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TAXATION 1

TAXATION LAW

TAXATION LAW

TAXATION LAW 1

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TAXATION 1

I. General Principles of
Taxation
DEFINITION
TAXATION

AND

CONCEPT

OF

Taxation
is a mode by which governments make
exactions for revenue in order to support their
existence and carry out their legitimate
objectives.

Taxes
are enforced proportional contributions from
persons and property levied by the law-making
body of the State by virtue of its sovereignty for
the support of the government and all public
needs.
The power of taxation proceeds upon the
theory that the existence of government is a
necessity; that it cannot continue without
means to pay its expenses; and that for those
means it has the right to compel all citizens
and property within its limits to contribute.
NATURE OF THE POWER OF TAXATION

(1) Inherent in sovereignty


(2) Essentially a legislative function
(3) Subject to constitutional and inherent
limitations

TAXATION LAW

SCOPE OF TAXATION
Subject to constitutional and inherent
restrictions, the power of taxation is regarded
as supreme, unlimited and comprehensive.
The principal check on its abuse rests only on
the responsibility of the members of the
legislature to their constituents.

EXTENT OF THE LEGISLATIVE POWER TO


TAX
Subject to constitutional and inherent
restrictions, the legislature has discretion to
determine the incidence of the power to tax.

ESSENTIAL CHARACTERISTICS OF
TAX
(1) an enforced contribution
(2) generally payable in the form of money
(3) proportionate in character or is laid by
some rule of apportionment which is
usually based on ability to pay;
(4) levied on persons, property, rights, acts,
privileges, or transactions.
(5) levied by the State which has jurisdiction or
control over the subject to be taxed.
(6) levied by the law-making body of the
State; and;
(7) levied for public purpose.

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TAXATION 1

TAXATION LAW

POWER OF TAXATION COMPARED WITH OTHER POWERS


1. As to concept

2. As to scope

3. As to authority

4. As to purpose

5. As to necessity
of delegation

6. As to
affected

Taxation

Police Power

Eminent Domain

Power
to
enforce
contribution to raise
government funds
Plenary, comprehensive
and supreme

Power to make and


implement laws for the
general welfare
Broader in application.
General power to make
and implement laws.
Exercised
only
by
government
or
its
political subdivisions
Property is taken or
destroyed to promote
general welfare
Can
be
expressly
delegated to the local
government units by the
law making body
Operates
on
a
community or a class of
individual
Healthy
economic
standard of society
Cost
of
regulation,
license
and
other
necessary expenses
Protection, safety and
welfare of society

Power to take private


property for public use
with just compensation
Merely a power to take
private
property
for
public use
May be granted to public
service or public utility
companies
Private property is taken
for public use

Exercised
only
by
government
or
its
political subdivisions
Money is taken to
support the government
The power to make tax
laws
cannot
be
delegated

person

Operates
on
a
community or a class of
individual
7. As to benefits
Continuous
protection
and organized society
8. As to amount of Generally no limit
imposition

9.
As
importance

to

Inseparable
for
the
existence of a nation it
supports police power
and eminent domain

10.
As
relationship
Constitution

to
to

Subject to Constitutional
and Inherent limitations.
Inferior
to
nonimpairment clause.

11. As to limitation

Relatively free from


Constitutional
limitations.
Superior
to
nonimpairment clause.

Constraints
by Limited by the demand
Constitutional
and for public interest and
Inherent limitations
due process

Can
be
expressly
delegated to the local
government units by the
law making body
Operates
on
the
particular
private
property of an individual
Market value of the
property expropriated
No imposition

Common necessities and


interest
of
the
community
transcend
individual
rights
in
property
Superior to and may
override Constitutional
impairment
provision
because the welfare of
the State is superior to
any private contract
Bounded
by
public
purpose
and
just
compensation

[Valencia and Roxas, Income Taxation 6th Edition (2013-2014), Valencia Educational Supply, pp. 9-10]

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PURPOSE OF TAXATION

Jurisdiction Over Subject and Objects

1. Revenue-raising
Primary purpose of taxation is to provide funds
or property with which to promote the general
welfare and protection it its citizens.

2. Non-revenue/Special or Regulatory
Taxation is often employed as a device for
regulation by means of which certain effects or
conditions envisioned by governments may be
achieved. These regulatory purposes are also
known as Sumptuary.

PRINCIPLES OF SOUND TAX SYSTEM


(1) fiscal adequacy
(2) administrative feasibility
(3) theoretical justice or equality
Note: The non-observance of the above
principles will not necessarily render the tax
imposed invalid except to the extent those
specific constitutional limitations are violated.
(De Leon)

THEORY AND BASIS OF TAXATION


Lifeblood Theory
Taxes are the lifeblood of the government and
their prompt and certain availability is an
imperious need. [CIR v. Pineda]

Necessity Theory
The power of taxation proceeds upon theory
that the existence of government is a necessity;
that is cannot continue without means to pay
its expenses; and that for those means it has
the right to compel all citizens and property
within its limits to contribute.

Benefits-Protection
Relationship)

Theory

TAXATION LAW

(Symbiotic

This principle serves as the basis of taxation


and is founded on the reciprocal duties of
protection and support between the State and
its inhabitants.

The limited powers of sovereignty are confined


to objects within the respective spheres of
governmental control. These objects are the
proper subjects or objects of taxation and none
else.

DOCTRINES IN TAXATION
Prospectivity of Tax Laws
General rule - Tax laws are prospective in
operation. Reason: Nature and amount of the
tax could not be foreseen and understood by
the taxpayer at the time the transaction.
Exception - Tax laws may be applied
retroactively provided it is expressly declared
or clearly the legislative intent.(e.g increase
taxes on income already earned)
when retroactive application would be so
harsh and oppressive [Republic v. Fernandez,
G.R. No. L-9141. September 25, 1956].
Exception to the exception - Collection of
interest in tax cases is not penal in nature; it is
but a just compensation to the State. The
constitutional prohibition against ex post facto
laws is not applicable to the collection of
interest on back taxes. [Central Azucarera
v.CTA]

Non-retroactivity of Rulings (sec. 246)


General rule - Any revocation, modification or
reversal of rules and regulations promulgated
in accordance with Sections 244 and 245 of
the Tax Code and rulings or circulars
promulgated by the CIR, that is prejudicial to
the taxpayer, shall NOT be given retroactive
effect.
Exceptions:
(1) Where the taxpayer deliberately misstates
or omits material facts from his return or
any document required of him by BIR;
(2) Where the facts subsequently gathered by
the BIR are materially different from the
facts on which the ruling is based; OR

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


246, NIRC)

TAXATION LAW

concerned, the taxpayer, the subject of tax, is


the person who must pay the tax to the
government.

Imprescriptibility
Incidence of taxation is that point on which the
tax burden finally rests or settles down. It takes
place when shifting has been effected from the
statutory taxpayer to another.

Unless otherwise provided by the tax itself,


taxes are imprescriptible. [CIR v. Ayala
Securities Corporation]

Double Taxation

Tax Avoidance (Tax Minimization)


The exploitation by the taxpayer of legally
permissible alternative tax rates or methods of
assessing taxable property or income in order
to avoid or reduce tax liability. It is politely
called tax minimization and is not
punishable by law.

Means taxing twice the same taxpayer for the


same tax period upon the same thing or
activity, when it should be taxed but once, for
the same purpose and with the same kind of
character of tax.
Constitutionality of Double Taxation
There is no constitutional prohibition against
double taxation in the Philippines. It is
something not favored, but is permissible,
provided
some
other
constitutional
requirement is not thereby violated. [Villanueva
v. City of Iloilo, G.R. No. L-26521, December 28,
1968]

Transformation
Transformation method of escape in taxation
whereby the manufacturer or producer upon
whom the tax has been imposed pays the tax
and endeavors to recoup himself by improving
his process of production thereby turning out
his units of products at a lower cost. The
taxpayer escapes by a transformation of the
tax into a gain through the medium of
production.

Double taxation in its narrow sense is


undoubtedly unconstitutional but that in the
broader sense is not necessarily so. [De Leon,
citing 26 R.C.L 264-265].Where double
taxation (in its narrow sense) occurs, the
taxpayer may seek relief under the uniformity
rule or the equal protection guarantee. [De
Leon, citing 84 C.J.S.138].

Tax Evasion (Tax Dodging)


Tax Evasion - is the use by the taxpayer of
illegal or fraudulent means to defeat or lessen
the payment of a tax. It is also known as tax
dodging. It is punishable by law.

ESCAPE FROM TAXATION


Shifting of tax burden
Shifting - the transfer of the burden of a tax by
the original payer or the one on whom the tax
was assessed or imposed to someone else.
What is transferred is not the payment of the
tax but the burden of the tax.

Elements of Tax Evasion


(1) The end to be achieved.
(2) An accompanying state of mind described
as being evil, in bad faith, willful or
deliberate and not accidental.
(3) A course of action (or failure of action)
which is unlawful.

All indirect taxes may be shifted; direct taxes


cannot be shifted.

EXEMPTION FROM TAXATION


Nature of tax exemption
(1) Mere personal privilege- cannot be
assigned or transferred without the

Impact of taxation is the point on which a tax is


originally imposed. In so far as the law is
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consent of the Legislature. The legislative


consent to the transfer may be given either
in the original act granting the exemption
or in a subsequent law
(2) General rule: revocable by the government.
Exception: if founded on a contract which is
protected from impairment. But the
contract must contain the essential
elements of other contracts. An exemption
provided for in a franchise, however, may
be repealed or amended pursuant to the
Constitution (see Sec. 11, Art. XII). A
legislative franchise is in the nature of a
contract.
(3) Implies a waiver on the part of the
government of its right to collect taxes due
to it, and, in this sense, is prejudicial
thereto. Hence, it exists only by virtue of an
express grant and must be strictly
construed.
(4) Not necessarily discriminatory, provided it
has reasonable foundation or rational
basis. Where, however, no valid distinction
exists, the exemption may be challenged
as violative of the equal protection

TAXATION LAW

Articles 1279 and 1290 of the NCC, and both


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

COMPROMISE
(a) A contract whereby the parties, by making
reciprocal concessions avoid litigation or
put an end to one already commenced.
(Art. 2028, Civil Code). It involves a
reduction of the taxpayers liability.
(b) Requisites of a tax compromise:
(1) The taxpayer must have a tax liability.
(2) There must be an offer (by the taxpayer
or Commissioner) of an amount to be
paid by the taxpayer.
(3) There must be acceptance (by the
Commissioner or the taxpayer, as the
case may be) of the offer in settlement
of the original claim.

TAX AMNESTY
A tax amnesty partakes of an absolute
forgiveness or waiver by the Government of its
right to collect what otherwise would be due it,
and in this sense, prejudicial thereto,
particularly to give tax evaders, who wish to
relent and are willing to reform a chance to do
so and become a part of the new society with a
clean slate.[Republic v. IAC (1991)]

REVOCATION OF TAX EXEMPTION


General Rule - revocable by the government.
Exception - Contractual tax exemptions may
not be unilaterally so revoked by the taxing
authority without thereby violating the nonimpairment clause of the Constitution.

Tax Amnesty is immunity from all criminal and


civil obligations arising from non-payment of
taxes. It is a general pardon given to all
taxpayers. It applies to past tax periods, hence
of retroactive application. [People v. Castaeda,
G.R. No. L-46881, September 15, 1988].

COMPENSATION AND SET-OFF


General Rule - Internal revenue taxes cannot
be the subject of set-off or compensation
[Republic v. Mambulao Lumber, G.R. No. L17725, February 28, 1962].
Exception - If the claims against the
government have been recognized and an
amount has already been appropriated for that
purpose. Where both claims have already
become due and demandable as well as fully
liquidated, compensation takes place by
operation of law under Art. 1200 in relation to

Tax Exemption is an immunity from all civil


liability only. It is an immunity or privilege, a
freedom from a charge or burden of which
others are subjected. [Greenfield v. Meer, 77 Phil.
394 (1946)]. It is generally prospective in
application. [Dimaampao, 2005, p. 111]
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TAXATION LAW
rule on strict construction does not apply.
[Comm. V. Arnoldus Carpentry Shop, Inc.,
159 SCRA 19 (1988)].

CONSTRUCTION AND INTERPRETATION


OF:
Tax Laws
General Rule - Tax laws are construed strictly
against the government and liberally in favor
of the taxpayer. [Manila Railroad Co. v. Coll. of
Customs, 52 Phil. 950 (1929)].
Exceptions
(1) The rule of strict construction as against
the government is not applicable where
the language of the statute is plain and
there is no doubt as to the legislative intent.
(see 51 Am.Jur.368). In such case, the
words employed are to be given their
ordinary meaning. Ex. Word individual
was changed by the law to person. This
clearly indicates that the tax applies to
both natural and juridical persons, unless
otherwise expressly provided.
(2) The rule does not apply where the taxpayer
claims exemption from the tax.

Tax Rules and Regulations


The
Secretary
of
Finance,
upon
recommendation of the CIR, shall promulgate
all needful rules and regulations for the
effective enforcement of the provisions of the
NIRC. (Sec. 244)
The power to interpret the provisions of the Tax
Code and other tax laws is under the exclusive
and original jurisdiction of the Commissioner
of Internal Revenue subject to review by the
Secretary of Finance (Sec. 4, par.1, NIRC).

Decisions of the Supreme Court and Court of


Tax Appeals
Decisions of the Supreme Court applying or
interpreting existing tax laws are binding on all
subordinate courts and have the force and
effect of law. As provided for in Article 8 of the
Civil Code, they form part of the law of the
land. They constitute evidence of what the
law means. (People v. Licera, 65 SCRA 270
[1975]).

Tax Exemption and Exclusion


General Rule - In the construction of tax
statutes, exemptions are not favored and are
construed strictissimi juris against the taxpayer.
[Republic Flour Mills v. Comm. & CTA, 31 SCRA
520 (1970)].
Exceptions:
(a) When the law itself expressly provides for a
liberal construction, that is, in case of
doubt, it shall be resolved in favor of
exemption; and
(b) When the exemption is in favor of the
government itself or its agencies, or of
religious, charitable, and educational
institutions because the general rule is that
they are exempt from tax.
(c) When the exemption is granted under
special circumstances to special classes of
persons.
(d) If there is an express mention or if the
taxpayer falls within the purview of the
exemption by clear legislative intent, the

Penal Provisions Of Tax Laws


Penal provisions of tax laws must be strictly
construed. It is not legitimate to stretch the
language of a rule, however beneficent its
intention, beyond the fair and ordinary
meaning of its language.
Non-Retroactive Application Of Tax Laws To
Taxpayers
General rule - Tax laws are prospective in
operation. The reason is that the nature and
amount of the tax could not be foreseen and
understood by the taxpayer at the time the
transaction which the law seeks to tax was
completed.

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Exception - Tax laws may be applied


retroactively provided it is expressly declared
or clearly the legislative intent. (Lorenzo v.
Posadas, 64 Phil. 353 [1937]).

now expressly given the power to create its


own sources of revenue and to levy taxes,
fees and charges, subject to such
guidelines and limitations as the Congress
may provide which must be consistent with
the basic policy of local autonomy. [Art X,
Sec 5, 1987 Constitution]

Exception to the Exception - a tax law should


not be given retroactive application when it
would be so harsh and oppressive for in such
case, the constitutional limitation of due
process would be violated (Republic v.
Fernandez,[1956]).

SCOPE
AND
TAXATION

LIMITATION

TAXATION LAW

(2) Delegation to the President


(a) to enter into Executive agreements,
and
(b) to ratify treaties which grant tax
exemption
subject
to
Senate
concurrence.
(c) The Congress may, by law, authorize
the President to fix within specified
limits, and subject to such limitations
and restrictions as it may impose, tariff
rates, import and export quotas,
tonnage and wharfage dues, and other
duties or imposts within the framework
of the national development program
of the Government. [Art. 6, Sec. 28 (2),
1987 Consti]

OF

Inherent Limitations
1. Public Purpose
The proceeds of the tax must be used (a) for
the support of the State or (b) for some
recognized objects of government or directly to
promote the welfare of the community.
2. Inherently Legislative
Stated in another way, taxation may
exceptionally be delegated, subject to such
well-settled limitations as
(1) The delegation shall not contravene any
constitutional provision or the inherent
limitations of taxation;
(2) The delegation is effected either by the
Constitution or by validly enacted
legislative measures or statute; and
(3) The delegated levy power, except when
the delegation is by an express provision
of the Constitution itself, should only be in
favor of the local legislative body of the
local or municipal government concerned.
[Vitug and Acosta]

(3) Delegation to administrative agencies Limited


to
the
administrative
implementation that calls for some degree
of discretionary powers under sufficient
standards expressed by law or implied
from the policy and purposes of the Act.
3. Territorial
Rule - A state may not tax property lying
outside its borders or lay an excise or privilege
tax upon the exercise or enjoyment of a right or
privilege derived from the laws of another state
and therein exercise and enjoyed. (51 Am.Jur.
87-88).

General Rule - Delegata potestas non potest


delegari. The power to tax is exclusively vested
in the legislative body and it may not be redelegated.
Exceptions
(1) Delegation to local governments - Under
the new Constitution, however, LGUs are

4. International Comity

Comity - respect accorded by nations to each


other because they are sovereign equals. Thus,
the property or income of a foreign state or
government may not be the subject of taxation
by another state.
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Intangible
personal
property
(e.g., credits,
bills
receivables,
bank
deposits,
bonds,
promissory
notes,
mortgage
loans,
judgments
and
corporate
stocks)

Exemption of Government Entities, Agencies,


and Instrumentalities
(a) If the taxing authority is the National
Government:
General Rule - Agencies and
instrumentalities of the government
are exempt from tax.
Exception - When it chooses to tax
itself. Nothing can prevent Congress
from
decreeing
that
even
instrumentalities or agencies of the
government performing governmental
functions may be subject to tax.
(Mactan Cebu Airport v Marcos, 1996)
(b) If the taxing authority is the local
government unit:
RA 7160 expressly prohibits LGUs from
levying
tax
on
the
National
Government,
its
agencies
and
instrumentalities and other LGUs.

Gen Rule: Domicile of the


owner. Mobilia sequuntur
personam (movables follow
the person)
Exceptions:
(1) When
property
has
acquired a business situs
in another jurisdiction; or
(2) When the law provides for
the situs of the subject of
tax (e.g., Sec 104, NIRC)

Excise Tax

Income

VAT

Source of the income,


nationality or residence of
taxpayer (Sec. 23, NIRC)
Location
of
property;
nationality or residence of
taxpayer
Location
of
property;
nationality or residence of
taxpayer
Where transaction is made

Poll,
Capitation or
Community
Tax

Residence
of
taxpayer,
regardless of the source of
income or location of the
property of the taxpayer

Donors Tax

(c) Situs of Taxation


Within the territorial jurisdiction, the
taxing authority may determine the
situs. Situs of taxation literally means
the place of taxation. The basic rule is
that the state where the subject to be
taxed has a situs may rightfully levy
and collect the tax; and the situs is
necessarily in the state which has
jurisdiction
or
which
exercises
dominion over the subject in question.
Kind of Tax

TAXATION LAW

Estate

Others

Situs
Property Tax

Real property Where


it
is
located
(lexreisitae)
Tangible
Where property is physically
Personal
located although the owner
property
resides in another jurisdiction.

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CONSTITUTIONAL LIMITATIONS

for interns, resident doctors


and other members of the
hospital
staff,
and
recreational facilities for
student nurses, interns and
residents, such as athletic
fields. [Abra Valley College
v. Aquino]

(1) Prohibition against imprisonment for nonpayment of poll tax (Art III, Sec 20, 1987
Constitution)
(2) Uniformity and equality of taxation (Art VI,
Sec 28(1), 1987 Constitution)
(3) Taxation does not require identity or
equality under all circumstances, or negate
the authority to classify the objects of
taxation

Prohibition against taxation of non-stock, nonprofit educational institutions (ART XIV, SEC 4,
1987 CONSTITUTION)
This provision covers only non-stock, non-profit
educational institutions

(4) Grant by Congress of authority to the


President to impose tariff rates Delegation
of Tariff powers to the President under the
flexible tariff clause [Art VI, Sec 28(2), 1987
Constitution], which authorizes the
President to modify import duties. (Sec. 401,
Tariff and Customs Code)

Lands, buildings, and improvements actually,


directly and exclusively used for educational
purposes are exempt from property tax (Sec.
28[3], Art. VI, 1987 Constitution), whether the
educational institution is proprietary or nonprofit.

(5) Prohibition against taxation of religious,


charitable entities, and educational entities
(Art VI, Sec 28(3), 1987 Constitution) The tax
exemption under this constitutional
provision covers property taxes only and
not other taxes (Lladoc v. Commissioner, 14
SCRA 292 [1965]).

Art. VI, sec. 28, par. 3


Charitable institutions,
churches and
parsonages or
convents appurtenant
thereto, mosques, nonprofit cemeteries, and
all lands, buildings,
and improvements,
actually, directly, and
exclusively used for
religious, charitable, or
educational purposes.
Property taxes

Use of the property, and not


the ownership
Actual, direct and exclusive
Nature of Use
use for religious, charitable or
educational purposes.
Real property taxes on
facilities which are
(1) actual,
(2) incidental to, or
(3) reasonably necessary for
Scope
of
the accomplishment of
Exemption
said purposes such as in
the case of hospitals, a
school for training nurses,
a nurses home, property to
provide housing facilities
Test
Exemption

TAXATION LAW

of

Art. XIV, sec. 4, par. 3


Non-stock, nonprofit educational
institutions.

Income, property,
and donors taxes
and custom duties.

(6) Majority vote of Congress for grant of tax


exemption (Art VI, Sec 28, 1987 Constitution)
Exemptions may be created by:
(1) the Constitution or
(2) statute subject to constitutional limitations
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Note:
(1) The LGU shall have the authority to grant
local tax exemption privileges. (Sec. 192,
LGC)
(2) The President may, when public interest so
requires, condone or reduce real property
taxes and interest. (Sec. 277, LGC)

TAXATION LAW

(1) Due process (Art III, Sec 1, 1987 Constitution)


(2) Equal protection (Art III, Sec 1, 1987
Constitution)
(3) Religious freedom (Art III, Sec 5, 1987
Constitution )
The Constitution, however, does not prohibit
imposing a generally applicable tax on the sale
of religious materials by a religious
organization. (Tolentino v. Secretary of Finance,
235 SCRA 630 [1994])

(7) Prohibition on use of tax levied for special


purpose
All money collected on any tax levied for a
special purpose shall be treated as a special
fund and paid out for such purpose only.

(4)Non-impairment of obligations of contracts


(ART III, SEC 10, 1987 CONSTITUTION)

(8) Presidents veto power on appropriation,


revenue, tariff bills (Art VI, Sec 27(2), 1987
Constitution)

The Contract Clause has never been thought as


a limitation on the exercise of the State's
power of taxation save only where a tax
exemption has been granted for a valid
consideration. [Tolentino v. Secretary of
Finance]

(9) Non-impairment of jurisdiction of the


Supreme Court (Art VIII, Sec 2; Art VIII, Sec
5(2,B); Art VI, Sec 30, 1987 Constitution)
(10) Grant of power to the local government
units to create its own sources of revenue [Art X,
Sec 5, 1987 Constitution]

STAGES OR PROCESS OF TAXATION

(13) No appropriation or use of public money for


religious purposes (Art VI, Sec 29, 1987
Constitution)

The exercise of taxation involves three stages,


namely:
(1) Levy Or Imposition This process involves
the passage of tax laws or ordinances
through the legislature.
(2) Assessment And Collection This process
involves the act of administration and
implementation of tax laws by the executive
through its administrative agencies such as
the Bureau of Internal Revenue or Bureau of
Customs.
(3) Payment this process involves the act of
compliance by the taxpayer in contributing
his share to pay the expenses of the
government.
(4) Refund A claim for refund must first be
filed with the Commissioner of Internal
Revenue.

