or manufactured competitive substitutes for the imported material (I think this means there are no local substitutes for the material..) exportation must be made 1 year after importation of material claim for refund or credit must be made 6 months from exportation when 2 or more result from the used of same imported material, apportionment shall be made every application for drawback must pay P500 filing, processing and supervision fees claims shall be paid by Bureau of Customs within 60 days after receipt of properly accomplished claims

4.

5. II. RATES OF DUTY A. General Rules Sec. 104 There shall be levied, collected and paid upon all imported articles the rates of duty indicated. Max rate: NOT exceed 100% ad valorem Rates of duty shall apply to ALL products whether imported directly or indirectly of all foreign products which do not discriminate against Philippine products If foreign country discriminates  additional 100% across-the-board duty on their products Rates of duty shall be subject to periodic investigation by Tariff Commission and may be revised by President upon recommendation of NEDA. Sec 106 B. 

Basis of Duty Sec. 201 Basis of Dutiable Value (note: RA 8181 amended this section) The DV shall be the Transaction Value which is the price actually paid or payable for the goods when sold for export to the Phil, adjusted by: a. commissions and brokerage fees costs of containers costs of packing value of materials, components, parts

b.

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and item incorporated in the imported good; tools, dies, moulds used I the production; materials consumed in the production; engineering, development, artwork, design, plans and sketches undertaken not in Phil  such goods and services were supplied by buyer to seller free of charge or at a reduced rate to the extent that value was not included in the price paid c. d. royalties and license fees that buyer paid any part of the proceeds of a subsequent resale, disposal or use of good that accrues to the seller transportation cost from port of export to port of entry in Phil loading, unloading and handling charges (arrastre) insurance 2. imported goods may be had by filing cash bond (imposable duties and taxes + 25% thereof) “Reasonable Doubt” refers to any condition that creates a probable cause to make the Commissioner of Customs believe in the inaccuracy of the invoice value of imported goods as declared by importer. It may include the following situations: 1. if sale price is subject to some consideration which value cannot be determined such as: a. seller fixes price on condition that buyer will also buy other goods in specified quantities b. price of imported goods is dependent upon price at which buyer sells other goods to seller c. price is established on the basis of a form of payment extraneous to the Imported goods part of proceeds of subsequent resale , disposal or use of goods will accrue to the seller buyer and seller are related to one another and relationship affected the price. They are related if: officers or directors of one another’s business legally recognized partners in business Er-Ee (removed in RA 8181, but included in CA 2-99) Any person owns, controls or holds 5% or more of the outstanding voting stocks of both of them One of them directly or indirectly controls the other Both directly or indirectly controlled by third person members of same family including brothers and sisters (whether full or half), spouse, ancestors and lineal descendants (note change in CA 2-99)

e. f. g.

Alternative Methods16: 1. TV of identical goods sold for export in Phil at or about the same time as good being valued 2. TV of similar goods sold for export in Phil at or about the same time as good being valued  if DV still cannot be determined using through the successive application of the methods above, the order of succession of the ff may be reversed upon request of the importer: 3. unit price at which the imported or similar or identical good is sold domestically  same condition as when imported to persons not related to seller at or about the same time of the importation of the goods being valued COMPUTED VALUE = cost of raw materials + profit and general expenses + freight + insurance fees + transpo expenses 4. using other means consistent accepted principles of GATT with

3.

values shall be ascertained by Commissioner from reports of revenue and commercial attaches values shall be published in at least 1 newspaper of general circulation party dissatisfied with the values can file protest 15 days from date of publication if it becomes necessary to delay the final determination of DV, release of

“identical Goods” – same in all respects including physical characteristics, quality and reputation. “Similar Goods” – although not alike in all respects, have like characteristics and component materials which enable them to perform the same functions and be commercially interchangeable Sec. 202 Bases of Dutiable Weight a) gross weight: weight of article + weight of all containers, packages, holders and packing where articles were contained during importation

16 Methods are applied successively. Alternative methods are used when value cannot be determined through successive application of previous methods.