PROVISIONS INDIRECTLY AFFECTING TAXATION

REQUISITES OF A VALID TAX LAW

(11) Flexible tariff clause


Delegation of Tariff powers to the President
under the flexible tariff clause [Art VI, Sec
28(2), 1987 Constitution]
Flexible tariff clause: the authority given to the
President, upon the recommendation of NEDA,
to adjust the tariff rates under Sec. 401 of the
Code in the interest of national economy,
general welfare and/or national security.
(12) Exemption from real property taxes (Art VI,
Sec 28(3), 1987 Constitution)

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(1) for a public purpose


(2) rule of taxation should be uniform
(3) the person or property taxed is within the
jurisdiction of the taxing authority
(4) assessment and collection is in consonance
with the due process clause
(5) The tax must not infringe on the inherent
and constitutional limitations of the power
of taxation

Taxes

License and
Regulatory Fee
Imposed under the Levied under the
taxing power of the police power of the
state for purposes of state.
revenue.
Forced contributions Exacted primarily to
for the purpose of regulate
certain
maintaining
businesses
or
government
occupations.
functions.
Generally, unlimited Should
not
as to amount
unreasonably exceed
the
expenses
of
issuing the license
and of supervision.
Imposed on persons, Imposed only on the
property
and
to right to exercise a
exercise a privilege.
privilege
Failure to pay does Failure to pay makes
not necessarily make the act or business
the act or business illegal.
illegal.

TAX AS DISTINGUISHED FROM


OTHER FORMS OF EXACTIONS
Tariff
Taxes

Tariff

All embracing term to A kind of tax imposed


include various kinds on articles which are
of
enforced traded internationally
contributions upon
persons
for
the
attainment of public
purposes

Penalty for nonpayment: surcharges


or
imprisonment
(except poll tax).

Toll
Taxes

Toll

Paid for the support


of the government
Demand
of
sovereignty
Generally, no limit on
the amount collected
as long as it is not
excessive,
unreasonable
or
confiscatory
Imposed only by the
government

Paid for the use of


anothers property.
Demand
of
proprietorship
Amount
paid
depends upon the
cost of construction
or maintenance of the
public improvement
used.
Imposed
by
the
government or by
private individuals or
entities.

TAXATION LAW

Special Assessment
Taxes
Levied not only on
land.
Imposed regardless
of
public
improvements
Contribution of a
taxpayer
for
the
support
of
the
government.
It
has
general
application both as to

License Fee
14

Special Assessment
Levied only on land.
Imposed because of
an increase in value
of land benefited by
public improvement.
Contribution of a
person
for
the
construction of a
public improvement
Exceptional both as
to time and locality.

UP LAW BOC

Taxes

TAXATION 1

Special Assessment

Generally intended to
raise revenue
May be imposed only
by the government

time and place.

Debt
Taxes

Cannot be a subject
of
set
off
or
compensation

Debt

Based on laws

Generally based on
contract, express or
implied.
Generally cannot be Assignable
assigned
Generally paid in May be paid in kind.
money
Cannot be a subject Can be a subject of
of
set
off
or set
off
or
compensation
compensation
(see
Art. 1279, Civil Code)
A person cannot be Imprisonment is a
imprisoned for non- sanction for nonpayment of debt payment
of
tax,
(except when it arises except poll tax.
from a crime),
Governed by the Governed by the
special prescriptive ordinary periods of
periods provided for prescription.
in the NIRC.
Does
not
draw Draws interest when
interest except only it is so stipulated or
when delinquent
where
there
is
default.
Imposed only by Can be imposed by
public authority
private individual

acts deemed injurious


Designed to regulate
conduct
May be imposed by
the government or
private individuals or
entities
Can be a subject of
set
off
or
compensation
(see
Art. 1279, Civil Code)

KINDS OF TAXES
As To Object
(1) Personal, Poll or Capitation Tax tax of a
fixed amount imposed on persons residing
within a specified territory, whether citizens
or not, without regard to their property or
the occupation or business in which they
may be engaged (e.g. community (formerly
residence) tax).
(2) Property Tax tax imposed on property, real
or personal, in proportion to its value or in
accordance with some other reasonable
method of apportionment (e.g., real estate
tax).
(3) Privilege/Excise Tax any tax which does
not fall within the classification of a poll tax
or a property tax. Thus, it is said that an
excise tax is a charge imposed upon the
performance of an act, the enjoyment of a
privilege, or the engaging in an occupation,
profession, or business. (e.g., income tax,
value added tax, estate tax, donors tax).

As To Burden Or Incidence
(1) Direct Taxes taxes which are demanded
from persons who also shoulder them; taxes
for which the taxpayer is directly or
primarily liable, or which he cannot shift to
another (eg. Income tax, estate tax, donors
tax, community tax)
(2) Indirect Taxes taxes which are demanded
from one person in the expectation and

Penalty
Taxes

TAXATION LAW

Penalty

Violation of tax laws Any sanction imposed


may give rise to as a punishment for
imposition of penalty. violation of law or
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TAXATION 1

TAXATION LAW

As To Scope (Or Authority Imposing The


Tax)

intention that he shall indemnify himself at


the expense of another, falling finally upon
the ultimate purchaser or consumer; taxes
levied upon transactions or activities before
the articles subject matter thereof, reach
the consumers who ultimately pay for them
not as taxes but as part of the purchase
price. (e.g., VAT, percentage tax; excise
taxes on specified goods; customs duties).

(1) National taxes imposed by the national


government (e.g. national internal revenue
taxes, customs duties, and national taxes
imposed by laws).
(2) Municipal or Local taxes imposed by local
governments (e.g. business taxes that may
be imposed under the Local Government
Code; professional tax).

As To Tax Rates
(1) Specific Tax a tax of a fixed amount
imposed by the head or number or by some
other standard of weight or measurement
(e.g., taxes on distilled spirits, wines, and
fermented liquors; cigars and cigarettes)
(2) Ad Valorem Tax a tax of a fixed proportion
of the value of the property with respect to
which the tax is assessed (e.g. real estate
tax, excise tax on automobiles, nonessential goods such as jewelry and
perfumes, customs duties (except on
cinematographic films)).
(3) Mixed

As To Graduation
(1) Proportionate The rate of tax is based on a
fixed percentage of the amount of the
property, receipts or other basis to be taxed.
Example: real estate tax, value added tax,
and other percentage taxes.
(2) Progressive The rate of tax increases as
the tax base or bracket increases.
Example: income tax, estate tax, donors tax.
(3) Digressive A fixed rate is imposed on a
certain amount and diminishes gradually on
sums below it. The tax rate in this case is
arbitrary because the increase in tax rate is
not proportionate to the increase of tax
base.
(4) Regressive The rate of tax decreases as the
tax base or bracket increases. There is no
regressive tax in the Philippines.

As To Purposes
(1) General or Fiscal Tax levied for the general
or ordinary purposes of the Government
(e.g. income tax, value added tax, and
almost all taxes).
(2) Special/Regulatory/ Sumptuary Tax levied
for special purposes (e.g. protective tariffs
or customs duties on imported goods to
enable similar products manufactured
locally to compete with such imports in the
domestic market).

Regressive/Progressive System Of Taxation


(1) A regressive tax, must not be confused
with regressive system of taxation.
(2) A progressive tax is also different from
a progressive system of taxation.

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TAXATION 1

II. National Internal


Revenue Code of 1997 as
amended (NIRC)

TAXATION LAW

subjected to one set of graduated tax rates or


normal corporate income tax. With respect to
such income the computation is global.
For those other income not mentioned above,
they remain subject to different sets of tax
rates and covered by different returns.

Income Tax is defined as a tax on all yearly


profits arising from property, professions,
trades, or offices, or as a tax on the persons
income, emoluments, profits and the like
(Fisher v. Trinidad, 43 Phil. 981).

Note: The Philippines, under EO 37 (1986) and


RA 8424 (1998), follows a semi-schedular and
semi-global tax system.

FEATURES OF THE
INCOME TAX LAW

INCOME TAX SYSTEMS

1.

Global Tax System


Under a global tax system, it did not matter
whether the income received by the taxpayer is
classified as compensation income, business or
professional income, passive investment
income, capital gain, or other income. All items
of gross income, deductions, and personal and
additional exemptions, if any, are reported in
one income tax return, and one set of tax rates
are applied on the tax base.

2.

3.

Schedular Tax System


Different types of incomes are subject to
different sets of graduated or flat income tax
rates. The applicable tax rate(s) will depend on
the classification of the taxable income and the
basis could be gross income or net income.
Separate income tax returns (or other types of
return applicable) are filed by the recipient of
income for the particular types of income
received.

Semi-Schedular
System

Or

Semi-Global

4.

5.

6.

Tax

All compensation income, business or


professional income, capital gain and passive
income not subject to final tax, and other
income are added together to arrive at the
gross income, and after deducting the sum of
allowable deductions, the taxable income is

PHILIPPINE

The tax burden is borne by


the income recipient upon whom the
tax is imposed.
PROGRESSIVE The tax rate increases as
the tax base increases. It is founded on
the ability to pay principle and is
consistent with Sec. 28, Art. VI, 1987
Constitution.
COMPREHENSIVE The Philippines has
adopted the most comprehensive
system of imposing income tax by
adopting the citizenship principle, the
residence principle, and the source
principle.
SEMI-SCHEDULAR OR SEMI-GLOBAL TAX
SYSTEM The Philippines follows the
semi-schedular or semi-global system
of income taxation
NATIONAL TAX It is imposed and
collected by the National Government
throughout the country.
EXCISE TAX It is imposed on the right or
privilege of a person to receive or earn
income. It is not a personal tax or a
property tax.
DIRECT TAX

CRITERIA IN IMPOSING PHILIPPINE


INCOME TAX
Citizenship or Nationality Principle
A citizen of the Philippines is subject to
Philippine income tax
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TAXATION 1

(a) on his worldwide income, if he resides in the


Philippines; or
(b) only on his income from sources within the
Philippines, if he qualifies as a nonresident
citizen.

TAXATION LAW

TAXABLE PERIOD
The accounting periods used in determining
the taxable income of taxpayers are:
(a) Calendar Year - Accounting period of 12
months ending on the last day of December
(b) Fiscal Year - Accounting period of 12 months
ending on the last day of any month other
than December (Sec. 22(Q), NIRC).
(c) Short Period- Accounting period which
starts after the first month of the tax year or
ends before the last month of the tax year
(less than 12 months).

Residence Principle
A resident alien is liable to pay Philippine
income tax on his income from sources within
the Philippines but is exempt from tax on his
income from sources outside the Philippines.

Source of Income Principle

Instances Whereby
Period Arises

An alien is subject to Philippine income tax


because he derives income from sources within
the Philippines. Thus, a non-resident alien or
non-resident foreign corporation is liable to
pay Philippine income tax on income from
sources within the Philippines, such as
dividend interest, rent, or royalty, despite the
fact that he has not set foot in the Philippines.

Short

Accounting

(a) When a corporation is newly organized.


(b) When a corporation is dissolved.
(c) When a corporation changes accounting
period.
(d) When the taxpayer dies.

When Calendar Year Shall Be Used In


Computing Taxable Income:

TYPES OF PHILIPPINE INCOME TAX


(1) Graduated income tax on individuals
(2) Normal corporate income tax on
corporations
(3) Minimum corporate income tax on
corporations
(4) Special income tax on certain corporations
(5) Capital gains tax on sale or exchange of
shares of stock of a domestic corp.
classified as capital assets
(6) Capital gains tax on sale or exchange of
real property classified as capital asset
(7) Final withholding tax on certain passive
investment income paid to residents
(8) Final withholding tax on income payments
made to non-residents
(9) Fringe benefits tax on fringe benefits of
supervisory or managerial employees
(10) Branch profit remittance tax
(11) Tax on improperly accumulated earnings
of corporations

(a) If the taxpayer's annual accounting period is


other than a fiscal year; or
(b) If the taxpayer has no annual accounting
period; or
(c) If the taxpayer does not keep books of
accounts; or
(d) If the taxpayer is an individual (Sec. 43,
NIRC).

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TAXATION 1
Estates
Trusts

KINDS OF TAXPAYERS
Taxpayer- any person subject to tax imposed
by Title II of the Tax Code (Sec. 22(N), NIRC).
Person- means an individual, a trust, estate or
corporation (Sec. 22(A), NIRC).

Individuals

Corporations

and

Partnerships

General Business Partnership


General Professional Partnership

Coownerships

For income tax purposes, taxpayers are


classified generally as follows:
(4) Individuals;
(5) Corporations;
(6) Partnerships; and
(7) Estates and Trusts.

Primary
Classification

TAXATION LAW

Individual Taxpayers
Citizens
(2) Resident Citizens (RC)
(3) Non-resident Citizens (NRC)
(a) Citizen of the Philippines who
establishes to the satisfaction of the
Commissioner the fact of his physical
presence abroad with a definite intention
to reside therein.
(b) Citizen who leaves the Philippines during
the taxable year to reside abroad, either
as an immigrant or for employment on a
permanent basis.
(c) Citizen of the Philippines who works and
derives income from abroad and whose
employment thereat requires him to be
physically present abroad most of the
time during the taxable year.
(d) Citizen previously considered as nonresident citizen and who arrives in the
Philippines at any time during the
taxable year to reside permanently in the
Philippines Treated as NRC with
respect to his income derived from
sources abroad until the date of his
arrival in the Philippines

Sub-Classification(s)
Citizens
Residents citizens
of
the
Non-resident
Philippin
citizens
es
Residents
Engaged
in Trade
or
Business
in
the
Philippine
s
NonAliens
residen Not
ts
Engaged
in Trade
or
Business
in
the
Philippine
s
Special
Classes of Minimum
Wage
Individual Earner
s
Domestic Corporations
Resident
Corporations
Foreign
Corporations
Non-resident
Corporations

Aliens
(1) Resident Alien - An alien actually present in
the Philippines who is not a mere transient
or sojourner is a resident for income tax
purposes.
No/Indefinite Intention = RESIDENT
Definite Intention = TRANSIENT:
Exception: Definite Intention but such cannot
be promptly accomplished, then he becomes
a resident.
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TAXATION 1

TAXATION LAW
corporation engaged in trade or business
within the Philippines.

(2) Non-resident Alien - Engaged in trade or


business within the Philippines - If the
aggregate period of his stay in the
Philippines is more than 180 days during
any calendar year.

Doing business The term implies a


continuity of commercial dealings and
arrangements, and contemplates, to that
extent, the performance of acts or works or
the exercise of some of the functions normally
incident to, and in progressive prosecution of
commercial gain or for the purpose and
object of the business organization. (RA 7042,
Foreign Investments Act)

Not engaged in trade or business within the


Philippines - If the aggregate period of his
stay in the Philippines does not exceed 180
days.
Special class of individual employees
Minimum Wage Earner
(a) A worker in the private sector paid the
statutory minimum wage;
(b) An employee in the public sector with
compensation income of not more than the
statutory minimum wage in the nonagricultural sector where he/she is assigned.

In order that a foreign corporation may be


regarded as doing business within a State,
there must be continuity of conduct and
intention to establish a continuous business,
such as the appointment of a local agent,
and not one of a temporary character (CIR v.
BOAC)

Corporations

(b) Non-resident foreign corporations


Foreign corporation not engaged in trade or
business within the Philippines

Includes all types of corporations, partnerships


(no matter how created or organized), joint
stock companies, joint accounts, associations,
or insurance companies, whether or not
registered with the SEC.

(3) Joint venture and consortium Essential


factors of a joint venture or consortium:
(a) Each party must make a contribution,
not necessarily of capital but by way of
services, skill, knowledge, material or
money;
(b) Profits must be shared among the
parties;
(c) There must be a joint proprietary interest
and right of mutual control over the
subject matter of the enterprise;
(d) There is a single business transaction.

Excludes general professional partnerships


(GPP), joint venture or consortium formed for
the purpose of undertaking construction
projects, joint venture or consortium engaging
in petroleum, coal, geothermal and other
energy operations pursuant to an operating or
consortium agreement under a service contract
with the government.
(1) Domestic corporations A corporation
created and organized under its laws (the
law of incorporation test).

Partnership
The Tax Code mandates that every other type
of business partnership is subject to income
tax in the same manner and at the same rate
as an ordinary corporation.

(2) Foreign corporations A corporation which


is not domestic.
(a) Resident foreign corporations Foreign

General Professional Partnerships (GPP)


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TAXATION 1

A general professional partnership is a


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

TAXATION LAW

INCOME TAXATION
Income Tax is defined as a tax on all yearly
profits arising from property, professions,
trades, or offices, or as a tax on the persons
income, emoluments, profits and the like
(Fisher v. Trinidad).

Not considered as a taxable entity for income


tax purposes. The partners themselves are
liable, not the partnership, are liable for the
payment of income tax in their individual
capacities.

General Principles
(1) A resident citizen of the Philippines is
taxable on all income derived from sources
within and without the Philippines;
(2) A nonresident citizen is taxable only on
income derived from sources within the
Philippines;
(3) An individual citizen of the Philippines who
is working and deriving income from abroad
as an overseas contract worker is taxable
only on income derived from sources within
the Philippines:

Estates and Trusts


Taxable estates and trusts are taxed in the
same manner and on the same basis as an
individual. EXCEPT for the exemption: 20,000
for estates and trusts, 50,000 for individuals.

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

Provided, That a seaman shall be treated as an


overseas contract worker if he is a:
(1) citizen of the Philippines; and
(2) receives compensation for services rendered
abroad as a member of the complement of
a
vessel
engaged
exclusively
in
international trade
(1) An alien individual, whether a resident or
not of the Philippines, is taxable only on
income derived from sources within the
Philippines;
(2) A domestic corporation is taxable on all
income derived from sources within and
without the Philippines; and
(3) A foreign corporation, whether engaged or
not in trade or business in the Philippines, is
taxable only on income derived from
sources within the Philippines. (Sec. 23)
Taxpayer
Within Without
Resident Citizen

Non-resident Citizen and


X
OCW
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TAXATION 1

Resident and Non-resident


Alien
Domestic Corporation

Foreign Corporation

(1) Actual receipt Income is actually reduced


to possession. The realization of gain may
take the form of actual receipt of cash.
(2) Constructive receipt An income is
considered constructively received when it is
credited to the account of, or segregated in
favour of a person.
Examples of
constructive receipt of income are:
(a) Interest credited on savings bank deposit
(b) Matured interest coupons not yet
collected by the taxpayer
(c) Dividends applied by the corporation
against the indebtedness of a
stockholder
(d) Share in the profit of a partner in a
general
professional
partnership,
although not yet distributed, is regarded
as constructively received; or
(e) Intended payment deposited in court
(consignation).

INCOME
Income means all wealth which flows to the
taxpayer other than a mere return of capital. It
includes gain derived from the sale or other
disposition of capital assets. Income is a gain
derived from labor or capital, or both labor and
capital; and includes the gain derived from the
sale or exchange of capital assets.
When Income is Taxable
Existence of taxable income
(1) There is INCOME, gain or profit
(2) RECEIVED or REALIZED during the taxable
year
(3) NOT EXEMPT from income tax

Recognition of Income. Methods of accounting


in reporting income and expenses

When is there INCOME?


When there is a FLOW of wealth other than
mere return of capital during the taxable
period.

Cash method vis--vis Accrual method Cash


method generally reports income upon cash
collection and reports expenses upon payment.
If earned from rendering of services, income is
to be reported in the year when collected,
whether earned or unearned. (Sec. 108, NIRC).

Income v. Capital (Madrigal v. Rafferty)


Income

TAXATION LAW

Capital

Accrual method generally reports income when


earned and reports expense when incurred. If
earned from sale of goods, income is to be
reported in the year of sale, irrespective of
collection. (Sec. 106, NIRC).

Denotes a flow of Fund or property


wealth
during
a existing
at
one
definite period of distinct point in time.
time.
Service of wealth
Wealth itself
Subject to tax
Return of capital is
not subject to tax
Fruit
Tree

Income realized pertains to the accrual basis of


accounting, when recognition of income in the
books is when it is realized and expenses are
recognized when incurred. It is the right to
receive and not the actual receipt that
determines the inclusion of the amount in
gross income

Realization of Income
Actual vis--vis Constructive receipt

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TAXATION 1

Examples:
(1) interest or rent income earned but not yet
received
(2) rent expense accrued but not yet paid
(3) wages due to workers but remaining unpaid

TAXATION LAW

entire purchase price has not been actually


received in the year of sale.
(c) The obligations of the purchaser received by
the vendor are to be considered as
equivalent of cash.

Installment method vis--vis Deferred method


vis--vis Percentage of completion method (in
long- term contracts)
Installment Method is a special method of
accounting whereby income on installment
sales of property during the year is allowed to
be reported in installments in proportion to the
installment payments actually received in that
year, which the gross profit realized or to be
realized when payment is completed, bears to
the total contract price (Sec. 49, NIRC).

Personal Property

Real Property

Dealer
Dealer in personal Installment
property
who method; Provided,
regularly sells in initial payments do
installment
plan: not exceed 25% of
Installment method selling price
*held as ordinary If exceeds 25%-assetregardless of Deferred payment
amount
of method
percentage of initial
payments
*held as inventory
Casual Sale
Installment
method; Provided:

Income may be reported on the installment


basis in the following cases:
(1) Sales of personal property by a dealer
(2) Sales of real property (inventory) and casual
sales of personalty
(3) Sales of real property considered as capital
asset by individuals

(1) Selling
price
exceeds
Php1,000
(2)
Initial
payments do not
exceed 25% of
selling price

Change from accrual to installment basis


A taxpayer entitled to the benefits of a dealer
in personal property may elect for any taxable
year to report his taxable income on the
installment basis. In computing his income for
the year of change or any subsequent year,
amounts actually received during any such
year on account of sales or other dispositions
of property made in any prior year shall not be
excluded. [see Sec. 49(D), NIRC].

If either of 2 or both
conditions
not
metDeferred
payment method

Deferred Payment
(a) If the initial payments exceed 25% of the
selling price, the gain realized may be
reported on a deferred payment method.
(b) The taxable gain or income returnable
during the year of sale is the difference
between the selling or contract price and
the cost of the property, even though the

*personal property
not
considered
inventory
Sale by Individuals
Installment
method; Provided,
initial payments do
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TAXATION 1
not exceed 25% of
selling price
(2)
*held
asset

as

capital

Percentage Of Completion (In Long-Term


Contracts)
Income from long-term construction contracts
refers to the earnings derived from
construction of a building, installation or other
construction contract usually covering a period
in excess of one year. When income is derived
from long-term construction contracts, it is
generally reported on the basis of percentage
of completion made every year that will be
evidence by the certificates of engineers or
architects. The reportable income is calculated
by deducting from the contract price the actual
cost of construction.

(3)

(4)

In recognizing realized revenue for long-term


construction contracts, accountants usually
follow two methods:
(a) Completed contract method requires
recognition of revenue only when the
contract is finally completed; and
(b) Percentage of completion method requires
recognition of income based on the
progress of work.