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b) legal weight: weight of article + weight of immediate containers, holders where such articles are usually contained at the time of their sale to the public in retail quantities net weight: only the actual weight of article articles affixed to cardboard, cards, paper, wood shall be dutiable together with weight of such holders when a single package contains articles dutiable according to different weights, the common exterior of the receptacle shall be prorated. currency of purchase and the unit of quantity in which the articles were bought if articles shipped otherwise than purchase, value of each article in unit which the article is usually bought and sold and in the currency they are usually transacted OR price in the currency manufacturer would receive if sold in ordinary course of trade in usual wholesale quantities all charges discounts, rebates, drawbacks, bounties current home consumption value or price other facts necessary for proper examination, appraisement and classification of the articles

f.

c) d) e)

g. h. i. j.

Sec. 203 Rate of Exchange Value quoted in foreign currency shall be converted into Phil currency at the exchange rate published by Central Bank Sec. 204 Effective Date of Rates of Import Duty Imported articles shall be subject to rates of import duty existing at the time of entry or withdrawal from warehouse For articles abandoned, forfeited or seized by government and sold at public auction, the rate of duty shall be the rates in force at the time of auction Duty based on weight, volume and quantity shall be levied and collected on the weight, volume and quantity at time of entry into warehouse or date of abandonment/forfeiture/seizure.

Sec. 1309 Certificate of Invoice Commercial invoice must be presented to the consular officer of the Phil for certification at the time or before or immediately after the shipment of article Consular invoice shall be certified in consular district where articles were manufactured or purchased or shippers.  In the absence of Phil consul, the invoice may be certified by consular officer in the district nearest the place of exportation or person designated by DFA Sec. 1310 All importations exceeding P10, 000 in DV shall be entered only 1. upon presentation of consular invoice under penalties of falsification, perjury. All importations exceeding P10, 000 in DV shall be entered only upon presentation of consular invoice under penalties of falsification, perjury OR 2. Affidavit showing cause why it is not possible to produce invoice + bond Exempt from consular invoice requirement: a. conditionally free importations b. tax free importations c. importations of government agencies and instrumentalities d. importations on consignment basis under RA 3137 and RA 6135 for re export Sec. 1313 Information Furnished on Classification and Value Classification: When article not specifically classified in code, the interested party, importer or foreign exporter may submit a sample with full description of component materials in a written request. Value: Upon written application, Collector shall furnish importer within 30 days the latest information s to the DV of articles to be imported. Importer must present all pertinent papers and documents, act in good faith and

Sec. 205 Imported article deemed “entered” in Phil for consumption when: entry form is properly filed and accepted together with related documents duties, taxes, fees and other charges are paid or secured to be paid imported article deemed to be “withdrawn” from warehouse in the Phil for consumption when: entry form is properly filed and accepted together with related documents duties, taxes, fees and other charges are paid or secured to be paid Sec. 1308 Contents of Commercial Invoice a. place, date, person by whom and the person to whom articles are sold If imported other than in a purchase, place from which shipped, date when the person to whom and by whom they are shipped b. port of entry c. detailed description of the articles (sufficient for tariff classification and statistical purposes) d. quantities e. if articles bought in pursuance to purchase, purchase price in the

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unable to obtain information due to unusual conditions Information given is not an appraisal nor is it binding upon the Collector’s right of appraisal. Customs Administrative Order # 2-96 COMPONENTS OF DUTIABLE VALUE  COST FREIGHT 1. COST a. Primary cost - export value (at time of export or date nearest exportation) at which the same, identical or similar article is freely offered for sale in the principal export market of the exporting country in the usual wholesale quantities and in ordinary course of trade - including: value of containers, coverings, packing other expenses, costs and charges incident to shipping article to Phil b. Alternate Cost - to be used if value cannot be ascertained thru the procedure given above or reasonable doubt exists as to the fairness of the value determined thru that process Cost at Country of Manufacture or Origin  if such country is not the country of exportation Third Country Cost - export value of the article from a country with the same stage of economic development as the country of exportation Domestic Wholesale Selling Price - domestic selling price in Metro Manila or other principal market in Philippines MINUS  25% selling price (for expenses and profits)  duties and taxes paid c. Identical and Similar goods Identical Goods – same in all respects (physical characteristics, quality and reputation)  minor differences in appearance shall not preclude it from being regarded as identical Similar Goods – respects not alike in all e. f. g. 2. 3. + INSURANCE PREMIUM + d. like characteristics and component materials perform same functions commercially interchangeable  factors to determine WON similar: quality, reputation and trademark Relationship of Export Value and Invoice Value export value ≠ importer’s invoice or transaction value └ may be obtained from identical or similar articles of other transaction or source of information covering INSURANCE PREMIUM transportation to port of entry to Phil FREIGHT covering transportation to port of entry to Phil

RA 8181 (1996) BASIS OF DUTIABLE VALUE IMPORTED ARTICLES, AMENDING 1464 (TARIFF AND CUSTOMS CODE)

OF PD

The DV of an imported article shall be the transaction price, which shall be the price actually paid or payable for the goods when sold for export to the Phil, adjusted by adding the ff to the extent that they are incurred by the buyer but not included in the price paid: a. commissions and brokerage fees costs of containers costs of packing value of materials, components, parts and item incorporated in the imported good; tools, dies, moulds used in the production; materials consumed in the production; engineering, development, artwork, design, plans and sketches undertaken not in Phil  such goods and services were supplied by buyer to seller free of charge or at a reduced rate to the extent that value was not included in the price paid royalties and license fees that buyer paid any part of the proceeds of a subsequent resale, disposal or use of good that accrues to the seller transportation cost from port of export to port of entry in Phil loading, unloading and handling charges (arrastre) insurance

b.

c. d.

Alternative Methods:

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1. Transaction Value of identical goods sold or export to the Phil at or about the date of exportation of the good being valued  if DV still cannot be determined using through the successive application of the 2 methods above, the order of succession of the ff may be reversed upon request of the importer: unit price at which the imported or similar or identical good is sold domestically  same condition as when imported to persons not related to seller at or about the same time of the importation of the goods being valued subject to applicable deductions provided under GATT COMPUTED VALUE = cost of raw materials + profit and general expenses + freight + insurance fees + transpo expenses 3. using other means consistent accepted principles of GATT  with 3. buyer and seller are related to one another and relationship affected the price. They are related if: officers or directors of one another’s business legally recognized partners in business Any person owns, controls or holds 5% or more of the outstanding voting stocks of both of them One of them directly or indirectly controls the other Both directly or indirectly controlled by third person members of same family including brothers and sisters (whether full or half), spouse, ancestors and lineal descendants

2.

“identical Goods” – same in all respects including physical characteristics, quality and reputation. “Similar Goods” – although not alike in all respects, have like characteristics and component materials which enable them to perform the same functions and be commercially interchangeable Customs Administrative Order # 2-99 (effective Jan 1, 1999) DETERMINATION OF DUTIABLE VALUE Dutiable Value (DV) shall be determined using one of the 6 methods of valuation. These methods must be applied in sequence. However, method 4 and 5 may be reversed at request of importer(unless there shall be difficulty in using method 5 in which case Commissioner shall reject request) Method # 1 TRANSACTION VALUE Price actually paid or payable for goods when sold for export to Phil + commissions & brokerage fees + cost of containers + cost of packing (labor, materials) + assists (value of goods and services supplied by the buyer free of charge or at a reduced price for use in connection with the production and sale for export of the good) + royalties & license fees + value of any part of the proceeds of subsequent resale, disposal or use of imported goods that accrue directly or indirectly to seller + cost of transport + loading, unloading, handling + insurance DV must NOT include: charges for construction, erection, assembly maintenance or technical assistance undertaken after importation cost of transport after importation duties and taxes of Phil

values shall be ascertained by Commissioner from reports of revenue and commercial attaches values shall be published in at least 1 newspaper of general circulation party dissatisfied with the values can file protest 15 days from date of publication if it becomes necessary to delay the final determination of DV, release of imported goods may be had by filing cash bond (imposable duties and taxes + 25% thereof)

‘Reasonable’ shall refer to any condition that creates a probable cause to make the Commissioner believe in the accuracy of the invoice value of imported goods as declared by importer. Such conditions may include, but not limited to: 1. if sale price is subject to some consideration which value cannot be determined such as: seller fixes price on condition that buyer will also buy other goods in specified quantities price of imported goods is dependent upon price at which buyer sells other goods to seller price is established on the basis of a form of payment extraneous to the Imported goods 2. part of proceeds of subsequent resale , disposal or use of goods will accrue to the seller

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other permissible deduction under WTO Valuation Agreement Produced by producer of the goods being valued