(5)

Long-term contracts are no longer allowed


to be reported based on the completed
contract method basis beginning January 1,
1998 pursuant to RA 8424; hence, all longterm contracts must be reported using the
percentage of completion method.
Tests in determining whether income is earned
for tax purposes
(1) Realization test no taxable income until
there is a separation from capital of
something of exchangeable value, thereby
supplying the realization or transmutation

24

TAXATION LAW
which would result in the receipt of income
(Eisner v Macomber).
Claim of right doctrine (or Doctrine of
Ownership, command, or control) a
taxable gain is conditioned upon the
presence of a claim of right to the alleged
gain and the absence of a definite
unconditional obligation to return or repay
that which would otherwise constitute a
gain..
Economic benefit test, Doctrine of
Proprietary Interest any economic benefit
to the employee that increases his net
worth, whatever may have been the mode
by which it is effected, is taxable.
Severance Test - Under the doctrine of
severance test of income, in order that
income may exist, is necessary that there
be a separation from capital of something
of exchangeable value. The income
required a realization of gain.
All Events Test - Under the accrual method
of accounting, expenses are deductible in
the taxable year in which: (1) all events
have occurred which determine the
liability; and (2) the amount of liability can
be determined with reasonable accuracy.

UP LAW BOC

TAXATION 1

TAXATION LAW

(c) Taxable income means the pertinent items


of gross income specified in the Tax Code,
less the deductions and/or personal and
additional exemptions, if any, authorized for
such types of income by the Tax Code or
other special laws (Sec. 31, NIRC). It is
synonymous to the term net income
[Valencia and Roxas]

GROSS INCOME
Gross Income means the pertinent items of
income referred to in Section 32(A) of the Tax
Code. It includes all income derived from
whatever source (unless exempt from tax by
law), including, but not limited to, the
following items
(1) Gross income derived from the conduct of
Trade or business or the exercise of a
profession
(2) Rents
(3) Interests
(4) Prizes and winnings
(5) Compensation for services in whatever form
paid, including, but not limited to fees,
salaries, wages, commissions, and similar
items
(6) Annuities
(7) Royalties
(8) Dividends
(9) Gains derived from dealings in property
(10) Pensions
(11) Partners distributive share from the net
income of the general professional
partnership (GPP) [Sec 32A, NIRC]

SOURCES OF INCOME SUBJECT TO TAX


Compensation Income
Income arising from an employer-employee
(ER-EE)
relationship.
It
means
all
remuneration for services performed by an EE
for his ER, including the cash value of all
remuneration paid in any medium other than
cash [Sec. 78(A)], unless specifically excluded
by the Tax Code.
General Rule - every form of compensation
income is taxable regardless of how it is
earned, by whom it is paid, the label by which
it is designated, the basis upon which it is
determined, or the form in which it is received.
The basis upon which remuneration is paid is
immaterial. It may be paid on the basis of piece
of work, percentage of profits, hourly, weekly,
monthly, or annually.
Exception - The term wages does NOT include
remuneration paid:
(a) For agricultural labor paid entirely in
products of the farm where the labor is
performed, or
(b) For domestic service in a private home, or
(c) For casual labor not in the course of the
employer's trade or business, or
(d) For services by a citizen or resident of the
Philippines for a foreign government or an
intl organization. [Sec. 78(A)]

Concept of Income from Whatever Source


Derived
Income derived from whatever source means
inclusion of all income not expressly exempted
within the class of taxable income under the
laws irrespective of the voluntary or involuntary
action of the taxpayer in producing the gains,
and whether derived from legal or illegal
sources (i.e. gambling, extortion, smuggling,
etc.)

Gross Income vis--vis Net Income vis-vis Taxable Income


(a) Gross Income - means income, gain or profit
subject to tax.
(b) Net Income means gross income less
statutory deductions and/or exemptions
(Sec. 31, NIRC)

Note: Compensation income including


overtime pay, holiday pay, night shift
differential pay, and hazard pay, earned by
MINIMUM WAGE EARNERS (MWE) who has no
other returnable income are NOT taxable and
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TAXATION 1

not subject to withholding tax on wages [RA


9504]

TAXATION LAW

the collection of compensation income of EEs,


the State requires the ER to withhold the tax
upon payment of the compensation income.

Forms Of Compensation And How They Are


Assessed
(a) Cash If compensation is paid in cash, the
full amount received is the measure of the
income subject to tax.

Fringe Benefits
Persons liable: The Employer (as a withholding
agent), whether individual, professional
partnership or a corporation, regardless of
whether the corporation is taxable or not, or
the government and its instrumentalities, is
liable to remit the fringe benefit tax to the BIR
once fringe benefit is given to a managerial or
supervisory employee.

(b) Medium other than money - If services are


paid for in a medium other than money the
fair market value (FMV) of the thing taken in
payment is the amount to be included as
compensation subject to tax.
If the services are rendered at a stipulated
price, in the absence of evidence to the
contrary, such price will be presumed to be
the FMV of the remuneration received.

The fringe benefit tax (FBT) is a final tax on the


employees income to be withheld by the
employer. The withholding and remittance of
FBT shall be made on a calendar quarterly
basis.

(c) Living quarters or meals General Rule - The value to the employee of
the living quarters and meals given by the
employer shall be added to his
compensation subject to withholding.
Exception - If living quarters/meals are
furnished to an employee for the
convenience of the employer the value
needed NOT be included as part of
compensation income.

Tax Rate and Tax Base


(a) Tax base is based on the grossed-up
monetary value (GMV) of fringe benefits.
(b) Rate is generally 32%
(c) GMV is determined by dividing the actual
monetary value of the fringe benefit by 68%
[100% - tax rate of 32%].
Special Cases:
Recepient Of Fb

(d) Facilities and privileges of a relatively small


value - Facilities and privileges otherwise
known as de minimis benefits furnished
or offered by an employer to his employees
generally, are NOT considered as
compensation subject to income tax and
therefore withholding tax if such facilities
are offered or furnished by the employer
merely as means of promoting the health,
goodwill, contentment, or efficiency of his
employees.

NRA-NETB
Alien
individual
employed
by
regional or area HQs
of MNCs or by ROHs
of MNCs
Alien
individual
employed by OBUs
of a foreign bank
established
in
Philippines
Alien
individual

Withholding Tax on Compensation Income


The income recipient (i.e., EE) is the person
liable to pay the tax on income, yet to improve
26

Tax Rate
25% FBT
on
the
GMV of
FB

Tax Base
Monetary
value of FB
divided by
75%

15% FBT
on
the
GMV of
FB

Monetary
value of FB
divided by
85%

UP LAW BOC

TAXATION 1

(c) Benefits given to the rank-and-file


employees, whether granted under a
collective bargaining agreement or not;
and
(d) Fringe benefits granted for the
convenience of the employer;
(e) De minimis benefits
De minimis benefits (exempt from income tax as
well as withholding tax on compensation
income of both managerial and rank and file
EEs) [Revenue Regulation No. 5-2011]:
(4) Monetized unused vacation leave credits of
private employees not exceeding ten (10)
days during the year;
(5) Monetized value of vacation and sick leave
credits paid to government officials and
employees;
(6) Medical cash allowance to dependents of
employees, not exceeding P750 per
employee per semester or P125 per month;
(7) Rice subsidy of P1,500 or one (1) sack of 50
kg. rice per month amounting to not more
than P1,500;
(8) Uniform and Clothing allowance not
exceeding P5,000 per annum (RR 8-2012)
(9) Actual medical assistance, e.g. medical
allowance to cover medical and healthcare
needs, annual medical/executive check-up,
maternity
assistance,
and
routine
consultations, not exceeding P10,000.00
per annum;
(10) Laundry allowance not exceeding P300
per month;
(11) Employees achievement awards, e.g., for
length of service or safety achievement,
which must be in the form of a tangible
personal property other than cash or gift
certificate, with an annual monetary value
not exceeding P10,000 received by the
employee under an established written plan
which does not discriminate in favor of
highly paid employees;
(12) Gifts given during Christmas and major
anniversary celebrations not exceeding
P5,000 per employee per annum; and

employed
by
a
foreign
service
contractor
or
subcontractor
engaged
in
petroleum
operations in Phils.
Any of their Filipino
individual employees
employed
and
occupying the same
position as those by
alien
employees
above
Subject
to
normal
rate
of
FBT or
Employees in special
special
economic zones
rates of
25% or
15% as
provided
above

TAXATION LAW

Monetary
value of FB
divided by
85%
or
75%

Taxable And Non-Taxable Fringe Benefits


Fringe Benefits NOT subject to Tax
(1) Fringe benefits not considered as gross
income
(a) if it is required or necessary to the
business of employer
(b) if it is for the convenience or advantage
of employer
(2) Fringe Benefit that is not taxable under Sec.
32 (B) Exclusions from Gross Income
(3) Fringe benefits not subject to Fringe Benefit
Tax:
(a) Fringe Benefits which are authorized and
exempted from income tax under the
Code or under special laws;
(b) Contributions of the employer for the
benefit of the employee for retirement,
insurance and hospitalization benefit
plans;
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TAXATION 1

(13) Daily meal allowance for overtime work


and night/graveyard shift not exceeding
twenty-five percent (25%) of the basic
minimum wage on a per region basis;
Professional Income
Refers to fees received by a professional from
the practice of his profession, provided that
there is NO employer-employee relationship
between him and his clients.
Income from Business
(a) Any income derived from doing business
(b) Doing business: The term implies a
continuity of commercial dealings and
arrangements, and contemplates, to that
extent, the performance of acts or works or
the exercise of some of the functions
normally incident to, and in progressive
prosecution of, the purpose and object of its
organization.
Income from Dealings in Property
Dealings in property such as sales or
exchanges may result in gain or loss. The kind
of property involved (i.e., whether the property
is a capital asset or an ordinary asset)
determines the tax implication and income tax
treatment, as follows:

Taxable
Net
Income

Ordinary
Net
Income

Net Capital
Gains (other
than those
subject to final
CGT)

Ordinary Assets

Capital Assets

which
would
properly
be
included in the
inventory of the
taxpayer if on hand
at the close of the
taxable year.
(2) Property held by
the
taxpayer
primarily for sale to
customers in the
ordinary course of
his
trade
or
business.
(3) Property used in
the
trade
or
business
of
a
character which is
subject
to
the
allowance
for
depreciation, or
(4) Real property used
in the trade or
business of the
taxpayer, including
property held for
rent.

his trade or business


which is not an
ordinary asset.
Generally,
they
include:
(1)
stocks
and
securities held by
taxpayers other
than dealers in
securities
(2) real property not
used in trade or
business, such as
residential house
and lot, idle or
vacant land or
building
(3)investment
property, such as
interest
in
a
partnership, stock
investment
(4)Personal or nonbusiness
properties, such
as family car,
home appliances,
jewelry.

Ordinary Asset

Capital Asset

Gain from sale, exchange or other disposition


Ordinary Gain (part of
Capital Gain
Gross Income)
Loss from sale, exchange, or other disposition
Ordinary Loss (part of
Allowable Deductions Capital Loss
from Gross Income)
Excess of Gains over Losses
Part of Gross Income
Net Capital Gain
Excess of Losses over Gains

Types of Properties
Capital v. Ordinary Asset

Ordinary Assets

TAXATION LAW

Capital Assets

(1)Stock in trade of the Property held by the


taxpayer or other taxpayer, whether or
property of a kind not connected with
28

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Part of Allowable
Deductions from
Gross Income

TAXATION 1

TAXATION LAW

capital loss from the net capital gain of the


subsequent taxable year; provided that the
following conditions shall be observed:
(5) The taxpayer is other than a corporation;
(6) The amount of loss does not exceed the
income before exemptions at the year when
the loss was sustained; and
(7) The holding period should not exceed 12
months. (Valencia)

Net Capital Loss

Types of Gains from dealings in property


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

When a capital gain or capital loss is sustained


by a corporation, the following rules shall be
observed:
(2) There is no holding period; hence, there is
no net capital loss carry-over.
(3) Capital gains and losses are recognized to
the extent of their full amount.
(4) Capital losses are deductible only to the
extent of capital gains.
(5) Net capital losses are not deductible from
ordinary gain or income but ordinary losses
are deductible from net capital gains.

If the asset involved is a capital asset, the rules


on capital gains and losses apply in the
determination of the amount to be included in
gross income. (See Capital Gains and Losses).
These rules do not apply to:
(a) real property with a capital gains tax (final
tax), or
(b) shares of stock of a domestic corporation
with a capital gains tax (final tax).
(c) Also, sale of shares of stock of a domestic
corporation, held as capital assets, through the
stock exchange by either individual or
corporate taxpayers, is subject to of 1%
percentage tax based on gross selling price.

(2) Actual gain vis--vis Presumed gain


Presumed Gain: In the sale of real property
located in the Philippines, classified as capital
asset, the tax base is the gross selling price or
fair market value, whichever is higher. The law
presumes that the seller makes a gain from
such sale.
Actual Gain: The tax base in the sale of real
property classified as an ordinary asset is the
actual gain. If the seller incurs a loss from the
sale, such loss may be deducted from his gross
income during the taxable year. The ordinary
gain shall be added to the operating income
and the net taxable income shall be subject to
the graduated rates from 5% to 32% (if an
individual) or to 30% corporate tax or to 2%
MCIT (if a corporation).

The tax rules for the gains or losses from sales


or exchanges of capital assets over ordinary
assets are as follows:
(1) Net capital gain is added to ordinary gain
but net capital loss is not deductible from
ordinary gain.
(2) Net ordinary loss is deductible from
ordinary gain.
(3) Capital losses are deductible only to the
extent of the capital gain.
(4) There is a net capital loss carry-over on the
net capital assets loss in a taxable year
which may be deducted as a short-term

Computation of the amount of gain or loss


Amount realized from sale or other
disposition of property
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TAXATION 1

Less: Basis or Adjusted Basis


NET GAIN (LOSS)

TAXATION LAW

(1) Cost or basis of the property sold: In


computing the gain or loss from the sale or
other disposition of property, the BASIS shall
be as follows:
(a) Property acquired by purchase its
acquisition cost, i.e., the purchase price plus
expenses of acquisition.
(b) Property which should be included in the
inventory its latest inventory value [RR-2
sec 136]
(c) Property acquired by devise, bequest or
inheritance its fair market price or value as
of the date of acquisition (inheritance)
(d) Property acquired by gift or donation the
basis is the same as it would be in the hands
of the donor or at the last preceding owner
by whom it was not acquired by gift, or the
fair market value at the time the gift was
made, whichever is lower
(e) Property acquired for less than an adequate
consideration in moneys worth the amount
paid by the transferee for the property

Note: Amount realized from sale or other


disposition of property = sum of money
received + fair market value of the property
(other than money) received
Note: When a taxpayer sells a real or personal
property, he should deduct its cost from its
selling price to measure the gain or loss from
the sales transaction (Sec. 40, NIRC).
(3) Long term capital gain vis--vis Short term
capital gain
Long-term capital gain: Capital asset is held for
more than twelve month before it is sold. Only
50% of the gain is recognized.
Short-term capital Gain: Capital asset is held
for less than 12 months. 100% of the gain is
subject to tax.

(6) Cost or basis of the property exchanged in


corporate reorganizations: Sales or
exchanges resulting in non-recognition of
gains or losses:

(4) Net Capital Gain vis--vis Net Capital Loss


Net Capital Gain is the excess of the gains over
the losses on sales or exchange of capital
assets during the taxable year.

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


consolidation, exchanges:
(a) Between the corporations which are
parties to the merger or consolidation
(property solely for stocks);
(b) Between a stockholder of a corporation
party to a merger or consolidation and
the other corporation, which is a party to
the merger or consolidation (stock in a
corporation solely for the stock of
another corporation);
(c) Between a security holder of a
corporation party to a merger or
consolidation and the other corporation,
which is a party to the merger or

Net Capital Loss means the excess of the losses


over the gains on sales or exchanges of capital
assets during the taxable year. [Sec. 39A,
NIRC]
(5) Computation of the amount of Gain or Loss
For income tax purposes the following rules
should be observed regarding the cost and
expenses of the capital assets:
(1) the costs and expenses of the acquisition
are to be capitalized, and
(2) the expenses of disposition are to be
treated as reduction from the selling price.
(Valencia)

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TAXATION 1

TAXATION LAW

consolidation (securities solely for


securities)
(2) Transfer to a controlled corporation a
person transfers his property to a
corporation in exchange for stocks in such a
corporation, resulting in acquisition of
corporate control by said person, alone or
together with others not exceeding four (4).

shall be recognized from the exchange,


but
(ii) if the corporation receiving such other
property and/or money does not
distribute it in pursuance of the plan of
merger or consolidation, the gain, if any,
but not the loss to the corporation shall
be recognized.

Exchange Not Solely in Kind -Gain, but not the


loss, shall be recognized if, in connection with
an exchange described in the above
exceptions:
(a) An individual, a shareholder, a security
holder or a corporation receives not only
stock or securities permitted to be received
without the recognition of gain or loss, but
also money and/or property.

The gain shall be recognized in an


amount not in excess of the sum of such
money and the fair market value of such
other property so received, which is not
distributed (Sec. 40 (C) (3) (b), NIRC).
If an individual, stockholder, security holder or
corporation receives on the exchange not only
stock or securities but also money and/ or
property (boot), the gain but not the loss shall
be recognized, in an amount not exceeding the
sum of the money and fair market value of the
property received.

The gain, if any, but not the loss, shall be


recognized but in an amount not in excess
of the sum of the money and the fair market
value of such other property received.

If the money or other property received has the


effect of a distribution of a taxable dividend,
there shall be taxed as dividend to the
stockholder an amount of the gain recognized
not in excess of his proportionate share of the
undistributed earnings and profits of the
corporation.

As to the shareholder, if the money and/or


other property received has the effect of a
distribution of a taxable dividend, there
shall be taxed as dividend to the
shareholder an amount of the gain
recognized not in excess of his
proportionate share of the undistributed
earnings and profits of the corporation.

The remainder, if any, of the gain recognized


shall be treated as a capital gain.

The remainder, if any, of the gain


recognized shall be treated as a capital gain
(Sec. 40 (C) (3) (a), NIRC).

SUBSTITUTED BASIS OF STOCK OR


SECURITIES RECEIVED BY TRANSFEROR
UPON THE EXCHANGE:

(b) The transferor corporation receives not only


stock permitted to be received without the
recognition of gain or loss but also money
and/or other property, then (i) if the corporation receiving such money
and/or other property distributes it in
pursuance of the plan of merger or
consolidation, no gain to the corporation

Original basis (cost) of the property, stock or


securities exchanged/transferred
LESS: (a) money received, if any; and
(b) FMV of the other property received.
Balance
ADD: (a) the amount treated as dividend of the
shareholder; and
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TAXATION 1

which is a party to the merger or


consolidation;
(b) A shareholder exchanges stock in a
corporation, which is a party to a merger
or consolidation, solely for the stock of
another corporation also a party to the
merger or consolidation; or
(c) A security holder of a corporation, which
is a party to the merger or consolidation,
exchanges his securities in such
corporation, solely for stock or securities
in another corporation, a party to the
merger or consolidation.
(2) If property is transferred to a corporation by
a person in exchange for stock or unit of
participation in such a corporation, of which
as a result of such exchange, said person,
alone or together with others not exceeding
4 persons, gains control of the corporation.
- Stocks issued for services shall not be
considered as issued in property.

(b) the amount of any gain that was recognized


on the exchange.
Basis (Cost) of the stock received
Notes:
(a) The property received as boot shall have
as basis its FMV
(b) If as part of the consideration to the
transferor, the transferee of property
assumes a liability of the transferor or
acquires from the latter property subject to
a liability, such assumption or acquisition
(in the amount of liability), shall be treated
as money received by the transferor on the
exchange
(c) If the transferor receives several kinds of
stocks or securities, the Commissioner is
authorized to allocate the basis among the
several classes of stocks or securities
received.

SUBSTITUTED
BASIS
TRANSFERRED:

OF

TAXATION LAW

(7) Income tax treatment of capital loss

PROPERTY

(a) Capital loss limitation rule (applicable to


both corporations and individuals)
General Rule: Losses from sales or exchanges
of capital assets shall be allowed only to the
extent of the gains from such sales or
exchanges (Sec. 39(C), NIRC).
Exception for Banks and Trust Companies: If a
bank or trust company incorporated under the
laws of the Philippines, a substantial part of
whose business is the receipt of deposits, sells
any bond, debenture, note, certificate or other
evidence of indebtedness issued by any
corporation (including one issued by a
government or political subdivision thereof)
with interest coupons or in registered form, any
loss resulting from such sale shall not be subject
to the foregoing limitation and shall not be
included in determining the applicability of
such limitation to other losses (Sec. 39(C),
NIRC).

The basis of the property transferred in the


hands of the transferee shall be the same as it
would be in the hands of the transferor
increased by the amount of the gain
recognized to the transferor on the transfer
[Sec. 40 (C)(5), NIRC].
Recognition of gain or loss in exchange of
property:
General rule: Upon the sale or exchange of
property, the ENTIRE amount of the gain or
loss shall be recognized.
Exceptions: No gain or loss shall be
recognized:
(1) If in pursuance of a plan of merger or
consolidation:
(a) A corporation, which is a party to a
merger or consolidation, exchanges
property solely for stock in a corporation,

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TAXATION 1

(b) Net loss carry-over rule (applicable only to


individuals)
If an individual sustains in any taxable year a
net capital loss, such loss (in an amount not in
excess of the net income for the year) shall be
treated in the succeeding taxable year as a loss
from the sale or exchange of a capital asset
held for not more than 12 months (Sec. 39(D),
NIRC).

TAXATION LAW

(b) Investor in shares of stock in a mutual fund


company
(c) All other persons who are specifically
exempt from national internal revenue
taxes under existing investment incentives
and other special laws.
Shares listed and traded through the stock
exchange other than sale by a dealer in securities.

(1) of 1% of the gross selling price of the


stock or gross value in money of the shares
of stock sold, bartered, exchanged or
otherwise disposed which shall be assumed
and paid by the seller or transferor through
the remittance of the stock transaction tax
by the seller or transferors broker.
(2) Note: In the nature of percentage tax and
not income tax; exempt from income tax per
Section 127 (d):

(8) Dealings in real property situated in the


Philippines
Persons Liable and Transactions Affected
(a) Individual taxpayers, estates and trusts
(1) Sale or exchange or other disposition of
real property considered as capital assets.
(2) Includes "pacto de retro sale" and other
conditional sale.
(b) Domestic Corporation
Sale or exchange or disposition of lands
and/or building which are not actually used
in business and are treated as capital asset.

Any gain derived from the sale, barter,


exchange or other disposition of share of
stock under this section shall be exempt
from taxes imposed in Sections 24(C),
27(D)(2), 28(A)(8)(c), and 28(B)(5)(c) of this
Code and from the regular individual or
corporate income tax.
(3) Note: Percentage tax under Sec. 127 is NOT
DEDUCTIBLE for income tax purposes.

Rate and Basis of Tax


A final withholding tax of 6% is based on the
gross selling price or fair market value or zonal
value whichever is higher.
Note: Gain or loss is immaterial, there being a
conclusive presumption of gain.

Shares not listed and traded through the stock


exchange
Net capital gains derived during the taxable
year from sale, exchange, or transfer shall be
taxed as follows (on a per transaction basis):

(9) Dealings in shares of stock of Philippine


corporations
Persons Liable to the Tax
(a) Individual taxpayer, whether citizen or alien;
(b) Corporate taxpayer, whether domestic or
foreign; and
(c) Other taxpayers not falling under (a) and (b)
above, such as estate, trust, trust funds and
pension funds, among others.

Amount of Capital Gain


1. Not over P 100,000 = Tax Rate of 5%
2. On any amount in excess of P 100,000 =
10%
(10) Sale of principal residence
Principal residence: the family home of the
individual taxpayer (RR 14-2000)

Persons not liable


(a) Dealers in securities
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TAXATION 1

TAXATION LAW

Passive Investment Income


Under Sec 24(B), a final tax is imposed upon
gross passive income of citizen and resident
aliens. An income is considered passive if the
taxpayer merely waits for it to be realized.

Disposition of principal residence (capital


asset) is exempt from Capital Gains Tax,
provided:
(a) Sale or disposition of the old principal
residence;
(b) By natural persons - citizens or aliens
provided that they are residents taxable
under Sec. 24 of the Code (does not include
an estate or a trust);
(c) The proceeds of which is fully utilized in (a)
acquiring or (b) constructing a new principal
residence within eighteen (18) months from
date of sale or disposition;
(d) Notify the Commissioner within thirty (30)
days from the date of sale or disposition
through a prescribed return of his intention
to avail the tax exemption;
(e) Can only be availed of onlyonce every ten
(10) years;
(f) The historical cost or adjusted basis of his
old principal residence shall be carried over
to the cost basis of his new principal
residence
(g) If there is no full utilization, the portion of
the gains presumed to have been realized
shall be subject to capital gains tax.
(h) Portion of presumed gains subject to CGT:
(Unutilized/GSP) x (higher of GSP or FMV)

(a) Interest Income


(b) Dividend Income
1. Cash dividend
2. Stock dividend
Stock dividend is generally exempt from
income tax, EXCEPT:
(a) If a corporation cancels or redeems
stock issued as a dividend at such time
and in such manner as to make the
distribution and cancellation or
redemption, in whole or in part,
essentially
equivalent
to
the
distribution of a taxable dividend, the
amount so distributed in redemption or
cancellation of the stock shall be
considered as taxable income to the
extent that it represents a distribution
of earnings or profits (Sec. 73(B), NIRC);
or
(b) Where there is an option that some
stockholders could take cash or
property dividends instead of stock
dividends;
some
stockholders
exercised the option to take cash of
property dividends; and the exercise of
option resulted in a change of the
stockholders proportionate share in
the outstanding share of the
corporation.
3. Property dividend
4. Liquidating dividend
The difference between the cost or other basis
of the stock and the amount received in
liquidation of the stock is a capital gain or a
capital loss.

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TAXATION 1

TAXATION LAW

Aircraft,
machineries
and
other Equipment
Other assets

7.5%

25%

30%

25%

(2) Lease of real property


Lessor
Citizen
Resident Alien
Non-resident
alien
engaged in trade or
business
in
the
Philippines
Non-resident
alien
not engaged in trade
or business in the
Philippines

(d) Rental Income


Refers to earnings derived from leasing
real estate as well as personal property.
Aside from the regular amount of payment
for using the property, it also includes all
other obligations assumed to be paid by
the lessee to the third party in behalf of the
lessor (e.g., interest, taxes, loans,
insurance premiums, etc.) [RR 19-86]
(1) Lease of personal property
Rental income on the lease of personal
property located in the Philippines and
paid to a non-resident taxpayer shall be
taxed as follows:

Vessel

Net taxable income


shall be subject to the
graduated income tax
rates

Rental income from


real property located
in the Philippines
shall be subject to
25%
final
withholding
tax
unless a lower rate is
imposed pursuant to
an effective tax treaty
Domestic Corporation Net taxable income
Resident
Foreign shall be subject to
Corporation
30%
corporate
income tax or its
gross income will be
subject to 2% MCIT
Non-resident Foreign Gross rental income
Corporation
from real property
located
in
the
Philippines shall be
subject
to
30%
corporate income tax,
such tax to be
withheld
and
remitted by the lessee
in the Philippines

(c) Royalty Income


Royalty is a valuable property that can be
developed and sold on a regular basis for a
consideration; in which case, any gain
derived therefrom is considered as an
active business income subject to the
normal corporate tax.

NonResident
Corporation
4.5%

Tax Rate

NonResident
Alien
25%

(3) Tax treatment of:


a. Leasehold improvements by lessee

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Rent
Income
from
leasehold
improvements:
i. Outright method- lessor shall report as
income FMV of the buildings or
improvements subject to the lease in
the year of completion.
ii. Spread-out method- lessor shall
spread over the remaining term of the
lease the estimated depreciated (book)
value
of
such
buildings
or
improvements at the termination of the
lease, and reports as income for each
remaining term of the lease an aliquot
part thereof. estimated BV at the
end of the lease contract/ remaining
lease term = Income per year

TAXATION LAW

scientific, educational, artistic, literary or


civic achievements are EXCLUSIONS from
gross income if:
(a) The recipient was selected without any
action on his part to enter a contest or
proceedings; and
(b) The recipient is not required to render
substantial future services as a condition
to receiving the prize or award.
(2) Prizes and awards granted to athletes in
local and international sports competitions
and tournaments held in the Philippines
and abroad and sanctioned by their
national associations shall be EXEMPT from
income tax.
Pensions, retirement benefit, or separation pay
(1) paid for past employment services
rendered.
(2) a stated allowance paid regularly to a
person on his retirement or to his
dependents on his death, in consideration
of past services, meritorious work, age, loss
or injury. It is generally taxable unless the
law states otherwise. [VALENCIA, Income
Taxation 5th ed. (200/9)]

VAT added to rental/paid by the lessee


If the lessee is VAT-registered, treat VAT paid
as input VAT;
If the lessee is not VAT-registered OR not
liable to VAT, treat VAT paid as additional rent
expense deductible from gross income.
Advance Rental/ Long Term Lease
Pre-paid rent must be reported in full in the
year of receipt, regardless of the accounting
method used by the lessor.

Income from any source whatever


Inclusion of all income not expressly exempted
within the class of taxable income under the
laws irrespective of the voluntary or involuntary
action of the taxpayer in producing the gains,
and whether derived from legal or illegal
sources

Annuities, Proceeds from life insurance or other


types of insurance
The annuity payments represent a part that is
taxable and not taxable. If part of annuity
payment represents interest, then it is a
taxable income. If the annuity is a return of
premium, it is not taxable.

Tax Benefit Rule


This is a general principle in taxation which
states that is a taxpayer deducted an item on
his income tax return and enjoyed a tax benefit
(reduced his income tax) thereby, and in a
subsequent year recovers all or part of that
item, he will recognize gross income in the year
the deducted item is recovered.

Prizes and awards


Contest prizes and awards received are
generally taxable. Such payment constitutes
gain derived from labor.
The EXCEPTIONS are as follows:
(1) Prizes and awards made primarily in
recognition
of
religious,
charitable,
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TAXATION LAW

Recovery of accounts previously writtenoff


Bad debts claimed as a deduction in the
preceding year(s) but subsequently
recovered shall be included as part of the
taxpayers gross income in the year of such
recovery to the extent of the income tax
benefit of said deduction. There is an
income tax benefit when the deduction of
the bad debt in the prior year resulted in
lesser income and hence tax savings for the
company. (Sec. 4, RR 5-99)

Income
Interest
Dividends

Residence of the debtor


Where incorporated
If Domestic: Philippines
If Foreign: Look at 3 year
average of gross income. If
50% or more, Philippines.
Services
Place of performance
Rentals
Location of the property
Royalties
Place of exercise
Sale of Real Location of realty
Property
Sale
of (a) Tangible
Personal
(1) Purchase
and
sale:
Location of Sale
(2) Manufactured w/in and
sold w/o: Partly w/in
and partly w/o
(3) Manufactured w/o and
sold w/in: Partly w/in
and partly w/o

Receipt of tax refunds or credit


General rule: a refund of a tax related to
the business or the practice of profession,
is taxable income (e.g., refund of fringe
benefit tax) in the year of receipt to the
extent of the income tax benefit of said
deduction (i.e., the tax benefit rule
applies).
Exceptions: However, the following tax
refunds are not to be included in the
computation of gross income:
(1) Philippine income tax, except the fringe
benefit tax
(2) Income tax imposed by authority of any
foreign country, if the taxpayer claimed a
credit for such tax in the year it was paid or
incurred.
(3) Estate and donors taxes
(4) Taxes assessed against local benefits of a
kind tending to increase the value of the
property assessed (Special assessments)
(5) Value Added Tax
(6) Fines and penalties due to late payment of
tax
(7) Final taxes
(8) Capital Gains Tax

(b) Intangible
General rule: Place of Sale
Exception: Shares of stock of
domestic corporations: Place
of incorporation
of Place of incorporation
of

Shares
Stock
Domestic
Corporation

SITUS OF INCOME TAXATION

Income

Situs

Situs

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TAXATION 1

the insured shall be included in gross


income. The interest income shall be taxed
at the graduated income tax rates.

exclusions from gross income


Exclusions from gross income refer to income
received or earned but is not taxable as income
because it is exempted by law or by treaty.
Such tax-free income is not to be included in
the income tax return unless information
regarding it is specifically called for. Receipts
which are not in fact income are, of course,
excluded from gross income.

(b) Return of premium paid.


General rule: The amount received by the
insured as a return of premiums paid by
him under life insurance, endowment, or
annuity contracts, either during the term or
at the maturity of the term mentioned in
the contract or upon surrender of the
contract is a return of capital and not
income.
Exception: If the amounts received by the
insured (when added to the amounts
already received before the taxable year
under such contract) exceed the aggregate
premiums or considerations paid (whether
or not paid during the taxable year), then
the excess shall be included in gross income.

Taxpayers who may avail of the exclusions

Exclusion

TAXATION LAW

Taxpayer

Return of capital

All taxpayers since


there is no income.
Already subject to All taxpayers unless
internal revenue tax
provided that income
is to be included.
Express exclusion
As expressly provided.

(c) Amounts received under life insurance,


endowment or annuity contracts.
Amounts received (other than amounts
paid by reason of the death of the insured
and interest payments on such amounts)
under a life insurance, endowment or
annuity contracts are excluded from gross
income,

Exclusions Under the Constitution


(a) Income derived by the government or its
political subdivisions from the exercise of
any essential governmental function
(b) Also, all assets and revenues of a nonstock, non-profit private educational
institution used directly, actually and
exclusively for private educational
purposes shall be exempt from taxation.

But if such amounts (when added to


amounts already received before the
taxable year under such contract) exceed
the aggregate premiums of considerations
paid (whether or not paid during the
taxable year), then the excess shall be
included in gross income.

Exclusions Under the Tax Code (Sec. 32, NIRC)


(a) Proceeds of life insurance policies.
General rule: The proceeds paid to his
estate or to any beneficiary (but not a
transferee for a valuable consideration),
directly or in trust, upon the death of the
insured, are excluded from the gross
income of the beneficiary.

However, in the case of a transfer for


valuable consideration, by assignment or
otherwise, of a life insurance, endowment ,
or annuity contract, or any interest therein,
only the actual value of such consideration
and the amount of the premiums and other

However, if such amounts are held by the


insurer under an agreement to pay interest
thereon, the interest payments received by
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UP LAW BOC

TAXATION 1

sums subsequently paid by the transferee


are exempt from taxation.

moral damages for


out-of-court
settlement,
including attorneys
fees
(4) Alienation of
affection, or breach
of promise to marry
(5) Any amount
received as a return
of capital or
reimbursement of
expenses

(d) Value of property acquired by gift,


bequest, devise or descent.
Gifts, bequests and devises (which are
subject to estate or gift taxes) are excluded
from gross income, BUT not the income
from such property.
If the amount received is on account of
services rendered, whether constituting a
demandable debt or not, or the use or
opportunity to use of capital, the receipt is
income (Pirovano v. Commissioner G.R. No.
L-19865, July 31, 1965).

(2) Any other


damages recovered
on account of
personal injuries or
sickness
(3) Exemplary and

(4) Any damages as


compensation for
unrealized income

(g) Retirement
benefits,
pensions,
gratuities, etc.
These are
(1) Retirement benefits under RA 7641, RA
4917, and Section 60(B) of the NIRC
(2) Terminal pay
(3) Retirement Benefits from foreign
government agencies
(4) Veterans benefits
(5) Benefits under the Social Security Act
(6) GSIS benefits

Examples of nontaxable and taxable


damages recoveries are:

(1) Personal (physical)


injuries or sickness

taxable damages
above

(f) Income exempt under tax treaty.


Income of any kind, to the extent required
by any treaty obligation binding upon the
Government of the Philippines.

(e) Amount received through accident or


health insurance (Compensation for
damages).
As a rule, amounts received through
accident or health insurance or under
workmens
compensation
acts,
as
compensation for personal injuries or
sickness, plus the amount of any damages
received, whether by suit or agreement, on
account of such injuries or sickness are
excluded from gross income.

Nontaxable
compensation for
damages on account of

TAXATION LAW

Retirement benefits received under RA


7641(The Retirement Pay Law) and those
received by officials and employees of
private firms under a reasonable private
benefit plan (RPBP) maintained by the
employer under RA 4917 (now Section
32(B)(6)(a) of NIRC) are excluded from gross
income subject to income tax.

Taxable
compensation for
damages on account
of
(1) Actual damages
for
loss
of
anticipated profits
(2) .Moral
and
exemplary
damages awarded
as a result of
break of contract
(3) Interest for non-

RA 7641

RPBP

Retiring
employee Retiring official or
must be in the service employee must have
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UP LAW BOC

TAXATION 1

of same employer been in the service of


CONTINUOUSLY for the same employer
at least five (5) years
forat least ten (10)
years.
Retiring
employee Retiring official or
must be at least sixty employee must be at
(60) years oldbut not least fifty (50) years
more than 65 years of old at the time of
age at the time of retirement
retirement
Availed of only once, Retiring
employee
and only when there shall
not
have
is no RPBP
previously availed of
the privilege under a
retirement
benefit
plan of the same or
another employer

TAXATION LAW
retiring
government
employees
is
considered not part of the gross salary, and
is exempt from taxes. The government
recognizes that for most public servants,
retirement pay is always less than
generous if not meager and scrimpy.
Terminal leave payments are given not
only at the same time but also for the same
policy considerations governing retirement
benefits. (Commissioner v. Castaneda, 203
SCRA 72).
Retirement BENEFITS from foreign
government agencies
The social security benefits, retirement
gratuities, pensions and other similar
benefits received by resident or nonresident citizens or aliens who come to
reside permanently in the Philippines from
foreign government agencies and other
institutions, private or public;

Plan
must
be
reasonable.
Its
implementation must
be fair and equitable
for the benefit of all
employees (e.g. from
president to laborer)
Plan
must
be
approved by BIR

Payments of VETERANS benefits under


U.S. Veterans Administration
Payments of benefits due or to become due
to any person residing in the Philippines
under the laws of the United States
administered by the United States
Veterans Administration

Terminal pay/Separation pay


Any amount received by an employee or by
his heirs from the employer as a
consequence of separation of such official
or employee from the service of the
employer because of death, sickness, other
physical disability or for any cause beyond
the control of the employee. The phrase
for any cause beyond the control of the said
official or employee means that the
separation of the employee must be
involuntary and not initiated by him.

Social Security Act benefits


Payments of benefits received under the
Social Security Act of 1954 (RA 8282), as
amended, e.g., Maternity Benefits

The terminal leave pay (amount paid for


the commutation of leave credits) of

(h) Winnings, prizes and award, including


those in sports competitions.

GSIS benefits
Benefits received from GSIS under the
GSIS Act of 1937, as amended, and the
retirement
gratuity
received
by
government officials and employees are
not taxable. [Sec. 32B6., NIRC; Sec. B1, RR
2-98]

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(a) All prizes and awards granted to


athletes:
(1) in local and international sports
competitions and tournaments
whether held in the Philippines or
abroad, AND
(2) sanctioned by their national sports
associations
shall not be included in gross
income and shall be tax exempt.
[Sec. 32 B7d, NIRC]

TAXATION LAW

deductions from gross income


Deductions are items or amounts which the law
allows to be deducted from the gross of
income of a taxpayer in order to arrive at
taxable income.
Deductions are in the nature of an exemption
from taxation; they are strictly construed
against the claimant, who must point to a
specific provision allowing them and who has
the burden of proving that they falls within the
purview of such provision. Thus, all deductions
must be substantiated, except when the law
dispenses with the records, documents or
receipts to support the deductions.

(b) Prizes and awards made primarily in


recognition of
charitable, literary,
educational, artistic, religious, scientific,
or civic achievement are not taxable,
provided:
(1) Recipient was selected without any
action on his part to enter the
contest or proceeding; and
(2) Recipient is not required to render
substantial future services as a
condition to receiving the prize or
award

Types of deductions
There are three (3) types of deductions from
gross income:
(a) itemized deductions in Section 34(A) to (J)
and (M) available to all kinds of taxpayers
engaged in trade or business or practice of
profession in the Philippines;
(b) optional standard deduction in Section 34(L)
available only to individual taxpayers
deriving business, professional, capital
gains and passive income not subject to
final tax, or other income; and
(c) the special deductions in Sections 37 and 38
of the NIRC, and in special laws like the BOI
law (E.O. 226).
Return of capital (cost of sales or services)
Income tax is levied by law only on income;
hence, the amount representing return of
capital should be deducted from proceeds
from sales of assets and should not be subject
to income tax.
Costs of goods purchased for resale, with
proper adjustment for opening and closing
inventories, are deducted from gross sales in
computing gross income (Sec. 65, Rev. Reg. 2)

Itemized deductions
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TAXATION 1

These are enumerated in Section 34 of the


NIRC.

TAXATION LAW

(4) The interest must be legally due.


(5) The interest must be stipulated in writing.
(6) The taxpayer is LIABLE to pay interest on
the indebtedness.
(7) The indebtedness must have been paid or
accrued during the taxable year.
(8) The interest payment arrangement must
not be between related taxpayers
(9) The interest must not be incurred to
finance petroleum operations.
(10) In case of interest incurred to acquire
property used in trade, business or exercise
of profession, the same was not treated as
a capital expenditure,

(1) Expenses
Business expenses deductible from gross
income include the ordinary and necessary
expenditures directly connected with or
pertaining to the taxpayers trade or business.
The cost of goods purchased for resale, with
proper adjustment for opening and closing
inventories, is deducted from gross sales in
computing gross income.
Requisites for deductibility of business
expenses.
(a) Ordinary AND necessary;
(b) Paid or incurred during the taxable year;
(c) Others: (not in the SC syllabus)
(1) Paid or incurred in carrying on or which
are directly attributable to the
development, management, operation
and/or conduct of the trade, business or
exercise of profession;
(2) Substantiated by adequate proof
documented by official receipts or
adequate records, which reflect the
amount of expense deducted and the
connection or relation of the expense to
the business/trade of the taxpayer);
(3) Legitimately paid (not a BRIBE, kickback,
or otherwise contrary to law, morals,
public policy);
(4) If subject to withholding tax, the tax
required to be withheld on the expense
paid or payable is shown to have been
properly withheld and remitted to the
BIR on time;
(5) Amount must be reasonable.

Limitation: The taxpayer's allowable deduction


for interest expense shall be reduced by an
amount equal to 33% of the interest income
subjected to final tax (see chapter on taxation
of passive income for interest income); effective
January 1, 2009.
Non-deductible interest expense.
(a) Interest paid in advance by the taxpayer
who reports income on cash basis shall only
be allowed as deduction in the year the
indebtedness is paid.
(b) If the indebtedness is payable in periodic
amortizations, only the amount of interest
which corresponds to the amount of the
principal amortized or paid during the year
shall be allowed as deduction in such
taxable year.
(c) Interest payments made between related
taxpayers.
(d) Interest on indebtedness incurred to finance
petroleum exploration.
Related Taxpayers
(a) Between members of the family, i.e. brothers
and sisters (whether by the whole or halfblood), spouse, ancestor, and lineal
descendants; or
(b) Except in case of distributions in liquidation,
between an individual and a corporation,

(2) Interest
Requisites for deductibility.
(1) There is an indebtedness.
(2) The indebtedness is that of the taxpayer
(3) The indebtedness is connected with the
taxpayers trade, profession, or business.
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TAXATION 1

where the individual owns directly or


indirectly more than 50% of the
outstanding stock of the corporation
(c) Except in the case of distributions in
liquidation, between two corporations
where:
(1) Either one is a personal holding company
of a foreign personal holding company
with respect to the taxable year
preceding the date of the sale of
exchange; and
(2) More than 50% of the outstanding stock
of each is owned, directly or indirectly, by
or for the same individual; or
(d) Between parties to a trust(1) Grantor and Fiduciary; or
(2) Fiduciary of a trust and fiduciary of
another trust if the same person is a
grantor with respect to each trust; or
(3) Fiduciary and Beneficiary

TAXATION LAW

(2) A capital expenditure for which the taxpayer


may claim only as a deduction the periodic
amortization of such expenditure.
Reduction of interest expense/interest arbitrage
The taxpayer's allowable deduction for interest
expense shall be reduced by an amount equal
to 33% of the interest income subjected to final
tax; effective January 1, 2009. (RA 9337)

(3) Taxes
Taxes Proper: Refers to national and local
taxes;
Requisites for deductibility.
Such tax must be:
(a) Paid or incurred within the taxable year;
(b) Paid or incurred in connection with the
taxpayers trade, profession or business;
(c) Imposed directly on the taxpayer.
(d) Not specifically excluded by law from being
deducted from the taxpayers gross income.

Interest subject to special rules.


1. Interest paid in advance
(a) No deduction shall be allowed if within the
taxable year an individual taxpayer
reporting income on cash basis incurs an
indebtedness on which an interest is paid in
advance through discount or otherwise.
(b) But the deduction shall be allowed in the
year the indebtedness is paid

Non-deductible taxes.
(1) Philippine income tax, except Fringe Benefit
Taxes;
(2) Income tax imposed by authority of any
foreign country, if taxpayer avails of the
Foreign Tax Credit (FTC)
(a) Exception to exception: When the
taxpayer does NOT signify his desire to
avail of the tax credit for taxes of foreign
countries, the amount may be allowed as
a deduction from gross income of citizens
and domestic corporations subject to the
limitations set forth by law.
(3) Estate and donors taxes
(4) Percentage tax on stock transaction;
(5) Taxes assessed against local benefits of a
kind tending to increase the value of the
property assessed (Special Assessments)
(6) Value Added Tax
(7) Fines and penalties
(8) Final taxes
(9) Capital Gains Tax

2. Interest periodically amortized - If the


indebtedness is payable in periodic
amortizations, the amount of interest which
corresponds to the amount of the principal
amortized or paid during the year shall be
allowed as deduction in such taxable year
3. Interest expense incurred to acquire property
for use in trade/business/profession - At the
option of the taxpayer, interest expense on a
capital expenditure may be allowed as:
(1) A deduction in full in the year when
incurred;

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(10) Import duties


(11) Business taxes
(12) Occupation taxes
(13) Privilege and license taxes
(14) Excise taxes
(15) Documentary stamp taxes
(16) Automobile registration fees
(17) Real property taxes
(18) Electric energy consumption tax under BP
36

TAXATION LAW

Limitations on Tax Credit.