CONDITIONS so the Transaction Value shall be the DV 1. sale for export to Phil 2. no restrictions as to the disposition or use of goods by buyer except: those imposed by law or Phil authorities limit the geographical area where goods may be resold do not substantially affect the value of the goods 3. not be subject to some condition or consideration for which value cannot be determined 4. no part of the proceeds of any subsequent disposal shall accrue to the seller 5. buyer and seller are not related or if they are, relationship did not affect the price DEEMED RELATED IF: officers or directors of one another’s business legally recognized partners in business Er-Ee Any person owns, controls or holds 5% or more of the outstanding voting stocks of both of them One of them directly or indirectly controls the other Both directly or indirectly controlled by third person Together they directly or indirectly control a third person Related by affinity or consanguinity up to 4th civil degree IF RELATED, USE OF TV ACCEPTABLE IF: 1. circumstances surrounding transaction show that relationship did not influence the price 2. TV closely approximates: TV of unrelated buyers of identical or similar goods Deductive value of identical or similar goods determined according to method #4 Computed value of identical or similar goods determined according to method #5 Method # 2 TRANSACTION VALUE OF IDENTICAL GOODS The DV shall be the transaction value of identical goods sold for export to the Phil and exported at or about the same time as the goods being valued. Identical goods must be same commercial level and substantially same quantity as the goods being valued. Identical goods Same in all respects (physical characteristics, quality and reputation) Produced in the same country as the goods being valued

 excludes imported goods for which engineering, development, artwork, design work, plans and sketches is undertaken in the Phil and provided by the buyer to the producer free of charge or at a reduced rate  When no identical goods produced by the same person  identical goods produced by different producer in the same country If NO identical goods at same commercial level and same quantity,  TV of identical goods at a different commercial level and different quantity may be utilized  TV shall be adjusted upward or downward to account for the difference

Method #3 TRANSACTION VALUE OF SIMILAR GOODS The DV shall be the transaction value of similar goods sold for export to the Phil and exported at or about the same time as the goods being valued. Similar goods must be same commercial level and substantially same quantity as the goods being valued. Similar goods: like characteristics and like component materials capable of performing same functions commercially interchangeable produced in same country produced by dame producer  excludes imported goods for which engineering, development, artwork, design work, plans and sketches is undertaken in the Phil and provided by the buyer to the producer free of charge or at a reduced rate  When no similar goods produced by the same person  similar goods produced by different producer in the same country If NO similar goods at same commercial level and same quantity,  TV of similar goods at a different commercial level and different quantity may be utilized  TV shall be adjusted upward or downward to account for the difference

Method # 4 THE DEDUCTIVE VALUE DV is determined on the basis of sales in the Phil of goods being valued of identical or similar imported goods less certain expenses resulting from importation and sale of goods. Deductive Value is determined by making a deduction from the established price per unit for the aggregate of the ff elements:

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a. b. c. d. Commissions OR additions made in connection with profit and general expenses AND transport, insurance and associated costs customs duties and other national taxes COSTS Sec. 302 Countervailing Duty When an article is granted any bounty, subsidy or subvention upon its production, manufacture or exportation in the country of origin and importation of which is likely to injure an established industry or retard the establishment of industry in Phil  countervailing duty = ascertained or estimated amount of bounty, subsidy or subvention  Injury criterion shall be applied only on imports from countries which adhere to GATT If article was allowed a drawback, only the excess of the amount of drawback over the total duties and taxes shall constitute bounty, subsidy, subvention When the conditions which necessitated the imposition of countervailing duties have ceased  must discontinue imposition

PRICE - COMMISIONS/ADDITIONS DUTIES/TAXES = DEDUCTIVE VALUE

CONDITIONS: 1. sold in the Phil in the same condition as imported 2. sales taken place at or about the same time of importation of good being valued 3. if no sale took place at or about the time of importation  use sales at the earliest date after importation (of the similar or identical good) but before expiration of 90 days 4. if no sale meet the above conditions, importer may choose the use of sales of goods being valued after further processing “at or about the same time”  45 days prior to and 45 days after importation Method # 5 THE COMPUTED VALUE DV is determined on the basis of cost of production + profit + general expenses reflected in sales from exporting country to the Phil of goods of same class or kind DV is calculated by: determine aggregate of relevant costs, charges and expenses or value of (1) materials and (2) production or processing costs costs (containers, packing, assists, + engineering, artwork, plans and sketches undertaken in Phil and charged to producer + profits and general expenses + cost of transport, insurance and charges to the port or place of importation Method # 6 THE FALLBACK VALUE DV cannot be determined using any of the above methods Use other reasonable means consistent with principles and general provisions of GATT