(1) [Per Country Limit]The amount of tax credit
shall not exceed the same proportion of the
tax against which such credit is taken, which
the taxpayer's taxable income from sources
within such country bears to his entire
taxable income for the same taxable year;
and
(2) [Worldwide Limit]The total amount of the
credit shall not exceed the same proportion
of the tax against which such credit is taken,
which the taxpayer's taxable income from
sources without the Philippines taxable
bears to his entire taxable income for the
same taxable year.

Special Rules:
1. Treatments of surcharges/interests/fines for
delinquency. The amount of deductible
taxes is limited to the basic tax and shall not
include the amount for any surcharge or
penalty on delinquent taxes. However,
interest on delinquent taxes, although not
deductible as tax, can be deducted as
interest expense at its full amount. (CIR v
Palanca, 18 SCRA 496).
2. Treatment of special assessment.Special
assessments and other taxes assessed
against local benefits of a kind tending to
increase the value of the property assessed
are non-deductible from gross income.
3. Tax credit - amount allowed by law to reduce
the Philippine income tax due, subject to
limitations, on account of taxes paid or
accrued to a foreign country

Formula:
Limit #1
Taxable
Income Per
Foreign
Country
Worldwide
Taxable
Income
Limit #2
Taxable
Income For
all Foreign
Countries
Worldwide
Taxable
Income

The following may claim tax credits:


(1) Resident citizens
(2) Domestic corporations, which include all
partnerships except general professional
partnerships
(3) Members of general professional
partnerships
(4) Beneficiaries of estates or trusts

Phil.
=
Income Tax

Limit on
amount
of tax
credit
(Per
Country
Limit)

Phil.
=
Income Tax

Limit on
amount
of tax
credit
(World
Wide
Limit)

Note: Computation of FTC: Limit #2 applies


where taxes are paid to two or more foreign
countries. Allowable tax credit is the lower
between the tax credit computed under Limit
#1 and that computed under Limit#2.

The following may NOT claim tax credits:


(1) Non-resident citizens
(2) Aliens, whether resident or non-resident
(3) Foreign corporations, whether resident on
non-resident

FTC Limitations lowest of the 3:


(1) Actual FTC
(2) For taxes paid to one foreign country
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TAXATION 1

(3) For taxes paid to 2 or more foreign countries

TAXATION LAW
except for banks and trust companies
under conditions in Sec. 39 of NIRC
where loss from such sale is not
subject to the foregoing limitation);

(4) Losses
Requisites for deductibility.
(1) Loss must be that of the taxpayer (e.g.,
losses of the parent corp. cannot be
deducted by its subsidiary);
(2) Actually sustained and charged off within
the taxable year;
(3) Incurred in trade, business or profession;
(4) Of property connected with the trade,
business, or profession, if the loss arises
from fires, storms, shipwreck or other
casualties, or from robbery, theft, or
embezzlement;
(5) Sustained in a closed and completed
transaction;
(6) Not compensated for by insurance or other
form of indemnity;
(7) Not claimed as a deduction for estate tax
purposes;
(8) In case of casualty loss, filing of notice of
loss with the BIR within 45 days from the
date of the event that gave rise to the
casualty; and
(9) The taxpayer must prove the elements of
the loss claimed, such as the actual nature
and occurrence of the event and amount of
the loss.

b. Securities becoming worthless - Loss in


shrinkage in value of stock through
fluctuation in the market is not
deductible from gross income.
Exception: If the stock of the corporation
becomes worthless, the cost or other basis may
be deducted by its owner in the taxable year in
which the stock became worthless, provided a
satisfactory showing of its worthlessness be
made, as in the case of bad debts.
c. Losses on wash sales of stocks or
securities
Wash Sale - a sale or other disposition of stock
or securities where substantially identical
securities (substantially the same as those
disposed of) are acquired or purchased (or
there was an option to acquire, and the
acquisition or option should be by purchase or
exchange upon which gain or loss is
recognized under the income tax law) within a
61-day period, beginning 30 days before the
sale and ending 30 days after the sale
General rule: Not deductible from gross income
Exception: If by a dealer in securities in the
course of ordinary business, it is deductible.

No loss is recognized in the following.


(1) Merger, consolidation, or control securities
(where no gains are recognized either);
(2) Exchanges not solely in kind;
(3) Related taxpayers (see above (c) Interest
expense incurred to acquire property for use
in trade/business/profession)
(4) Wash sales;
(5) Illegal transactions

d. Wagering losses - Losses from


wagering (gambling) are deductible
only to the extent of gains from such
transactions. A wager is made when
the outcome depends upon CHANCE.
e. NOLCO (Net Operating Loss Carry Over)

Other types of losses.


a. Capital losses - Incurred in the sale or
exchange of capital assets (allowable
only to the extent of capital gains,

Requisites for NOLCO:

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TAXATION 1

(1) The taxpayer was not exempt from income


tax the year the loss was incurred;
(2) There has been no substantial change in the
ownership of the business or enterprise
wherein:
(a) AT LEAST 75% of nominal value of
outstanding issued shares is held by or
on behalf of the same persons; or
(b) AT LEAST 75% of the paid up capital of
the corporation is held by or on behalf of
the same persons.

TAXATION LAW

(2) Losses due to voluntary removal of building


incident to renewal or replacements are
deductible from gross income.
(3) Loss of useful value of capital assets due to
charges in business conditions is deductible
only to the extent of actual loss sustained
(after adjustment for improvement,
depreciation and salvage value)
(4) Losses from sales or exchanges of property
between related taxpayers are not
recognized, but the gains are taxable.
(5) Losses of farmers incurred in the operation
of farm business are deductible.

Taxpayers Entitled to NOLCO


(1) Individuals engaged in trade or business or
in the exercise of his profession (including
estates and trusts);
Note:An individual who avails of 40% OSD
shall not simultaneously claim deduction of
NOLCO.
However,
the
three-year
reglementary period shall continue to run
during such period notwithstanding the fact
that the aforesaid taxpayer availed of OSD
during the said period.

(5) Bad debts


Requisites for deductibility.
(1) Valid and legally demandable debt due to
the taxpayer
(2) Debt is connected with the taxpayer's trade,
business or practice of profession;
(3) Debt was not sustained in a transaction
entered into between related parties;
(4) Actually ascertained to be worthless and
uncollectible as of the end of the taxable
year (taxpayer had determined with
reasonably degree of certainty that the
claim could not be collected despite the fact
that the creditor took reasonable steps to
collect); and
(5) Actually charged off the books of accounts
of the taxpayer as of the end of the taxable
year

(2) Domestic and resident foreign corporations


subject to the normal income tax (e.g.,
manufacturers and traders) or preferential
tax rates under the Code (e.g., private
educational institutions, hospitals, and
regional operating headquarters) or under
special
laws
(e.g.,
PEZA-registered
companies)
Note: Domestic and resident foreign
corporations taxed during the taxable year
with Minimum Corporate
Income Tax cannot enjoy the benefit of
NOLCO. However, the three-year period for
the expiry of he NOLCO is not interrupted by
the fact that the corporation is subject to
MCIT during such three-year period.

General rule: Taxpayer must ascertain and


demonstrate with reasonable certainty the
uncollectibility of debt
Exceptions:
(1) Banks as creditors BSP Monetary Board
shall ascertain the worthlessness and
uncollectibility of the debt and shall
approve the writing off
(2) Receivables from an insurance or surety
company (as debtor) may be written off as
bad debts only when such company is

Other Losses:
(1) Abandonment losses in petroleum operation
and producing well.
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TAXATION 1

declared closed due to insolvency or similar


reason

TAXATION LAW

(2) in accordance with a National Priority


Plan determined by NEDA (otherwise,
subject to statutory limit)
(b) Donations to Certain Foreign Institutions or
International Organizations which are fully
deductible in compliance with agreements,
treaties or commitments entered into by
the Government of the Philippines and the
foreign institutions or international
organizations or in pursuance of special
laws
(c) Donations to Accredited Non-government
Organizations subject to conditions set forth
in RR No. 13-98 NGO means a non-stock
non-profit
domestic
corporation
or
organization:
(1) Organized and operated exclusively for:
(a) scientific,
(b) research,
(c) educational,
(d) character-building and youth and
sports development,
(e) health,
(f) social welfare,
(g) cultural or
(h) charitable purposes, or
(i) a combination thereof,
(2) No part of the net income of which
inures to the benefit of any private
individual
(3) Directly utilizes contributions for the
active conduct of the activities
constituting the purpose or function for
which it is organized, not later than 15th
day of the month following the close of
its taxable year in which contributions
are received, unless an extended period
is granted by the Secretary of Finance,
upon recommendation of the CIR
(4) Administrative expense ,on an annual
basis, must not exceed 30% of total
expenses for the taxable year
(5) Upon dissolution, its assets would be
distributed to another accredited NGO
organized for a similar purpose or

(6) Depreciation
Requisites for Deductibility.
1. It must be reasonable.
2. It must be charged off during the year.
3. The asset must be used in profession, trade
or business.
4. The asset must have a limited useful life.
5. The depreciable asset must be located in
the Philippines if the taxpayer is a
nonresident alien or a foreign corporation.
[Valencia and Roxas]

(7) Charitable and other contributions


Requisites for deductibility.
(1) Actually PAID or made to the ENTITIES or
institutions specified by law;
(2) Made within the TAXABLE year.
(3) It must be EVIDENCED by adequate receipts
or records.
(4) For Contributions Other than Money: The
amount shall be BASED on the acquisition
cost of the property (i.e., not the fair market
value at the time of the contribution).
(5) For Contributions subject to the statutory
limitation: It must NOT EXCEED 10%
(individual) or 5% (corporation) of the
taxpayers taxable income before charitable
contributions
Contributions Deductible in Full:
(a) Donations to the Government of the
Philippines, or to any of its agencies, or
political subdivisions, including fully owned
government corporations
(1) Exclusively to finance, provide for, or to be
used in undertaking priority activities in
(a) Education
(b) Health
(c) Youth and sports development
(d) Human settlements
(e) Science and culture, and
(f) Economic development
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purposes, OR to the State for public


purpose, OR would be distributed by a
competent court of justice to another
accredited NGO to be used in such
manner as in the judgment of said court
shall best accomplish the general
purpose for which the dissolved
organization was organized.

TAXATION LAW
deductible in year the contribution is made,
the remaining balance will be amortized
equally over nine consecutive years

Requisites for deductibility of payments to


pension trusts.
(1) There must be a pension or retirement plan
established to provide for the payment of
reasonable pensions to employees;
(2) The pension plan is reasonable and
actuarially sound;
(3) It must be funded by the employer;
(4) The amount contributed must no longer be
subject to the employers control or
disposition; and
(5) The payment has not theretofore been
allowed before as a deduction.

Contributions subject to the Statutory Limit


(a) Government or any of its agencies or
political subdivisions exclusively for public
purposes (contributions for non-priority
activities)
(b) Accredited
domestic
corporation
or
associations organized exclusively for
(1) religious
(2) charitable
(3) scientific
(4) youth and sports development
(5) cultural
(6) educational purposes or
(7) rehabilitation of veterans
(c) Social welfare institutions
(d) Non-government organizations: No part of
the net income of which inures to the
benefit of any private stockholder or
individual

Deductions under special laws.


(1) Special deductions for productivity bonus
and manpower training under the
Productivity Incentives Act of 1990
(2) Deductions for training expenses of
qualified jewelry enterprises (Jewelry
Industry Development Act of 1998)
(3) Deductions under the Adopt-a-School Act of
1998
(4) Deductions under the Expanded Senior
Citizens Act of 2003. (Domondon)

Statutory Limit:
(a) 10% in the case of an individual (individual
donor), and
(b) 5% in the case of a corporation (corporate
donor),
of the taxpayer's/donors income derived from
trade, business or profession computed before
the deduction for contributions and donations

Optional standard deduction.


Individuals, except non-resident aliens
(1) May be taken by an individual in lieu of
itemized deductions except those earning
purely compensation income.
(2) If an individual opted to use OSD, he is no
longer allowed to deduct cost of sales or
cost of services.
(3) Amount: 40% of gross sales or gross
receipts(under RA 9504, effective July 6,
2008)

(8) Contributions to pension trusts


Contribution to a pension trust may be claimed
as deduction as follows:
(1) Amount contributed for the present/normal
service cost 100% deductible
(2) Amount contributed for the past service cost
1/10 of the amount contributed is

Requisites:
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TAXATION 1

(1) Taxpayer is a citizen or resident alien;


(2) Taxpayers income is not entirely from
compensation;
(3) Taxpayer signifies in his return his
intention to elect this deduction;
otherwise he is considered as having
availed of the itemized deductions.
(4) Election is irrevocable for the year in
which made; however, he can change to
itemized deductions in succeeding years.

TAXATION LAW
OSD is a proxy for all the items of
deductions allowed in arriving at
taxable income. This means that the
OSD is in lieu of the items of
deductions claimed by the GPP and the
items of deduction claimed by the
partners.
c. If the GPP avails of OSD in computing
its net income, the partners comprising
it can no longer claim further
deduction from their share in the said
net income.
d. The type of deduction chosen by the
GPP must be the same type of
deduction that can be availed of by the
partners. (RR 2-2010)

Corporations, except non-resident foreign


corporations
The option to elect Optional Standard
Deduction granted is now granted to
corporations (domestic and resident foreign
corporations) by virtue of RA 9504.
(1) The OSD is 40% of its gross income.
(2) The domestic and resident foreign
corporation shall keep such records
pertaining to his gross income as defined
in Section 32 of the NIRC during the
taxable year, as may be required by the
rules and regulations promulgated by the
Secretary
of
Finance
upon
recommendation of the CIR.
(3) Corporations availing of OSD are still
required to submit their financial
statements when they file their annual ITR
and to keep such records pertaining to its
gross income. (RR 2-2010).

PERSONAL AND ADDITIONAL EXEMPTION (R.A. NO.


9504, MINIMUM WAGE EARNER LAW).
Basic personal exemptions
Basic personal exemption is Fifty thousand
pesos (P50,000) for each individual taxpayer,
regardless of status, i.e., whether single,
married or head of the family.
But note Sec 35(A)
married individuals
spouses is deriving
spouse shall be
exemption.

Partnerships
(1) General Co-Partnership
For purposes of taxation, the Code
considers general co-partnerships as
corporations. Hence, rules on OSD for
corporations are applicable to general copartnerships.

of NIRC - In the case of


where only one of the
gross income, only such
allowed the personal

Additional exemptions for taxpayer with


dependents
(a) An individual, whether single or married,
shall be allowed an additional exemption of
P25,000 for each qualified dependent child
(QDC), provided that the total number of
dependents
for
which
additional
exemptions may be claimed shall not
exceed 4 dependents (depends on the
number of qualified dependent children)
(b) Married Individuals: Additional exemptions
for QDC are claimed by only one spouse.

(2) General Professional Partnerships (GPP)


b. If the GPP availed of itemized
deductions, the partners are not
allowed to claim the OSD from their
share in the net income because the
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TAXATION 1

(c) Who is a dependent for purposes of


additional exemptions?
(1) A taxpayers child, whether legitimate,
illegitimate or legally adopted child
(2) chiefly dependent for support upon on
the taxpayer
(3) living with the taxpayer
(4) not more than 21 years old, unmarried
and not gainfully employed or
(5) regardless of age, is incapable of selfsupport because of mental or physical
defect. (Sec 35 B, NIRC)
(d) Who may claim personal exemptions?
(1) Citizens (whether resident or nonresident) and resident aliens
(2) Non-resident aliens engaged in trade or
business are entitled personal exemptions
subject to reciprocity. (See below)

TAXATION LAW

Non-resident aliens engaged in trade or


business are entitled personal exemptions
subject to reciprocity.
It means that NRAETB shall be allowed a
personal exemption only if the income tax law
in his country grants allowance for personal
exemptions to the citizens and residents of the
Philippines as stipulated in the reciprocity tax
treaty with the Philippine Government.
Limit of PE Allowed to NRAETB: An amount
equal to the exemptions allowed by the nonresident aliens country to Filipino citizens not
residing therein but deriving income therefrom,
but not to exceed the amount fixed by NIRC.[In
other words, whichever is lower]
Items not deductible
General rule: In determining deductions, one of
the general rules (see above) is that deductions
must be paid or incurred in connection with the
taxpayers trade, business or profession.
Capital expenditures (e.g. acquisition cost of a
building) are also not deductible, because
these are not expenses, but form part of assets.

Status-at-the-end-of-the-year rule
Change of Status[Sec 35(C), NIRC]
(1) If taxpayer marries during taxable year,
taxpayer may claim the corresponding BPE
in full for such year (i.e., no need to pro-rate
the exemption).
(2) If taxpayer should have additional
dependent(s) during taxable year, taxpayer
may claim corresponding AE in full for such
year.
(3) If taxpayer dies during taxable year, his
estate may claim BPE and AE as if he died at
the close of such year.
(4) If during the taxable year
(a) spouse dies or
(b) any of the dependents dies or marries,
turns 21 years old or becomes gainfully
employed, taxpayer may still claim same
exemptions as if the spouse or any of the
dependents died, or married, turned 21
years old or became gainfully employed
at the close of such year.

In computing taxable net income, no deduction


shall be allowed in respect to:
(1) Personal, living or family expenses (note:
they are not deductible from compensation
and business/professional income under
Section 24(A), NIRC)
(2) Any amount paid out for new buildings or
for permanent improvements (capital
expenditures), or betterments made to
increase the value of any property or estate
(3) Any amount expended in restoring property
(major repairs) or in making good the
exhaustion thereof for which an allowance
[for depreciation or depletion] is or has
been made
(4) Premiums paid on any life insurance policy
covering the life of any officer, employee, or
any person financially interested in the trade
or business carried on by the taxpayer,

Exemptions claimed by non-resident aliens

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TAXATION LAW

exempt corporations

individual or corporate, when the taxpayer


is directly or indirectly a beneficiary under
such policy
(5) Interest expense and bad debts between
related parties (See Sec. 36(B), NIRC).
(6) Losses from sales or exchanges of property
between related taxpayers.
(7) Non-deductible interest should the
taxpayer elect to deduct interest payments
against its gross income, he cannot at the
same time capitalize such interest and
claim depreciation on the undepreciated
cost which includes the interest. (PICOP v.
Commissioner, G.R. No. 106949-50, Dec. 1,
1995)
(8) Non deductible taxes
(9) Non-deductible losses
(10) Losses on Wash Sales (except if by dealer in
securities in ordinary course of

These are:
(1) Proprietary Educational Institutions and
hospitals
(2) Government
owned
and
controlled
corporations
(3) Others
Proprietary Educational Institutions and
hospitals
By way of exception, proprietary educational
institutions and hospitals are liable for net
income at a rate of only ten percent (10%).
Government owned and controlled corporations
All corporations, agencies, or instrumentalities
owned or controlled by the Government are
subject to income tax, except:
(1) GSIS
(2) SSS
(3) PHIC
(4) Local water districts (LWDs)
(5) PCSO
Others

The following organizations shall not be taxed


in respect to income received by them as such:
(1) Labor,agricultural
or
horticultural
organization not organized principally for
profit
(2) Mutual savings bank not having a capital
stock represented by shares, and
cooperative bank without capital stock
organized and operated for mutual
purposes and without profit
(3) A Beneficiary society, order or association,
operating for the exclusive benefit of the
members such as a fraternal organization
operating under the lodge system, or
mutual aid association or a non-stock
corporation organized by employees
providing for the payment of life, sickness,
accident, or other benefits exclusively to the
members of such society, order, or

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association, or non-stock corporation or


their dependents
(4) CEMETERY company owned and operated
exclusively for the benefit of its members
(5) Non-stock corporation or association
organized and operated exclusively for
Religious, charitable, scientific, athletic, or
cultural purposes, or for the rehabilitation of
veterans, no part of its net income or asset
shall belong to or inure to the benefit of any
member, organizer, officer or any specific
person
(6) Business league chamber of commerce, or
board of trade, not organized for profit and
no part of the net income of which inures to
the benefit of any private stock-holder, or
individual
(7) Civic league or organization not organized
for profit but operated exclusively for the
promotion of social welfare
(8) A non-stock and non-profit Educational
institution
(9) Government Educational institution
(10) Farmers' or other mutual typhoon or fire
insurance company, mutual ditch or
irrigation company, mutual or cooperative
telephone company, or like organization of a
purely local character, the income of which
consists solely of assessments, dues, and
fees collected from members for the sole
purpose of meeting its expenses and
(11) Farmers', fruit growers', or like association
organized and operated as a Sales agent
for the purpose of marketing the products
of its members and turning back to them
the proceeds of sales, less the necessary
selling expenses on the basis of the
quantity of produce finished by them;

TAXATION LAW
for profit regardless of the disposition
made of such income, shall be subject to
tax.
(b) RA 9178 Act to Promote the
Establishment of Barangay Micro
Business
Enterprises
(BMBEs)
implemented by DO 17-04, April 20,
2004
(1) BMBEs shall be exempt from income
tax for income arising from the
operations of the enterprise.
(2) BMBE is any business entity or
enterprise engaged in the production,
processing or manufacturing of
products or commodities, including
agro-processing trading and services,
whose total assets including those
arising from loans but exclusive of
land on which the particular business
entitys office, plant and equipment
are situated, shall not be more than
P3M.
(c) Recreational Clubs - RMC 35-2012
(August 3, 2012) clarifies taxability of
clubs organized exclusively for pleasure,
recreation
and other non-profit
purposes (recreational clubs). Income
from whatever sources including but not
limited to membership fees, assessment
dues, rental income, and service fees are
subject to income tax and VAT.

Note:
(a) Notwithstanding
the
exemptions,
income of whatever kind and character
of the enumerated organizations from
any of their properties, real or personal,
or from any of their activities conducted
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TAXATION LAW

Taxation of resident citizens, non-resident citizens and resident aliens


Summary Table for Taxation of Individuals (all individual taxpayers, including non-resident aliens)
Classification

Taxable Income

Resident Citizen

Income
from
sources within and
outside
the
Philippines
Non-Resident Citizen
Income
from
sources within the
Philippines
Resident Alien
Income
from
sources within the
Philippines
Non-resident
Alien Income
from
Engaged in Trade or sources within the
Business
Philippines

Basic Personal
Exemption
Allowed

Additional
Personal
Exemption
Allowed

Tax Rates

5%-32%

Allowed

Allowed

5%-32%

Allowed

Allowed

5%-32%

Lower
amount No
specific 5%-32%
between
PE provision
allowed to Filipinos
in
the
foreign
country where he
resides vs. PE in the
Philippines
Non-resident
Alien Income
from Not allowed
Not allowed
25%
Not Engaged in Trade sources within the
or Business
Philippines
General rule that resident citizens are taxable on
income from all sources within and without the
Philippines

(2) Leaves the Philippines during the taxable


year to reside abroad (as immigrant or
for employment on a permanent basis)
(3) Works and derives income from abroad
and whose employment requires him to
be present abroad most of the time
during the taxable year
(4) Has been previously considered as a nonresident and arrives in the Philippines at
any time during the taxable year to
reside here permanently (only with
respect to his income from sources
abroad until the date of his arrival in the
country)

General rule: A Filipino resident citizen is


taxable on income from all sources (within and
without the Philippines)
Exception: A non-resident citizen is taxable
only on income derived from sources within the
Philippines.
A non-resident citizen is a Filipino citizen who:
(1) Establishes to the satisfaction of the CIR
the fact of his physical presence abroad
with a definite intention to reside therein
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TAXATION LAW
fair market value of the thing taken in
payment is the measure of the income
subject to tax.
(a) Fringe benefit not subject to tax
If the recipient of the fringe benefits is a
rank and file employee, and the said
fringe benefit is not tax-exempt, then the
value of such fringe benefit shall be
considered as part of the compensation
income of such employee subject to tax
payable by the employee. (Domondon)

Taxation on Compensation Income


Income arising from an ER-EE relationship.
Inclusions
(1) Monetary compensation If compensation
is paid in cash, the full amount received is
the measure of the income subject to tax.
(a) Regular salary/wage
(b) Separation pay - taxable if voluntarily
availed of. It shall not be taxable if
involuntary
(c) Retirement benefit not otherwise exempt
General rule: retirement pay is taxable
Exceptions:
(a) SSS or GSIS retirement pays.
(b) Retirement pay (R.A. 7641) due to old
age
provided
the
following
requirements are met:
(i) The retirement program is
approved
by
the
BIR
Commissioner;
(ii) It must be a reasonable benefit
plan. (fair and equitable)
(iii) The retiree should have been
employed for 10 years in the said
company;
(iv) The retiree should have been 50
years old or above at the time of
retirement; and
(v) It should have been availed of for
the first time.
(d) Bonuses, 13th month pay, and other
benefits not exempt .
(e) Directors fees
Fees received by an employee for the
services rendered to the employer
including a directors fee of the
company, fees paid to the public
officials such as clerks of court or
sheriffs for services rendered in the
performance of their official duty over
and above their regular salaries.