Sec. 303 Marking a. marking of articles marked in official language of Phil and in conspicuous places to indicate to the ultimate purchaser the name of country of origin b. marking of containers

failure to mark 5% ad valorem failure or refusal to mark within 30 days from date of notice shall constitute act o abandonment. no imported article shall be delivered until it has been inspected, examined or appraised Sec. 304 Discrimination by Foreign Countries The president may proclaim new and additional duties in an amount not exceeding 100% ad valorem on articles from country where: 1. imposes an unreasonable charge, exaction not equally enforceable in other laws 2. discriminate against the commerce of Phil in such a way that it places Phil commerce at a disadvantage D. Flexible Tariff Rates Sec.401 Pres is empowered to: 1. increase, reduce or remove existing rates 2. establish quota or ban import of any commodity 3. impose an additional duty not exceeding 10% ad valorem the pres’ power to increase or decrease rates of import duty shall include authority to modify the form of duty

C.

Special Duties Sec. 301 Dumping Duty When Sec of Finance receives a petition or has reason to believe that a specific foreign article is being imported into, or sold/ likely to be sold in Phil, at a price less than its normal value  within 20 days, must determine prima facie case for dumping

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any order of Pres shall take effect 30 days after promulgation except if the imposition of additional duty is less than 10%, it shall take effect upon the discretion of the President. III. IMPOSITION OF DUTIES A. Persons liable Deemed Owner of Imported Articles: 1. consignee 2. holder of bill of lading 3. if consigned to order, the consignor 4. underwriters of abandoned articles and salvors of articles saved at a wreck  the liability of importer for the duties, taxes, fees and other charges constitute a personal debt due to the government which may be discharged only upon full payment. It also constitutes a lien upon the articles imported while articles are in custody or subject to control of government all importations by the government, its branches, instrumentalities, GOCCs, agencies or instrumentalities owned or controlled by government are subject to similar duties, taxes and fees except for those provided in Sec. 105 (conditionally free imports) C. 2. the invoice and entry contains just and faithful account of the value or price of articles; nothing has been omitted or concealed to the best of knowledge of declaring, all the invoices and B of L are the only ones in exiting in relation to the importation in question the invoices, entries and B of L are genuine and true

3.

4.

 signed by importer, consignee or holder of bill, manager of corporation, firm or association, licensed customs broker Form of Import Entry: shall be signed by person making entries have required # of copies as prescribed by RR Contents: name of importing vessel or aircraft # and marks of packages, quantity description of article value set in the invoice Examination, Appraisal Classification (§1405-08) and

B.

Declaration  imported articles must be entered in customhouse at the port of entry within 30 days from date of discharge by: 1. importer, being holder of B of L 2. customs broker 3. agent

Procedure: 1. appraisers shall ascertain, estimate, determine the value or price of articles  file action within 1 year 2. examiners shall render a report 3. appraisers shall describe all articles on the face of entry in tariff  15 days An appraisal, fully passed upon and approved by Collector, may not be altered or modified except: 1. statement of error 2. request for reappraisal and/or classification if duty assessed entered value D. E. amount is lower than the

Import entries: 1. Informal entry articles of commercial nature intended for sale, barter or hire the DV is P2,000 or less personal and household effects, not in commercial quantity, for personal use 2. Formal entry may be for immediate consumption, or under irrevocable domestic letter of credit, bank guarantee or bond for: a. placing article in customs bonded warehouse b. constructive warehousing and immediate transportation to other Phil ports upon proper examination and appraisal c. constructive warehousing and immediate exportation

Assessment of Taxes Liquidation (§1601-03) Liquidation shall be made on the face of entry showing the particulars Daily record of entries liquidated shall be posted ion the public corridor of customs house Tentative Liquidation -if to determine the exact amount due some future action is required, liquidation is deemed tentative as to items affected and shall be subject to future and final adjustment and settlement within 6 months Finality of Liquidation: After expiration of 1 year from date of final payment of duties

Written Declaration of Import Entry must contain statements that declare: 1. full account of value or price