Exclusions
(1) Fringe benefit subject to tax
Convenience of the ER Rule
If meals, living quarters, and other facilities
and privileges are furnished to an employee
for the convenience of the employer, and
incidental to the requirement of the
employees work or position, the value of
that privilege need not be included as
compensation (Henderson v. Collector (1961)).
(2) De minimis benefits - These are exempt from
fringe benefit tax and compensation income
tax.
(3) Bonuses, 13th month pay and other benefits
and payments specifically excluded from
taxable compensation income
(a) Gross benefits received by employees of
public and private entities provided that
the total exclusion shall not exceed
P82,000 (amounts in excess are
considered compensation income) (R.A.
10653)
Deductions
(1) Personal exemptions
and additional
exemptions
(2) Health and hospitalization insurance
(a) Premium
Paid
on
Health
or
Hospitalization Insurance [Sec.34 (M)]
(b) Amount of premium paid on health
and/or hospitalization by an individual

(2) Nonmonetary compensation - If services are


paid for in a medium other than money, the
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TAXATION LAW

taxation of business income/income from


practice of profession

taxpayer (head of family or married), for


himself and members of his family
during the taxable year.

All income obtained from doing business


and/or engaging in the practice of a profession
shall be included in the computation of taxable
income.

Requisites for Deductibility


(1) Insurance must have actually been taken
(2) The amount of premium deductible does
not exceed P2,400 per family or P200 per
month whichever is lower during the
taxable year.
(3) That said family has a gross income of not
more than P250,000 for the calendar year.
(4) In case of married individual, only the
spouse claiming additional exemption
shall be entitled to this deduction.

taxation of passive income


Passive income subject to final tax
Final tax means tax withheld from source,
and the amount received by the income earner
is net of the tax already. The tax withheld by
the income payor is remitted by him to the BIR.
The income having been tax-paid already, it
need not be included in the income tax return
at the end of the year. These passive income
items are as follows:
(1) Interest income
(2) Royalties
(3) Dividends from domestic corporations
(4) Prizes and other winnings

Note: The spouse claiming the additional


exemptions for qualified dependent children
shall be the same spouse to claim the
deductions for premium payments.
The following may avail of the deduction
(a) Individual taxpayers earning purely
compensation income during the year.
(b) Individual taxpayer earning business
income or in practice of his profession.
Taxation of compensation income of a minimum
wage earner
The minimum wage shall be exempt from the
payment of income tax on their taxable income:
Provided, further, That the holiday pay,
overtime pay, night shift differential pay and
hazard pay received by such minimum wage
earners shall likewise be exempt from income
tax

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TAXATION LAW

Summary Table of Rates


(Includes NRAETB and NRANETB)
Section 24(B). Final Tax Rates on Certain Passive Income from Philippine sources
(1) INTEREST, ROYALTIES, PRIZES AND OTHER
Citizens,
WINNINGS
Residents
(a) Interest from any currency bank deposit
20%
(b) Yield or any other monetary benefit from deposit substitute
20%
(c) Yield or any other monetary benefit from trust funds and
20%
similar arrangements
(d) Royalties, in general (other than royalties described in
20%
letter e)
(e) Royalties on books as well as other literary works and
10%
musical compositions
(f) Prizes exceeding P10,000
20%
(g) Other winnings (other than Philippine Charity Sweepstakes
20%
and Lotto winnings)
(h) Interest incomes received from a depositary bank under
7 1/2%
expanded foreign currency deposit system
Note: NRC
Exempt
(RR 12011)
(i) Interest income from long-term deposit or investment
Exempt
evidenced by certificates prescribed by BSP.
If
preterminatedbefore fifth year, a final tax shall be imposed
based on remaining maturity:
(a) 4 years to less than 5 years
5%
(b) 3 years to less than 4 years
12%
(c) Less than 3 years
20%
(2) CASH AND/OR PROPERTY DIVIDENDS
Citizens,
Residents
(a) Cash and/or property dividends actually or constructively
received from a domestic corp. or from a joint stock co.,
insurance or mutual fund companies and regional
operating headquarters of multinational companies
(beginning January 1, 2000)
10%
(b) Share of an individual in the distributable net income after
tax of a PARTNERSHIP (other than a general professional
partnership) (beginning January 1, 2000)
10%
(c) Share of an individual in the net income after tax of an
ASSOCIATION, a JOINT ACCOUNT, or a JOINT VENTURE or
CONSORTIUM taxable as a corporation, of which he is a
member or a co-venturer (beginning January 1, 2000)
10%
56

NRAETB NRANETB
20%
20%
20%

25%
25%
25%

20%

25%

10%

25%

20%
20%

25%
25%

Exempt

Exempt

Exempt

25%

5%
12%

25%
25%

20%
25%
NRAETB NRANETB

20%

25%

20%

25%

20%

25%

UP LAW BOC

TAXATION 1

TAXATION LAW

taxation of capital gains

Passive income not subject to tax


(1) Interest income from long-term deposit or
investment in the form of savings, common
or individual trust funds, deposit substitutes,
investment management accounts and
other investments evidenced by certificates
in such form prescribed by the BSP shall be
exempt from tax

Income from sale of shares of stock of a


Philippine corporation
1. Shares traded and listed in the stock exchange
exempt
The transaction is exempt from income tax
regardless of the nature of business of the
seller or transferor. However, it is subject to
the one-half of one percent (1/2 of 1%) stock
transaction tax imposed under Sec. 127(A) of
the Tax Code based on the gross selling
price or gross value in money of the shares
of stock sold or transferred.

But should the holder of the certificate preterminate the deposit or investment before
the 5th year, a final tax shall be imposed on
the entire income and shall be deducted
and withheld by the depository bank from
the proceeds of the long-term deposit or
investment certificate based on the
remaining maturity thereof:
(a) Four (4) years to less than five (5) years 5%;
(b) Three (3) years to less than four (4) years
- 12%; and
(c) Less than three (3) years - 20%.

2. Shares not listed and traded in the stock


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

(2) Any income of nonresidents, whether


individuals
or
corporations,
from
transactions with depository banks under
the expanded system shall be exempt from
income tax.

Income from the sale of real property situated in


the Philippines
What property covered
Property located in the PH classified as capital
assets
What transactions covered
Sales, exchanges, or other disposition of real
property (classified as capital assets), including
pacto de retro sales and other forms of
conditional sales of the following: citizens,
resident aliens, NRAETB, NRANETB, domestic
corporations.
Tax rate
57

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General rule: 6% ofwhichever is higher
(a) Gross selling price, or
(b) Fair market value (determined
accordance with Sec. 6(E)).

TAXATION 1

in

TAXATION LAW

Determination of whether short- or longterm: If held for <12 mos, then short-term.
Otherwise, long-term.

Except
(1) In case of sales made to the government, any
of its political subdivisions or agencies, or to
GOCCs, it can be taxed either:
(a) Under Sec. 24(C)(1) 6% CGT, or
(b) Under Sec. 24(A), at the option of the
taxpayer.
(2) In case of the sale of or disposition of their
principal residence by natural persons
(a) Tax treatment: Exempt from capital
gains tax (CGT). If there is no full
utilization of the proceeds of sale or
disposition, the portion of the gain
presumed to have been realized from
the sale or disposition shall be subject
to CGT.
(b) How taxable portion and tax
determined:

(2) At 30% corporate income tax, if the seller is a


corporation.
Summary Tables of Rates
(Tables include NRAETB and NRANETB)
Section 24(C).Capital Gains Tax from Sale of
Shares of Stock of a domestic corporation NOT
TRADED in the Stock Exchange
RES/CIT NRAETB NRANETB
Tax base:
Net Capital
Gain
Tax
rate:
5%
5%
5%
Not
over
10%
10%
10%
P100,000

[ @ (

)] [
]

Amount in
excess of
P100,000
Section 24(D).Capital Gains Tax from Sale of
Real Property Classified as Capital Asset
RES/CIT NRAETB NRANETB
Tax base:
Gross
selling price
or current
fair market
value,
whichever
is higher
Tax rate:
6%
6%
6%

Income from the sale, exchange, or other


disposition of other capital assets
Other properties shall be subject to income
tax
(1) At the graduated income tax rates, if the
seller is an individual;
(a) Long-term capital gains: only 50% is
recognized.
(b) Short-term capital asset transactions:
100% subject to tax. (Sec. 39(B))

58

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TAXATION 1

TAXATION LAW

Resident
CITIZEN
ALIEN
Category of Income
(1) Compensation
Profession

Business

All sources

Within the
Philippine
s

Non-Resident
CITIZEN
NRAETB NRANETB
Within the
Philippine
s

Within the
Philippine
s

(2) Prizes of P10,000 or less

Based on Taxable (i.e, Net) Income


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

Within the
Philippine
s
GIW
25%

Not
Applicabl
e

(3) Interest from any currency bank


deposit , etc., Royalties (other
than from books, literary works
Gross Income Within the Philippines (GIW) 20%
and
musical
compositions),
Final Withholding Tax
Winnings / Prizes (except prizes
P10,000 and below)
(4) Royalties from books, literary
works, musical compositions
GIW 10% Final Withholding Tax
(5) Interest from long-term deposit or EXEMPT; However:
investment certificates, which In case of pre-termination, with remaining
25%
have a maturity of 5 years or more maturity of:
4 years to less than 5 years 5% on entire
income
3 years to less than 4 years 12% on entire
income
less than 3 years 20% on entire income
(6) Cash / Property Dividends from a
domestic corporation, etc., OR
share in the distributable net
GIW

income after tax of a partnership GIW 10% Final Withholding Tax


20%
(except a general professional
partnership), etc.
(7) Interest
(Expanded
Foreign
GIW 7.5%
Currency Deposit System)
Withholding Tax
(8) Winnings
on
Sweepstakes / Lotto

Final

EXEMPT

Philippine
EXEMPT

(9) Capital Gains on Sale of Shares of Net Capital Gains within:


Domestic Corp. (not traded in a Not Over P100,000 5% Final Tax
59

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TAXATION 1
Resident
CITIZEN
ALIEN

Category of Income
domestic stock exchange)

TAXATION LAW
Non-Resident
CITIZEN
NRAETB NRANETB

Within the Within the Within the Within the


All sources Philippine Philippine Philippine Philippine
s
s
s
s
Amount in Excess of P100,000 plus 10% Final Tax on the
excess

(10)
Capital Gains on Sale of Real
Gross Selling Price or FMV, whichever is higher
Property in the Philippines
6% Final Withholding Tax
(11)
Sale of Shares of Domestic
of 1% of the Selling Price (Stock Transaction Tax)
Corp. (traded in a domestic stock
Note: Stock Transaction Tax is not an income tax, but a
exchange)
business (percentage) tax
(12) Sale of Real Property located
Abroad
Schedular Income Tax Rates (Sec. 24, NIRC)
(13) Sale of Shares of Foreign Corp
(i.e, 5% to 32%)
(14) Passive Income from Abroad

Computations
Pure Compensation Income
Gross Compensation Income
Less: Personal
&
Additional
Exemptions
and
hospitalization/health
insurance premium
Taxable Income
x
Rate
Income Tax
Less: Creditable Withholding Tax on
Compensation Income
Tax Payable

insurance premium
Taxable Compensation Income
ADD: Gross Business Income &/or
Income from Practice of
Profession
Less: Allowable Deduction (itemized
or optional deduction)
Taxable Income
x
Rate
Income Tax
Less: Creditable Withholding Tax on
Compensation Income/Other
Allowable Tax Credit
Tax Payable

xx

xx
xx
xx
xx
xx

Mixed-Income (i.e., compensation income and


business income/income from the practice of
profession)

Less:

Xx
Xx

Xx
Xx
Xx

Xx
Xx

Pure Business/Professional Income


Gross Business Income &/
or Income from Practice of Xx
Profession
Less: (a) Allowable Deduction
(itemized
or
optional xx
deduction)

Gross Compensation Income


Xx
Personal
&
Additional
Exemptions
and
hospitalization/health Xx
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TAXATION 1

(b) Personal
&
Additional
Exemptions
and hospitalization/health
insurance premium
Total Taxable Income
x
Rate
Income Tax
Less: Creditable Withholding Tax on
Compensation
Income/Other
Allowable Tax Credit
Tax Payable

Taxation of non-resident
engaged in trade or business

TAXATION LAW

an association, a joint account, or a joint


venture taxable as a corporation of which
he is a member or a co-venturer;
(b) Interests
(c) Royalties (in any form); and
(d) Prizes (except prizes amounting to Ten
thousand pesos (P10,000) or less which
shall be subject to graduated tax) and other
winnings (except Philippine Charity
Sweepstakes and Lotto winnings);

xx

Xx
Xx

Xx
Xx

Except:
(1) The following Royalties shall be subject to a
final tax of ten percent (10%) on the total
amount thereof:
(a) On books as well as other literary works;
and
(b) On musical compositions
(2) Cinematographic films and similar works
shall be subject to twenty-five percent
(25%) of the gross income
(3) Interest income from long-term deposit or
investment in the form of savings, common
or individual trust funds, deposit substitutes,
investment management accounts and
other investments evidenced by certificates
in such form prescribed by the Bangko
Sentral ng Pilipinas (BSP) shall be exempt
from the tax

aliens

(See above summary tables)

general rules
(a) Subject to an income tax in the same
manner as an individual citizen and a
resident alien individual on taxable income
from all sources within the Philippines
(b) Nonresident alien doing business in the
Philippines: a non-resident alien individual
who shall come to the Philippines and stay
therein for an aggregate period of more
than 180 days during any calendar year

cash and/or property dividends


The following shall be subject to an income tax
of twenty percent (20%) on the total amount
thereof:
(a) Cash and/or property dividends from:
(1) A domestic corporation;
(2) A joint stock company;
(3) An insurance or mutual fund company;
(4) A regional operating headquarter of
multinational company;
(5) The share of a nonresident alien
individual in the distributable net income
after tax of a partnership (except a
general professional partnership) of
which he is a partner;
(6) The share of a nonresident alien
individual in the net income after tax of

But should the holder of the certificate preterminate the deposit or investment before
the fifth (5th) year, a final tax shall be
imposed on the entire income and shall be
deducted and withheld by the depository
bank from the proceeds of the long-term
deposit or investment certificate based on
the remaining maturity thereof:
(a) Four (4) years to less than five (5) years 5%;
(b) Three (3) years to less than four (4) years 12%; and
(c) Less than three (3) years - 20%.

capital gains
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TAXATION 1

Capital gains realized from sale, barter or


exchange of shares of stock in domestic
corporations not traded through the local stock
exchange, and real properties shall be subject
to the similar tax prescribed on citizens and
resident aliens.
(a) Sale, barter or exchange of Shares of stock
in domestic corporation not traded
(1) Net over P100,000 5% of net capital
gains realized
(2) On any amount in excess of P100,000
10% of net capital gains realized
(b) Sale, barter or exchange of real properties
6% of gross selling price or current FMV
whichever is higher

TAXATION LAW

The same tax treatment shall apply to


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

Individual taxpayers exempt from


income tax
Individual Taxpayers exempt from income tax
are:
(1) Senior Citizens
(2) Minimum wage earners
(3) Exemptions granted under international
agreements

non-resident aliens not engaged in


trade or business

senior citizens

(1) Alien individuals employed by:


(a) Regional or Area Headquarters (RAHQ)
and Regional Operating Headquarters
(ROHQ) established in the Philippines by
multinational companies

Who covered: any resident citizen


(a) At least 60 years old, and
(b) Who are considered minimum wage earners
under RA 9504. (Sec. 4 (b) RA 7432, as
amended by RA 9994) and/or the
aggregate amount of gross income earned
by the senior citizen during the taxable year
does not exceed the amount of his personal
exemptions (BPE and APE).

Multinational company, defined a


foreign firm or entity engaged in
international trade with affiliates or
subsidiaries or branch offices in the AsiaPacific Region and other foreign markets

minimum wage earners


Rule: they shall be exempt from payment of
income tax on their taxable income

(b) Offshore Banking Units established in the


Philippines

Limit: however, if he receives other benefits


in excess of the allowable statutory amount of
P30,000, then he shall be taxable on the
exceeds benefits as well as his salaries, wages,
and allowances, just like an employee
receiving compensation income beyond the
statutory minimum wage.

(2) Alien individuals who are permanent


residents of a foreign country but who are
employed and assigned in the Philippines by
a foreign service contractor or by a foreign
service subcontractor engaged in petroleum
operations in the Philippines
Tax Rate and Base - 15% of gross income
received as salaries, wages, annuities,
compensation, remuneration and other
emoluments, such as honoraria and
allowances.

exemptions granted under international


agreements (sec. 32(b))
See RMC No, 31-2013, April 12, 2013 taxation
of compensation income of Philippine
62

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TAXATION 1

nationals and alien individuals employed by


foreign governments/embassies/diplomatic
missions and international organizations
situated in the Philippines

TAXATION LAW

Taxation of Domestic Corporations


TAX PAYABLE
Taxes payable are:
(1) Regular tax
(2) Minimum Corporate Income Tax

Regular Tax
Normal Corporate Income Tax Rate: 30%of
Taxable Income (effective January 1, 2009)
Gross Income
Less: Allowable Deductions
Taxable Income

XXX
XXX
XXX

Minimum corporate income tax (MCIT)


(a) applies to domestic corporations and RFCs
whenever such corporations have zero or
negative taxable income or whenever the
MCIT is greater than the normal income tax
due from such corporations.
(b) Imposed upon any domestic corporation
beginning the fourth taxable year in which
such corporation commenced its business
operations. For purposes of the MCIT, the
taxable year in which business operations
commenced shall be the year when the
corporation registers with the BIR (not in
which the corporation started commercial
operations).
(c) Tax rate: 2% of the Gross Income
Who are covered by MCIT?
The MCIT covers domestic and resident foreign
corporations which are subject to the regular
income tax. The term regular income tax
refers to the regular income tax rates under the
Tax Code. Thus, corporations which are subject
to a special corporate tax system do not fall
within the coverage of the MCIT.
Items allowed to be credited against quarterly
MCIT due: (a) CWT, (b) Quarterly income tax
payments under the normal income tax; and
(c) MCIT paid in the previous taxable quarter(s).
63

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TAXATION 1

TAXATION LAW

Any excess of the minimum corporate income


tax over the normal income tax shall be carried
forward on an annual basis. The excess can be
credited against the normal income tax in the
nextthree (3) succeeding taxable years. [Sec.
27(E)(2)] In the year to which carried forward,
the normal tax should be higher than the MCIT.

Excess MCIT from the previous taxable year/s


shall not be allowed to be credited against the
quarterly MCIT tax due.
Annual Income Tax Computation.
The final comparison between the normal
income tax payable and the MCIT shall be
made at the end of the taxable year. The
payable or excess payment in the Annual
Income Tax Return shall be computed taking
into consideration corporate income tax
payment made at the time of filing of quarterly
corporate income tax returns whether this be
MCIT or normal income tax.

Relief from the MCIT under certain conditions


(Sec. 27 (E ), NIRC)
The Secretary of Finance, upon the
recommendation of the Commissioner, may
suspend the imposition of the MCIT upon
submission of proof by the applicantcorporation that the corporation sustained
substantial losses on account of the following
(LMB):
(1) Prolonged labor dispute (losses from a strike
staged by employees that lasts for more
than 6 months and caused the temporary
shutdown of operations), or
(2) Force majeure (acts of God and other
calamity; includes armed conflicts like war
or insurgency), or
(3) Legitimate business reverses (substantial
losses due to fire, robbery, theft or other
economic reasons).

In the computation of annual income tax due,


if the normal income tax due is higher than the
computed annual MCIT, the following shall be
allowed to be credited against the annual
income tax: (a) quarterly MCIT payments, (b)
quarterly normal income tax payments, (c)
excess MCIT in the prior year/s (subject to the
prescriptive period allowed for its creditability),
(d) CWTs in the current year, (d) excess CWTs
in the prior year.
If in the computation of annual income tax due,
the computed annual MCIT due is higher than
the annual normal income tax due, the
following may be credited against the annual
income tax: (a) quarterly MCIT payments of
current taxable quarter, (b) quarterly normal
income tax payments in current year, (c) CWTs
in the current year, (d) excess CWTs in the prior
year.

Optional Gross Income Tax (OGIT).


Section 27 (A) of the NIRC provides for an
optional gross income tax of 15% based on
gross income.
The President, upon the
recommendation of the Secretary of Finance,
may, effective January 1, 2000, allow domestic
corporations the option to be taxed at fifteen
percent (15%) of gross income as defined
therein.

Manner of Filing and Payment.


The MCIT shall be paid in the same manner
prescribed for the payment of the normal
corporate income tax which is on a quarterly
and on a yearly basis.

Note: At present, the OGIT has not been


implemented in the Philippines.

Corporations exempt from the MCIT:


( BIPTENG)

Carry forward of excess minimum tax

64

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TAXATION 1

(1) Banks and other non-bank financial


intermediaries;
(2) Insurance companies;
(3) Publicly-held corporations;
(4) Taxable partnerships;
(5) General professional partnerships;
(6) Non- taxable joint ventures; and
(7) Enterprises that are registered:
(a) with the Philippine Economic Zone
Authority (PEZA) under R.A. 7916;
(b) pursuant to the Bases Conversion and
Development Act of 1992 under R.A. 7227;
and
(c) under special economic zones declared by
law which enjoy payment of special tax
rate on their registered operations or
activities in lieu of other taxes, national or
local.

TAXATION LAW

(b) But by virtue of RA 9504, it now also


applies to corporations, except non-resident
foreign corporation.
(c) Moreover, the rate was increased from 10%
to 40%.