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In the absence of protest, final and conclusive between the parties unless liquidation was tentative IV. REMEDIES OF THE GOVERNMENT A. 1. Extrajudicial Enforcement of Tax Lien Sec. 1508 When an importer has an outstanding and demandable account with the Bureau of Customs, Collector shall hold the delivery of the article Upon notice, he may sell such importation or a portion of it to satisfy the obligation  importer may settle his obligation anytime before the sale 2. Seizure and Forfeiture Sec 2205 WHO: customs official Fisheries Commissions Philippine Coast Guard  to make seizure of any vessel, aircraft, cargo, animal or any movable property when the same is subject to forfeiture or liable for any fine under the tariff and customs law ADMINISTRATIVE PROCEEDINGS (Secs 2301 – 2316) When seizure is made: 1. Collector shall issue a warrant for the detention of the property Cash bond if importer wishes to secure release of article for legitimate use amount fixed by Collector conditioned on payment of appraised value of article and/or fine, expenses, costs  article will NOT be released if: prima facie evidence of fraud in the importation] article is prohibited by law 2. 3. Report to Commissioner and Chairman of Commission of Audit written notice to owner or importer  he shall he given opportunity to be heard Notification to an unknown owner - posting for 15 days in the public corridor of customhouse - publication in newspaper - other means Collector considers desirable 4. Collector shall make a list and particular description and classification of the seized property, appraisal based on local wholesale values by at least 2 appraising officials absent such, 2 competent disinterested citizens    If within 15 days from notification, no owner or agent is found or appears before Collector  property forfeited to Government and sold at auction SETTLEMENT While case is pending, Collector may accept settlement of any seizure case upon approval of Commissioner payment of fine ( 25% - 80% of the landed cost of the article) In case of forfeiture, should pay the domestic market value of the seized article Settlement NOT allowed: o Fraud in importation o importation prohibited by law o release would be contrary to law PROTEST written protest payment before protest is necessary (amount due + docket fee)

When: at the time payment of the amount claimed to be due is made within 15 days thereafter Form: filed according to RR; point out the particular decision or ruling grounds used as basis for the protest Scope: limited to the subject matter of a single adjustment (refers to the entire content of one liquidation including duties, fees, surcharges and fines) or other independent transaction  failure to protest will render the action of the Collector final and conclusive except for manifest error  upon demand of Collector, the importer shall furnish samples of the articles which are the subject of the protest HEARING: 15 days after filing of protest DECISION: within 30 days REVIEW BY COMMISIONER: 15 days after notification in writing of Collector’s decision  if decision of Collector is adverse to government  automatic review DECISION OF COMMISIONER: within 30 days  notice to party who brought case ( if seizure case, personal service if practicable) REVIEW BY SECRETARY OF FINANCE  if decision of Collector is adverse government  automatic review to

»»» Inaction of Commissioner or Secretary for 30 days from receipt of records of the case  decision under review becomes final and executory APPEAL TO CTA: within 30 days from receipt of copy of decision  COMPROMISE

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Commissioner may compromise any case subject to approval by Secretary 1. 2. 3. B. Judicial
SEIZURE

4.

Claim made in writing Collector shall verify with the records in his office certify claim to Commissioner with his recommendation and necessary papers Commissioner shall then cause the claim to be paid if found correct If the result of the refund would result to a corresponding refund of the internal revenue taxes on the same importation, Collector shall certify to Commissioner who shall cause the said excess to be paid, refunded or credited in favor of the importer

WRITTEN NOTICE TO IMPORTER/ OWNER

SETTLEMENT

PROTEST
15 days

B.

Protest (§2308-09. 2312) written protest payment before protest is necessary (amount due + docket fee)

HEARING
30 days

DECISION
15 days If gov’t, automatic review

When: at the time payment of the amount claimed to be due is made within 15 days thereafter Form: filed according to RR point out the particular decision or ruling ground used as basis for the protest Scope: limited to the subject matter of a single adjustment (refers to the entire content of one liquidation including duties, fees, surcharges and fines) or other independent transaction  failure to protest will render the action of the Collector final and conclusive except for manifest error  upon demand of Collector, the importer shall furnish samples of the articles which are the subject of the protest

Review by Commissioner
30 days

DECISION

Secretary of Finance
30 days

Appeal to CTA

V.

REMEDIES OF THE TAXPAYER A. Refund (§1707-08) When: 1. manifest clerical error made in invoice or entry 2. error in return of weight, measure and gauge certified, under penalties of falsification or perjury, by examining official 3. error in the distribution of charges on invoices not involving any question of law certified, under penalties of falsification or perjury, by examining official Conditions 1. errors discovered before payment OR discovered within 1 year after the final liquidation 2. written request and notice from importer OR statement of error certified by the Collector How:

C.