Applicability of the MCIT where a corporation is


governed both under the regular tax system
and a special income tax system
For corporations whose operations or activities
are partly covered by the regular income tax
and partly covered under special income tax
system, the MCIT shall apply on operations by
the regular income tax system

allowable deductions
Itemized deductions
(1) Bad debts
(2) Expenses
(3) Losses
(4) Taxes
(5) Depreciation
(6) Interest
(7) Depletion of oil and gas wells and mines
(8) Charitable and other contributions
(9) Research and development
(10) Pension trusts
Optional standard deduction
(a) Before RA 9504, effective July 6, 2009,
OSD only applied to individuals except nonresident aliens.
65

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TAXATION 1

TAXATION LAW
expanded foreign currency deposit system
shall
be
exempt
from
incomeexemptfromincome tax

taxation of passive income


Passive income subject to tax
Passive income subject to tax:
(1) Interest from deposits and yield or any other
monetary benefit from deposit substitutes
and from trust funds and similar
arrangements and royalties 20%

Except: net income from transactions


specified by the Secretary of Finance upon
recommendation by the Monetary Board
BUT: Interest income from foreign currency
loans granted by such depository banks
under said expanded foreign currency
deposit system to residents, other than
offshore banking units in the Philippines,
shall be subject to a final tax at the rate of
10%.

(2) Capital gains from the sale of shares of


stock not traded in the stock exchange of a
domestic corporation held as capital asset
On the net capital gain:
First P100,000: Final Tax of 5%
On any amount in excess of P100,000: plus
10% Final tax on the excess

(b) Any income of nonresidents, whether


individuals
or
corporations,
from
transactions with depository banks under
the expanded system shall be exempt
fromexemptfrom income tax.

(3) Income derived from depository bank under


the expanded foreign currency deposit
system 7.5%
(4) Capital gains realized from the sale,
exchange, or disposition of lands and/or
buildings which are not actually used in the
business of a corporation and are treated as
capital assets On the gross selling price,
or the current fair market value at the time
of the sale, whichever is higher, a final tax of
6%

taxation of capital gains


Income from sale of shares of stock
On sale, barter, exchange or other disposition
of shares of stockof a domestic corporation not
listed and traded through a local stock exchange,
held as a capital asset:

Inter-corporate dividends
Dividends received from another domestic
corporation - exempt

On the net capital gain:


(a) First P100,000: Final Tax of 5%
(b) On any amount in excess of P100,000: plus
10% Final tax on the excess

Passive income not subject to tax


Income from the sale of real property
situated in the Philippines

(a) Income derived by a depository bank under


the expanded foreign currency deposit
system from foreign currency transactions
with nonresidents, offshore banking units in
the Philippines, local commercial banks,
including branches of foreign banks that
may be authorized by the Bangko Sentral
ng Pilipinas (BSP) to transact business with
foreign currency depository system units
and other depository banks under the

Philippine & (iii) Income from the sale, exchange,


or other disposition of other capital assets
On the sale, exchange or disposition of lands
and/or buildings which are not actually used in
the business of a corporation and are treated
as capital assets On the gross selling price,
or the current fair market value at the time of
the sale, whichever is higher, a final tax of 6%
66

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TAXATION 1

TAXATION LAW

government
performing
governmental
functions may be subject to tax. Where it is
done precisely to fulfilfulfill a constitutional
mandate and national policy, no one can doubt
its wisdom. (Mactan Cebu Airport v Marcos,
1996)

tax on proprietary educational


institutions and non-profit hospitals
Tax Rate and Base 10% on net income
(except on income subject to capital gains tax
and passive income subject to final tax) within
and without the Philippines

If the taxing authority is the local govt unit - RA


7160 expressly prohibits LGUs from levying tax
on the Natl Govt, its agencies and
instrumentalities and other LGUs.

Caveat: If gross income from unrelated trade or


business or other activity exceeds 50%of total
gross income derived from all sources, the tax
rate of 30% shall be imposed on the entire
taxable income.

Taxation
of
Corporations

Resident

Foreign

general rule
A resident foreign corporation is a corporation
organized under the laws of a foreign country,
which is engaged in trade or business in the
Philippines.
(a) A Philippine branch of a foreign corporation
duly licensed by the SEC is considered a
resident foreign corporation. Thus, only the
income of the Philippine branch from sources
within the Philippines is subject to Philippine
income tax.
(b) Marubeni v. Commissioner: As general rule,
the head office of a foreign corporation is
the same juridical entity as its branch in the
Philippines following the single entity
concept. Thus, the income from sources
within the Phils. of the foreign head office
shall thus be taxable to the Philippine
branch.

tax
on
government-owned
or
controlled corporations, agencies or
instrumentalities
For GOCCs:
General rule:GOCCs are taxable as any other
corporation engaged in similar business,
industry or activity, except:
(a) Government Service Insurance System
(GSIS)
(b) Social Security System (SSS)
(c) Philippine Health Insurance Corporation
(PHIC)
(d) Local water districts (LWDs)
(e) Philippine Charity Sweepstakes Office
(PCSO)
(Sec. 27(C), NIRC)

with respect to their income from sources


within the philippines

For instrumentalities and agencies of


government:

Resident foreign corporations are subject to


any or some of the following:
(1) Capital Gains Tax
(2) Final Tax on Passive Income

General Rule: The government is exempt from


tax.
Exception: When it chooses to tax itself.
Nothing can prevent Congress from decreeing
that even instrumentalities or agencies of the
67

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TAXATION 1

(3) Normal Tax [OR] Minimum Corporate


Income Tax (MCIT) [OR] Gross Income Tax
(GIT)
(4) Branch Profit Remittance Tax

TAXATION LAW

Capital gain from sale of shares of stock not


traded in the stock exchange
On sale, barter, exchange or other disposition
of shares of stock ofstockof a domestic
corporation not listed and traded through a
local stock exchange, held as a capital asset:

minimum corporate income tax


The discussion with respect to this topic
(income subject to normal tax, MCIT, or GIT)
under
the
subheading
of
domestic
corporations is equally applicable to resident
foreign corporations, both as to concepts and
computations, except that RFCs are taxed only
on income from sources within the Philippines.
(a) Normal Corporate Income Tax Rate30% of
net taxable income from sources within the
Philippines [RA 9337]
(b) Minimum Corporate Income Tax (MCIT)2%
of MCIT Gross Income from sources within
the Philippines. The MCIT is imposed on
RFCs underRFCsunder the same conditions
as domestic corporations. [Sec. 28(A)(2)]
(c) Gross Income Tax (GIT) The President,
upon the recommendation of the Secretary
of Finance, may allow resident foreign
corporations the option to be taxed at
fifteen percent (15%) of gross income within
the Philippines, under the same conditions
as domestic corporations. [Sec. 28(A)(1)]

On the net capital gain:


(a) First P100,000: Final Tax of 5%
(b) On any amount in excess of P100,000: plus
10% Final tax on the excess
Intercorporate dividends
Dividends received from a domestic corporation
liable to tax under the NIRC- exempt

Taxation of Non-Resident Foreign


Corporations
general rule
Except as otherwise provided, the tax is 30% of
the gross income (except certain passive
income)received during each taxable year from
all sources within the Philippines, such as
interests (except interests on foreign loans,
dividends, rents, royalties, salaries, premiums
(except reinsurance premiums), annuities,
emoluments or other fixed or determinable
annual, periodic or casual gains, profits and
income, and capital gains EXCEPT capital gains
on the sale of shares of stock (not listed and
traded through a local stock exchange), of a
domestic corporation which are subject to the
tax rates prescribed for individuals and resident
foreign corporations.

tax on certain income


Interest from deposits and yield or any other
monetary benefit from deposit substitutes, trust
funds and similar arrangements and royalties
On any currency bank deposit, yield or any
other monetary benefit from deposit
substitutes, trust
funds and similar
arrangements Final tax of 20%

tax on certain income

Income derived from a depository bank under the


expanded foreign currency deposit system
Under the expanded foreign currency deposit
system (EFCDS) Final tax of 7.5%

Interest on foreign loans


(a) on foreign loans contracted on or after
August 1, 1986 20%
(b) under the expanded foreign currency
deposit system (EFCDS) - exempt
68

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TAXATION 1

Intercorporate dividends
(a) (Intercorporate Dividend) 15%, as long as
the country in which the nonresident foreign
corporation is domiciled allows a tax credit
for taxes deemed paid in the Philippines
equivalent to at least15%
(b) 15% represents the difference between the
regular income tax of 30% on corporations
and the 15% tax on dividends (tax sparing
credit)
(c) If the country within which the NRFC is
domiciled does NOT allow a tax credit, a
final withholding tax at the rate of30% is
imposed on the dividends received from a
domestic corporation.

TAXATION LAW

On sale, barter, exchange or other disposition


of real property or on shares of stock of a
domestic corporation not listed and traded
through a local stock exchange, held as a
capital asset:
On the net capital gain:
(a) First P100,000 Final Tax of 5%
(b) On any amount in excess of P100,000 plus
Final Tax of 10% on the excess

Summary of Tax Bases and Rates of Special


Corporations
Quick Glance

Capital gains from sale of shares of stock not


traded in the stock exchange
Type of Corporation

Tax
Rate

Tax Base

Domestic Corporations
Proprietary Educational Institutions and Hospitals
Taxable Income from all sources
(Non-profit)
Depository Banks (Foreign Currency Deposit Units)
(1) With respect to income derived under the Exempt (except that net income
expanded foreign currency deposit system from from such transactions is subject
certain foreign currency transactions
to the regular income tax payable
(2) With respect to interest income from foreign by banks)
currency loans to residents other than offshore
units in the Philippines or other depository banks Amount of interest income
under the expanded system
Resident Foreign Corporations
International Carriers (Preferential Rate/Exempt subj Gross Philippine Billings
to reciprocity RA 10378)
Offshore Banking Units
(1) With respect to income derived by offshore Exempt (except that net income
banking units from certain foreign currency from such transactions is subject
transactions
to the regular income tax payable
(2) With respect to interest income derived from by banks)
foreign currency loans granted to residents other
than offshore banking units or local commercial Amount of interest income
banks

69

10%

10%

2.5%

10%

UP LAW BOC

TAXATION 1

Type of Corporation

TAXATION LAW
Tax
Rate

Tax Base

Resident Depository Bank (Foreign Currency Deposit


Units)
Exempt (except that net income
(1) With respect to income derived under the from such transactions is subject
expanded foreign currency deposit system from to the regular income tax payable
certain foreign currency transactions
by banks)
(2) With respect to interest income from foreign
currency loans to residents other than offshore
Amount of interest income
units in the Philippines or other depository banks
under the expanded system
Regional or Area Headquarters
Exempt
Regional Operating Headquarters of Multinational Taxable Income from within the
Companies
Philippines
Non-resident Foreign Corporations [EXCLUDED]
Non-resident cinematographic film owners, lessors or Gross
Income
from
the
distributors
Philippines
Non-resident Owner or Lessor of Vessels Chartered by Gross Rentals, Lease and Charter
Philippine Nationals
Fees from the Philippines
Non-resident Owner or Lessor of Aircraft, Machineries Gross Rentals, Charges and Fees
and Other Equipment
from the Philippines

70

10%
10%

25%
4.5%
7.5%

UP LAW BOC

Improperly Accumulated
Corporations

TAXATION 1

Earnings

of

TAXATION LAW

Taxation of Partnerships
Classification of Partnerships for Tax
Purposes

See: Sec. 29, as implemented by RR 2-2001


which prescribes rules governing the
imposition of IAET

(1) General Professional Partnerships (GPP)


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

Rule: There is imposed for each taxable year, in


addition to other taxes, a tax equal to 10% of
the improperly accumulated taxable income of
domestic and closely-held corporations formed
or availed of for the purpose of avoiding the
income tax with respect to its shareholders or
the shareholders of any other corporation, by
permitting the earnings and profits of the
corporation to accumulate instead of dividing
them among or distributing them to the
shareholders.

A GPP is exempt from income tax. It is,


however, required to file a tax return for its
income for the purpose of furnishing
information as to the share in the gains or
profits that each partner shall include in his
individual tax return.
(2) Other Partnerships (or General Copartnerships) partnerships wherein all or
part of their income is derived from the
conduct of trade or business. An ordinary
business partnership is considered as a
corporation and is thus subject to corporate
tax of 30%.

Exception: The use of undistributed earnings


and profits for the reasonable needs of the
business would not generally make the
accumulated or undistributed earnings subject
to the tax.
What is meant by reasonable needs of the
business is determined by the immediacy test.
It states that the reasonable needs of the
business are the
(1) immediate needs of the business; and

Other Partnerships (or general co-partnerships)


Rules:
(1) The partnership is subject to the same rules
on corporations (capital gains tax, final tax
on passive income, normal tax, minimum
corporate income tax [MCIT] and gross
income tax [GIT]), but is not subject to the
improperly accumulated earnings tax [IAET].
The partnership must file quarterly and
year-end income tax returns.
(2) The taxable income of the partnership, less
the normal corporate income tax (30%)
thereon, is the distributable net income of
the partnership.

Covered Corporations
Only domestic corporations classified as closelyheld corporations are liable for IAET.

The share of a partner in the partnerships


distributable net income of a year shall be
deemed to have been actually or constructively
received by the partners in the same taxable
year and shall be taxed to them in their
71

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TAXATION 1

individual
capacity,
whether
actually
distributed or not. [Sec. 73(D)] Such share will
be subjected to a final tax of 10% to be
withheld by the partnership. [Sec. 24(B)(2)]

TAXATION LAW

the joint venture partners will be taxed on their


respective shares in the income of the joint
ventures.
Two elements necessary to exempt a joint
venture or consortium from tax
(a) The
joint
venture
must
be
an
unincorporated entity formed by two or
more persons
(b) The joint venture was formed for the
purpose of undertaking a construction
project, or engaging in the petroleum and
other energy operations with operating
contract with the government.

Co-ownership
When Co-ownership is not subject to tax
When the co-ownerships activities are limited
merely to the preservation of the co-owned
property and to the collection of the income
from the property. The income derived by a coowner from the property shall be reported in
his individual tax return regardless of whether
such income is actually or constructively
received.
When Co-ownership is subject to tax
The following circumstances would render a
co-ownership subject to a corporate income
tax: (a) When a co-ownership is formed or
established voluntarily, or upon agreement of
the parties; (b) When the individual co-owner
reinvested his share, and (c) When the
inherited property remained undivided for
more than ten years, and no attempt was ever
made to divide to same among the co-heirs,
nor was the property under administration
proceedings nor held in trust, the property
should be considered as owned by an
unregistered partnership.
Joint Venture and Consortium
An unincorporated joint venture is taxed likes a
corporation. The share of the joint venture
partners will no longer be taxable to them
because they partake of dividends if paid to a
domestic or resident corporation.
However, an unincorporated joint venture
formed for the purpose of undertaking a
construction project or engaging in petroleum
operations pursuant to the consortium
agreement with the Philippine Government is
not subject to the corporate income tax. Only
72

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Taxation
of
Partnerships

TAXATION 1

General

Professional

TAXATION LAW

Withholding Tax
Withholding tax is a method of collecting
income tax in advance from the taxable income
of the recipient of income. It is a systematic
way of collecting taxes at source, an
indispensable method of collecting taxes to
ensure adequate revenue for the government.

Rules
(1) A GPP is a partnership formed by persons
for the purpose of exercising their common
profession, no part of the income of which is
derived from engaging in trade or business.
A GPP as such shall not be subject to the
income tax. It is not a taxable entity for
income tax purposes.
(2) The partners shall only be liable for income
tax only in their separate and individual
capacities.
(3) For purposes of computing the distributive
share of the partners, the net income of the
GPP shall be computed in the same manner
as a corporation.
(4) Each partner shall report as gross income
his
distributive
share,
actually
or
constructively received, in the net income of
the partnership.
(5) The distributive share of a partner (actual or
constructive) shall be subject to a creditable
withholding income tax of 10% if the amount
share is not more than P720,000 and 15% if
the amount of the share is more than
P720,000. (RR 2- 1998)
(6) If the partnership sustains a net operating
loss, the partners shall be entitled to deduct
their respective shares in the net operating
loss from their individual gross income.

In the operation of the withholding tax system,


the payee is the taxpayer, the person on whom
the tax is imposed, while the payor, a separate
entity, acts no more than an agent of the
government for the collection of the tax in
order to ensure its payment.
The amount thereby used to settle the tax
liability is deemed sourced from the proceeds
constitutive of the tax base. In an ad valorem
tax, the tax paid or withheld is not deducted
from the tax base, except when the law clearly
spells out in defining the tax base.
The duty to withhold is different from the duty
to pay income tax. The revenue officers
generally disallow the expenses claimed as
deduction from gross income, if no withholding
of tax as required by law or the regulations was
withheld and remitted to the BIR within the
prescribed dates.
Withholding Agent
Any person or entity who is required to deduct
and remit the taxes withheld to the
government.
Duties
Agent
(a)
(b)
(c)
(d)
(e)

Kinds
73

and Obligations of the Withholding


To Register
To Deduct and Withhold
To Remit the Tax Withheld
To File Annual Return
To Issue Withholding Tax Certificates

UP LAW BOC

TAXATION 1

Withholding of final tax of certain incomes


Subject to rules and regulations the Secretary
of Finance may promulgate, upon the
recommendation of the Commissioner,
requiring the filing of income tax return by
certain income payees, the tax imposed or
prescribed by specific section of the NIRC on
specified items of income shall be withheld by
payor-corporation and/or person and paid in
the same manner and subject to the same
conditions as provided in Section 58 of the
NIRC.

TAXATION LAW

corporation, where the principal office is


located; or
(4) As Commissioner otherwise permits.
Period for filing and payment:
(a) The return shall be filed and the payment
made within twenty-five (25) days from the
close of each calendar quarter.
(b) The Commissioner may, with the approval
of the Secretary of Finance, require the
employers to pay or deposit the taxes
deducted and withheld at more frequent
intervals, in cases where such requirement is
deemed necessary to protect the interest of
the Government.

Withholding of creditable tax at source


The Secretary of Finance may, upon the
recommendation of the Commissioner, require
the withholding of a tax on the items of income
payable to natural or juridical persons, residing
in
the
Philippines,
by
payorcorporation/persons as provided for by law, at
the rate of not less than one percent (1%) but
not more than thirty-two percent(32%), which
shall be credited against the income tax
liability of the taxpayer for the taxable year.

final withholding tax at source


Under the final withholding tax system, the
amount of income tax withheld by the
withholding agent is constituted as a full and
final payment of the income tax due from
payee on the said income (e.g., interest on
deposits, royalties, etc.). The liability for
payment of the tax rests primarily on the payor
as a withholding agent. Thus, in case of the
withholding agents failure to withhold the tax
or in case of under-withholding, the deficiency
tax shall be collected from him. The payee is
not required to file an income tax return for the
particular income, nor is he liable for the
payment of the tax. (Sec. 2.57, RR No. 2-98)

withholding of vat
(1) On gross payments for the purchase of
goods
(2) On gross payments for the purchase of
services
(3) Payments made to government public
works contractors
(4) Payments for lease or use of property or
property rights to non-resident owners

The finality of the withholding tax is limited


only to the payees income tax liability on the
particular income. It does not extend to the
payees other tax liability on said income, such
as when the said income is further subject to a
percentage tax, such as gross receipts tax in
the case of a bank.

filing of return and payment of taxes


withheld
Where to file and pay:
(1) Authorized agent bank;
(2) Collection Agent;
(3) the duly authorized Treasurer of the city or
municipality where the employer has his
legal residence or principal place of
business, or in case the employer is a

Income payments subject to Final Withholding


Tax:
(1) Income Payments to a Citizen or to a
Resident Alien Individual
(a) Interest on any peso bank deposit
74

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TAXATION 1

(b) Royalties
(c) Prizes (except prizes amounting to
P10,000 or less which is subject to tax
under Sec. 25(A)(1) of the Tax Code
(d) Winnings (except from Philippine
Charity Sweepstake Office and Lotto)
(e) Interest income on foreign currency
deposit
(f) Interest income from long term deposit
(g) Cash and/or property dividends
(h) Capital Gains presumed to have been
realized from the sale, exchange or
other disposition of real property
(2) Income Payments to a Non-Resident Alien
Engaged in Trade or Business in the
Philippines
(a) On Certain Passive Income
(1) cash and/or property dividend
(2) Share in the distributable net
income of a partnership
(3) Interest on any bank deposits
(4) Royalties
(5) Prizes (except prizes amounting to
P10,000 or less which is subject to
tax under Sec. 25(A)(1) of the Tax
Code.
(6) Winnings (except from Philippine
Charity Sweepstake Office and
Lotto)
(b) Interest on Long Term Deposits
(c) Capital Gains presumed to have been
realized from the sale, exchange or
other disposition of real property
(3) Income Derived from All Sources Within
the Philippines by a Non-Resident Alien
Individual Not Engaged in Trade or
Business
(a) On gross amount of income derived
from all sources within the Philippines
(b) On Capital Gains presumed to have
been realized from the sale, exchange
or disposition of real property located
in the Philippines
(4) Income Derived by Alien Individual
Employed by a Regional or Area

(5)
(6)

(7)

(8)

75

TAXATION LAW
Headquarters and Regional Operating
Headquarters of Multinational Companies
Income Derived by Alien Individual
Employed by Offshore Banking Unit
Income of Aliens Employed by Foreign
Petroleum Service Contractors and
Subcontractors
Income Payment to a Domestic
Corporation
(a) Interest from any currency bank
deposits and yield or any other
monetary benefit from deposit
substitutes and from trust fund and
similar arrangements derived from
sources within the Philippines
(b) Royalties derived from sources within
the Philippines
(c) Interest income derived from a
depository bank under the Expanded
Foreign Currency Deposit (FCDU)
System
(d) Income derived by a depository bank
under the FCDU from foreign
transactions with local commercial
banks
(e) On capital gains presumed to have
been realized from the sale, exchange
or other disposition of real property
located in the Philippines classified as
capital assets, including pacto de retro
sales and other forms of conditional
sales based on the gross selling price
or fair market value as determined in
accordance with Sec. 6(E) of the NIRC,
whichever is higher
Income Payments to a Resident Foreign
Corporation
(a) Offshore Banking Units
(b) Tax on branch Profit Remittances
(c) Interest on any currency bank deposits
and yield or any other monetary benefit
from deposit substitute and from trust
funds and similar arrangements and
royalties derived from sources within
the Philippines

UP LAW BOC

TAXATION 1

(d) Interest income on FCDU


(e) Income derived by a depository bank
under the expanded foreign currency
deposits system from foreign currency
transactions with local commercial
banks
(9) Income Derived from all Sources Within
the Philippines by a Non-Resident Foreign
Corporation
(a) Gross income from all sources within
the Philippines such as interest,
dividends, rents, royalties, salaries,
premiums
(except
re-insurance
premiums), annuities, emoluments or
other fixed determinable annual,
periodic or casual gains, profits and
income or capital gains
(b) Gross income from all sources within
the Philippines derived by a nonresident cinematographic film owner,
lessor and distributor
(c) On the gross rentals, lease and charter
fees derived by a non-resident owner or
lessor of vessels from leases or
charters to Filipino citizens or
corporations as approved by the
Maritime Industry Authority
(d) On the gross rentals, charter and other
fees derived by a non-resident lessor of
aircraft, machineries and other
equipment
(e) Interest on foreign loans contracted on
or after August 1, 1986

TAXATION LAW
(d) Expenses for foreign travel
(e) Holiday and vacation expenses
(f) Educational assistance to employees
or his dependents
(g) Membership fees, dues and other
expense in social and athletic clubs or
other
similar
organizations
- Health insurance
(h) Informers Reward

creditable withholding tax


Taxes withheld on certain income payments
are intended to equal or at least approximate
the tax due of the payee on the income. The
income recipient is still required to file his
income tax return as prescribed in Section 51 of
the NIRC, wither to report the income and/or
pay the difference between the tax withheld
and the tax due on the income.
Expanded Withholding Tax
(a) a kind of withholding tax which is
prescribed on certain income payments and
is creditable against the income tax due of
the payee for the taxable quarter/year in
which the particular income was earned.
(b) An income payment is subject to the
expanded withholding tax if the following
conditions concur:
(1) An expense is paid or payable by the
taxpayer, which is income to the recipient
thereof subject to income tax;
(2) The income is fixed or determinable at the
time of payment;
(3) The income is one of the income payments
listed in the regulations that is subject to
withholding tax;
(4) The income recipient is a resident of the
Philippines liable to income tax; and
(5) The payor-withholding agent is also a
resident of the Philippines.