Abandonment (§1801-03) Article is deemed abandoned when: 1. owner, importer or consignee expressly signifies in writing to Collector his intention to abandon 2. after due notice, fails to file an entry within 30 days from date of discharge of last package from vessel or aircraft 3. after filing entry, fails to claim his importation 15 days from date of posting of the notice to claim such importation Effect: deemed to have renounced his interest and property rights ipso facto deemed property of the Government  any official or employee who: had knowledge of the existence of abandoned article custody or charge of such article fails to report within 24 hours from time article deemed abandoned shall be punished accdg to sec. 3604 ( fine: P5000 – P50,000mprisonment: 1 yr – 10 yrs

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perpetual disqualification to hold public office, vote and participate in election) VI. Problems 1. Whenever the decision of the Collector of Customs is adverse to the government, it is automatically elevated to the Commissioner for review and, if it is affirmed by him, it is automatically elevated to the secretary of Finance for review. What is the basis of the automatic review procedure in the Bureau of Customs? Explain. (2002 Bar) Answer: Automatic review is intended to protect the interest of the Government in the collection of taxes and customs duties in seizure and protest cases. Without such automatic review, neither the Commissioner of Customs nor the Secretary of Finance would know about the decision laid down by the Collector favoring the taxpayer. The power to decide seizure and protest cases may be abused if no checks are instituted. Automatic review is necessary because nobody is expected to appeal the decision of the Collector which is favorable to the taxpayer and adverse to the Government. (Yaokasin v. Commissioner 180 SCTA 591 2. The Collector of Customs of the Port of Cebu issued warrants of seizure and detention against the importation of machineries and equipment by LLD Import and Export Co. for alleged nonpayment of tax and customs duties in violation of customs laws. LLD was notified of the seizure, but before it could be heard, the Collector of Customs issued a notice of sale of the articles. In order to restrain the Collector from carrying out the order to sell, LLD filed with the CTA a petition for review with application for issuance of a writ of prohibition. It also filed with the CTA an appeal for refund of overpaid taxes on its other importations of raw materials which has been pending with the Collector of Customs. The Bureau of Customs moved to dismiss this case for lack of jurisdiction of the CTA. (2002 Bar) A. Does the CTA have jurisdiction over the petition for review and writ of prohibition? Explain. B. Will an appeal to the CTA for a tax refund be possible? Explain. Answer: A. No, because there is no decision as yet by the Commissioner of Customs which can be appealed to the CTA. Neither would the remedy of prohibition lie because the CTA has not acquired any appellate jurisdiction over the seizure case. The writ of prohibition being merely ancillary to the appellate jurisdiction, the CTA has no jurisdiction 3. over it until it has acquired jurisdiction on the petition for review. No, because the Commissioner of Customs has not yet rendered a decision on the claim for refund. The jurisdiction of the Commissioner and the CTA are not concurrent in so far as claims for refund are concerned. The only exception is when the Collector has not acted on the protested payment for a long time, the continued inaction of the Collector or Commissioner should not be allowed to prejudice the taxpayer (Nestle v. CA, July 6, 2001)

B.

On the basis of a warrant of seizure and detention issued by the Collector of Customs for the purpose of enforcing the Tariff and Customs laws, assorted brands of cigarettes said to have been illegally imported into the Philippines were seized from a store where they were openly offered for sale. Dissatisfied with the decision rendered after hearing by the Collector of Customs on the confiscation of the articles, the importer filed a petition for review with the CTA. The Collector moved to dismiss the petition for lack of jurisdiction. Rule on the motion. (2000 Bar) Answer: No. The legislators intended to divest the RTCs of the jurisdiction to replevin a property which is subject of seizure and forfeiture proceedings for violation of the Tariff and Customs Code otherwise, actions for forfeiture of property for violation of the Customs laws could easily be undermined by the simple device of replevin. (Dela Fuente v. De Veyra, 120 SCRA 455)

4.

What do you understand by the term “flexible tariff clause” as used in the Tariff and Customs Code? (2001 Bar) Answer: The term “flexible tariff clause” refers to the authority given to the President to adjust the tariff rates under Section 401 of the Tariff and Customs Code, which is the enabling law that made effective the delegation of the taxing power to the President under the Constitution.

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