(10) Fringe Benefits Granted to the Employee


(except Rank and File)
Goods, services or other benefits furnished
or granted in cash or in kind by an
employer to an individual employee
(except rank and file) such as but not
limited to the following:
(a) Housing
(b) Vehicle of any kind
(c) Interest on loans

Income payments
Withholding Tax:

76

subject

to

Expanded

UP LAW BOC

TAXATION 1

(1) Professional fees / talent fees for services


rendered by the following individuals:
(a) Those individually engaged in the
practice of profession or callings
(b) Professional entertainers such as but
not limited to actors and actresses,
singers and emcees
(c) Professional
athletes
including
basketball players, pelotaris and
jockeys
(d) Directors involved in movies, stage,
radio, television and musical directors
(e) Insurance agents and insurance
adjusters
(f) Management
and
technical
consultants
(g) Bookkeeping agents and agencies
(h) Other recipient of talent fees
(i) Fees of directors who are not
employees of the company paying such
fees whose duties are confined to
attendance art and participation in the
meetings of the Board of Directors
(2) Professional fees, talent fees, etc for
services of taxable juridical persons
(3) Rental of real property used in business
(4) Rental of personal properties in excess of P
10,000 annually
(5) Rental of poles, satellites and transmission
facilities
(6) Rental of billboards
(7) Cinematographic film rentals and other
payments
(8) Income payments to certain contractors
(a) General engineering contractors
(b) General building contractors
(c) Specialty contractors
(d) Other contractors like:
(1) Transportation contractors which
include common carriers for the
carriage of goods and merchandise
of whatever kind by land, air or
water, where the gross payments
by the payor to the same payee
amounts to at least two thousand

TAXATION LAW
pesos (P2,000) per month,
regardless of the number of
shipments during the month
(2) Filling, demolition and salvage
work contractors and operators of
mine drilling apparatus
(3) Operators of dockyards
(4) Persons engaged in the installation
of water system, and gas or electric
light, hear or power
(5) Operators
of
stevedoring,
warehousing
or
forwarding
establishments
(6) Printers,
bookbinders,
lithographers and publishers,
except those principally engaged in
the publication or printing of any
newspaper, magazine, review or
bulletin which appears at regular
intervals, with fixed prices for
subscription and sale
(7) Advertising agencies, exclusive of
payments to media
(8) Independent
producers
of
television, radio and stage
performances or shows
(9) Independent producers of "jingles"
(10) Labor recruiting agencies
(11) Persons engaged in the installation
of
elevators,
central
air
conditioning
units,
computer
machines and other equipment
and
machineries
and
the
maintenance services thereon
(12) Messengerial, janitorial, security,
private detective and other
business agencies
(13) Persons engaged in landscaping
services
(14) Persons engaged in the collection
and disposal of garbage
(15) TV and radio station operators on
sale of TV and radio airtime, and
(16) TV and radio blocktimers on sale of
TV and radio commercial spots

77

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TAXATION 1

(17) Persons engaged in the sale of


computer
services,
computer
programmers,
software
developer/designer, etc.
(9) Income distribution to the beneficiaries of
estates and trusts
(10) Gross commission or service fees of
customs, insurance, stock, real estate,
immigration and commercial brokers and
fees of agents of professional entertainers
(11) Commission, rebates, discounts and other
similar considerations paid/granted to
independent and exclusive distributors,
medical/technical
and
sales
representatives and marketing agents and
sub-agents of multi level marketing
companies
(12) Income payments to partners of general
professional partnerships
(13) Payments made to medical practitioners
through a duly registered professional
partnership
(14) Payments for medical/dental/veterinary
services
thru
hospitals/clinics/health
maintenance organizations, including
direct payments to service providers
(15) Gross selling price or total amount of
consideration or its equivalent paid to the
seller/owner for the sale, exchange or
transfer of real property
(16) Additional
income
payments
to
government personnel from importers,
shipping and airline companies or their
agents
(17) Certain income payments made by credit
card companies
(18) Income payments made by the top 10,000
private corporations to their purchase of
goods
and
services
from
their
local/resident suppliers other than those
covered by other rates of withholding
(19) Income payments by government offices
on their purchase of goods and services,
from local/resident suppliers
(20)
Tolling fees paid to refineries

TAXATION LAW

(21) Payments made by pre-need companies to


funeral parlors
(22)
Payments made to embalmers by
funeral parlors
(23)Income payments made to suppliers of
agricultural products
(24)
Income payments on purchases of
mineral, mineral products and quarry
resources

Withholding tax on compensation


The tax withheld from income payments to
individuals arising from an employeremployee relationship.
Compensation is any remuneration received for
services performed by an employee from his
employer under an employee-employer
relationship.
The different kinds of compensation are:
(1) Regular compensation - includes basic
salary, fixed allowances for representation,
transportation and others paid to an
employee
(2) Supplemental compensation - includes
payments to an employee in addition to
the regular compensation such as but not
limited to the following:
(a) Overtime Pay
(b) Fees, including director's fees
(c) Commission
(d) Profit Sharing
(e) Monetized Vacation and Sick Leave
(f) Fringe benefits received by rank & file
employees
(g) Hazard Pay
(h) Taxable 13th month pay and other
benefits
(i) Other remunerations received from an
employee-employer relationship

78

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TAXATION 1

Exemptions from Withholding tax on


compensation:
Remuneration as an incident of employment
(a) Retirement benefits received under RA
7641 (Retirement Pay Law) and those
received by officials and employees of
private firms, under a reasonable private
benefit plan.
(b) Any amount received by an official or
employee or by his heirs from the employer
due to death, sickness or other physical
disability or for any cause beyond the
control of the said official or employee
such as retrenchment, redundancy or
cessation of business
(c) Social security benefits, retirement
gratuities, pensions and other similar
benefits
(d) Payment of benefits due or to become due
to any person residing in the Philippines
under the law of the US administered US
Veterans Administration
(e) Payment of benefits made under the SSS
Act of 1954, as amended
(f) Benefits received from the GSIS Act of 1937,
as amended, and the retirement gratuity
received by the government employee
(g) Remuneration paid for agricultural labor
(h) Remuneration for domestic services
(i) Remuneration for casual labor not in the
course of an employer's trade or business
(j) Compensation for services by a citizen or
resident of the Philippines for a foreign
government
or
an
international
organization
(k) Payment for damages actual, moral,
exemplary damages received by an
employee or his heirs pursuant to a final
judgment or compromise agreement
arising out of or related to an employeremployee relationship.
(l) Proceeds of Life Insurance the proceeds
of life insurance policies paid to the heirs or
beneficiaries upon the death of the insured,
whether in a single sum or otherwise;

TAXATION LAW

provided however, that interest payments


agreed under the policy for the amounts
which are held by the insured under such
an agreement shall be INCLUDED in the
gross income.
(m) Amount received by the insured as a return
of premium
(n) Compensation for injuries or sickness
amounts received through accident or
health insurance or under Workmens
Compensation Acts, as compensation for
personal injuries or sickness, plus the
amount of any damages received whether
by suit or agreement on account of such
injuries or sickness.
(o) Income exempt under Treaty
(p) Thirteenth (13th) month pay and other
benefits (not to exceed P 30,000)
(1) Mandatory 1 month basic salary
received after the twelfth *12th) month
pay
(2) Other benefits such as Christmas
bonus, productivity incentives, loyalty
award, gift in cash or in kind and other
benefits of similar nature actually
received by officials and employees of
both government and private offices
including the Additional Compensation
Allowance (ACA) granted and paid to
all officials and employees of the
Nations Government (NGAs) including
State Universities and Colleges (SUCs),
Government-Owned-or-Controlled
Corporations (GOCCs), Government
Financial Institutions (GFIs) and Local
Government Units (LGUs)
(a) De minimis benefits, given in
excess of the ceilings prescribed in
regulations, shall be taxable to the
recipient employee only if such
excess is beyond the P30,000
threshold.
(q) GSIS,
SSS,
Medicare
and
other
contributions GSIS, SSS, Medicare and

79

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TAXATION 1

Pag-Ibig contributions, and union dues of


individual employees
(r) Compensation income of MWEs who work
in the private sector and being paid the
statutory minimum wage (SMW), as fixed
by Regional Tripartitie Wage and
Productivity Board (RTWPB)/National
Wages and Productivity Commission
(NWPC), applicable to the place where
he/she is assigned
(s) Compensation income of employees in the
public sector with compensation income of
not more than the SMW in the nonagricultural
sector,
as
fixed
by
RTWPB/NWPC, applicable to the place
where he/she is assigned.

timing of withholding
The obligation of the payor to deduct and
withhold the tax arises at the time an income
payment is paid or payable, or the income
payment is accrued or recorded as an expense
or asset, whichever is applicable, in the payors
books, whichever comes first.
The term
payable refers to the date the obligation
becomes due, demandable or legally
enforceable.
Where income is not yet paid or payable but
the same has been recorded as an expense or
asset, whichever is applicable, in the payors
books, the obligation to withhold shall arise in
the last month of the return period in which the
same is claimed as an expense or amortized
for
tax
purposes.
(Mamalateo)

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I. ESTATE TAX

will, ad nutum; but document.


revocability may be
provided for indirectly
by means of a reserved
power in the donor to
dispose
of
the
properties conveyed;
(iii) That the transfer
should be void if the
transferor
should
survive the transferee.
Subject to ESTATE TAX Subject to DONORS
TAX
Exceptions: (subject to
estate tax) when inter
vivos is treated by law
as substitutes for
testamentary
dispositions
(i.e.,
transfers which are
inter vivos in form but
mortis
causa
in
substance)i.e.
transfers
in
contemplation
of
death [Sec. 85(B),
NIRC]
Transfer with retention
or
reservation
of
certain rights [Sec.
85(B), NIRC]
Revocable
transfers
[Sec. 85(C), NIRC]
Transfers of property
arising under general
power of appointment
[Sec. 85(D), NIRC]
Transfers
for
insufficient
consideration
[Sec.
85(G), NIRC]

BASIC PRINCIPL ES
Time of death governs:
(1) The determination of the extent of the
decedents interest for computing his gross
estate.
(2) The statute that governs estate taxation.
(3) The accrual of the estate tax.

DEFINITION
ESTATE TAX is tax on the (i) right to transmit
property at death and on certain transfers by the
decedent during his lifetime OR (ii) those which
are made by the law equivalent of testamentary
dispositions.

TAXABLE TRANSFERS
Taxable transfers are complete when the
transferor divested himself of all economic
beneficial interest in himself or his estate.
Transfers Mortis Causa
A
donation
which
purports to be one inter
vivos but
withholds
from the donee the
right to dispose of the
donated
property
during the donor's
lifetime is in truth
one mortis causa.
Characteristics:
(i) It conveys no title or
ownership
to
the
transferee before the
death of the transferor;
or what amounts to the
same thing, that the
transferor should retain
the ownership (full or
naked) and control of
the property while
alive;
(ii) That before his
death, the transfer
should be revocable by
the
transferor
at

TAXATION LAW

Transfers Inter Vivos


Gratuitous
transfers
that take effect after
death, either testate or
intestate

Donative intent of the


donor1
Capacity of the donor
Delivery
of
the
donated property
Acceptance of the
donee
Donation must be in
the proper form
Movable: orally or in
writing if value is equal
to or less than P5,000.
Otherwise, it shall be
in writing.
Immovable: must be
made in a public

CLASSIFICATION OF DECEDENT
Estate Tax applies only to individuals. The
decedent may be classified into:
(a) Citizen (RC/NRC)
(b) Resident alien (RA); or
(c) Non-resident alien (NRA).

CONCEPT OF RESIDENCE
Residence
and
domicile
are
interchangeably without distinction.

Note: The transfers which may be constituted as donation


is exempt from the donative intent requirement.
1

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SITUS
OF
PROPERTIES

TAXATION 2

INTANGIBLE

TAXATION LAW
If there is reciprocity, the intangible personal
property of an NRA shall not be included in
his gross estate. If there is no reciprocity,
such intangible personal property will be
included.

PERSONAL

General Rule: Mobilia Sequuntur Personam


Principle: Taxation of intangible personal
properties (such as credits, bills, bank deposits
promissory notes, and corporate stocks) follows
the residence/domicile of owner thereof. Situs is
the domicile or residence of the owner. (Collector
v Fisher)
Exceptions:
(1) When it is inconsistent with express
provisions of law
(2) When justice does not demand that it should
be, as where the property in fact has a situs
elsewhere

GROSS ESTATE VIS--VIS NET ESTATE

Intangible Properties which are considered


situated in the Philippines (Sec 104)
(a) Franchise which must be exercised in the
Philippines
(b) Shares, obligations or bonds issued by any
corporation or sociedad anonima organized
or constituted in the Philippines in
accordance with its laws
(c) Shares, obligations or bonds issued by any
foreign corporation 85% of the business of
which is located in the Philippines
(d) Shares, obligations or bonds issued by any
foreign corporation if such shares,
obligations or bonds have acquired a
business situs in the Philippines
(e) Shares or rights in any partnership, business
or industry established in the Philippines

Gross Estate

Net Estate

Value at the time of


death of all
the
decedents
property
wherever situated
HOWEVER, in the case
of a NRA at the time of
his death, only that part
of the entire gross
estate which is situated
in the Philippines shall
be included in his
taxable estate. [Sec 85,
NIRC]

Value of the estate after


all deductions have
been made against the
gross estate; subject to
the graduated tax rates.
[Sec. 6, RR 2-2003]
This is the TAX BASE.

FORMULA FOR ESTATE TAX


Gross Estate (Sec. 85)
Less: Deductions (Sec. 86)
------------------------------------------------------Net estate before share of surviving spouse (if
married)
Less: Net share of the surviving spouse in the
conjugal property (Sec. 86(C))
------------------------------------------------------= Net taxable estate
Multiply by: Tax rate (Sec. 84)
------------------------------------------------------= Estate Tax Due
Less: Tax Credit, if any (Sec. 86(E), or 110 (B))
------------------------------------------------------= Estate Tax Due, if any

RULE OF RECIPROCITY
There is reciprocity if the foreign country of which
the decedent was a citizen and resident at the
time of his death:
(a) 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
(b) Allowed a similar exemption from transfer
tax in respect of intangible personal property
owned by citizens of the Philippines not
residing in that country
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DETERMINATION OF GROSS ESTATE AND


NET ESTATE (AND COMPOSITION)
NOTE: Memorize Sections 85 and 86.

SUMMARY OF THE COMPOSITION OF THE GROSS ESTATE AND EXCLUSIONS, DEDUCTIONS


THEREFROM
RC/NRC/RA

NRA

Composition and Determination of GROSS Estate


The value at the time of his death of all the
deceaseds:
a. Real property wherever situated
b. Tangible personal property wherever situated,
and
c. Intangible personal property wherever situated

The value at the time of his death of all the


deceaseds:
a. Real property located in the Phil.
b. Tangible personal property located in the Phil.,
and
c. Intangible personal property with a situs in the
Phil. (subject to the rule of reciprocity)
Note: If there is reciprocity, intangible assets are
excluded from gross estate

Exclusions from GROSS Estate(Sec 85H and Sec 87)


GSIS proceeds/ benefits
Accruals from SSS
Proceeds of life insurance where the beneficiary is irrevocably appointed
Proceeds of life insurance under a group insurance taken by employer
War damage payments and Benefits received from US Veterans Administration
Transfer by way of bona fide sales
Transfer of property to the National Government or to any of its political subdivisions
Separate property of the surviving spouse
Merger of usufruct in the owner of the naked title
Properties held in trust by the decedent. Transmission of inheritance or legacy by fiduciary heir or legatee
to the fideicommissay
Transmission from the first heir, legatee, or done in favour of another beneficiary, in accordance with the
desire of their predecessor
Acquisition and/or transfer expressly declared as not taxable
Bequests, devises, legacies or transfers to social welfare, cultural and charitable institutions
Deductions from GROSS estate to arrive at the NET estate

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RC/NRC/RA
Ordinary deductions
(1) Expenses, losses, indebtedness, taxes. (ELIT)
Funeral expenses
Judicial expenses
Claims against the estate
Claims against insolvent persons
Unpaid mortgage and debt
Taxes
Losses
(2) Vanishing deductions
(3) Transfers for public use
(4) Amounts received under R.A. 4917
Special deductions
(a) Family home
(b) Standard deduction
(c) Medical expenses
Share in conjugal property

NRA
Ordinary deductions2
(1) Proportionate deductions for expenses, losses,
indebtedness, taxes. (ELIT)3
Funeral expenses
Judicial expenses
Claims against the estate
Claims against insolvent persons
Unpaid mortgage and debt
Taxes
Losses
(2) Vanishing deductions
(3) Transfers for public use
No Amounts received under R.A. 4917

No special deductions

Share in conjugal property

No deduction shall be allowed for NRA, if the executor, administrator, or anyone of the heirs, DID NOT include in the return
required to be filed under Section 90 of the Code the value at the time of the decedents death of that part of his gross estate NOT
situated in the Philippines. [Sec. 86 (D), NIRC; Sec 7, RR 2-2003]
2

Formula for Proportionate Deductions of NRA: Allowable Deduction =

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VALUATION OF GROSS ESTATE (SEC 88)

TAXATION LAW

(1) Property owned by the decedent actually and


physically present in his estate at the time of
his death;
(2) Decedents interest;
(3) Properties not physically in the estate, such
as:
(4) Transfers in contemplation of death [Sec.
85(B), NIRC];
(5) Transfers with retention or reservation of
certain rights [Sec. 85(B), NIRC];
(6) Revocable transfers [Sec. 85(C), NIRC];
(7) Property passing under general power of
appointment [Sec. 85(D), NIRC];
(8) Transfers for insufficient consideration [Sec.
85(G), NIRC];
(9) Proceeds of life insurance [Sec. 85(E), NIRC];
(10) Claims against insolvent persons; and
(11) Capital of the surviving spouse [Sec. 85(H),
NIRC].

General Rule: Gross Estate = FMV at the time of


the decedents death
Real Property
Appraised value, whichever is higher between:
(a) FMV,
as
determined
by
the
Commissioner (zonal value) or
(b) FMV, as shown in the schedule of values
fixed by the Provincial or City Assessor.
If there is no zonal value, the taxable base is the
FMV that appears in the latest tax declaration.
If there is an improvement, the value of
improvement is the construction cost per
building permit or the fair market value per latest
tax declaration.
Personal Property
FMV at the time of death. If none, acquisition cost
for recently acquired properties or the current
market price for the previously acquired
properties. (Sec 40(B)
Stocks, bonds, and other securities.
If listed and traded stocks = value is the mean
between the highest and lowest quoted selling
prices at the date of death; if none, nearest the
date of death (Sec 5 RR02-2003)
If unlisted stocks = (ordinary common shares)
book value at time of death or (preferred shares)
par value

DEDUCTIONS FROM ESTATE


ORDINARY DEDUCTIONS
(1) Expenses, Losses, Indebtedness and Taxes,
Etc. (ELIT)
(2) Funeral Expenses (Sec. 86 (A)(1)(a))
Actual funeral expenses shall mean (i) those
which are actually incurred (ii) in connection
with, and before the interment or burial of
the deceased and (iii) must be paid out of the
estate and not by another person or out of
contributions from friends and relatives.
These must be (iv) duly supported by receipts
or invoices or other evidence to show that
they were actually incurred.

NB: Bonds, mortgages, and Certificates of Stocks


are taxable at the place where they are physically
located.
Proceeds of Life Insurance with Revocable
Beneficiary: face value of policy (not cash
surrender value)

Limitation: Allowable deduction is not to exceed


P200,000 and whichever is lower of:
(a) The actual funeral expenses (whether or not
paid) up to the time of interment, or
(b) An amount equal to 5% of the gross estate.
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.
(Sec. 6(A)(1), RR 02-2003)

Right to Usufruct use or habitation, and annuity


Probable life of the beneficiary in accordance
with the latest basic standard mortality table
shall be taken into account.

ITEMS TO BE INCLUDED IN GROSS ESTATE


[SEC. 85, NIRC]

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Not included are:


(1) Expenses incurred after the interment, such
as for prayers, masses, entertainment, or the
like are not deductible.
(2) (ii) Any portion of the funeral and burial
expenses borne or defrayed by relatives and
friends of the deceased are not deductible.
(3) (iii) Medical expenses as of the last illness
will not form part of funeral expenses but
should be claimed as medical expenses. (Sec.
6, RR 2-2003)

TAXATION LAW

(a) Compensation paid to a trustee of the


decedents estate for his services rendered
for the purpose of managing the decedents
real estate for the benefit of the testamentary
heirs (Lorenzo v. Posadas)
(b) Expenses incurred by the presumptive heir
and that of her witnesses for appearance at
the trial to oppose the probate of a will.
(c) Attorneys fees incident to litigation incurred
by the heirs in asserting their respective
rights, or claims as to who are entitled to the
estate left by the deceased.
(d) Premiums paid by the administrator on his
bond, being exclusively used for his account,
since the giving of the bond is in the nature of
a qualification for the office and not
necessary in the settlement of his estate.

JUDICIAL EXPENSES OF TESTAMENTARY


AND INTESTATE PROCEEDINGS (SEC. 86
(A)(1)(B))
Expenses allowed as deduction under this
category are (i) those incurred in the inventorytaking of 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. In short, these deductible items
are expenses (ii) 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. (Sec. 86 (A)(2),
RR 2-2003). These expenses must be (iii) for the
benefit of the estate, and (iv) substantiated by
recipts OR if unpaid, should be supported by a
sworn statement of account issued and signed by
the creditor.

CLAIMS AGAINST THE ESTATE (SEC. 86


(A)(1)(C))
The word claims is generally construed to
mean (i) debts or demands of a pecuniary nature
(ii) which could have been enforced against the
deceased in his lifetime and could have been
reduced to simple money judgements. These are
liabilities of the estate or indebtedness of such
(iii) arising out of: contract, tort, or operation of
law. (Dizon v CTA, 2008)
Requisites for Deductibility of Claims Against the
Estate:
(a) The liability represents a personal obligation
of the deceased existing at the time of his
death except unpaid obligations incurred
incident to his death such as unpaid funeral
expenses (i.e., expenses incurred up to the
time of internment) and unpaid medical
expenses which are classified under a
different category of deductions.
(b) The liability was contracted in good faith and
for adequate and full consideration in money
or moneys worth
(c) The claim must be a debt or claim which is
valid in law and enforceable in court;
(d) The indebtedness must not have been
condoned by the creditor or the action to

Judicial expenses may include:


(a) Fees of executor or administrator
(b) Attorneys fees (Commissioner v CA (2000)
(c) Court fees
(d) Accountants fees
(e) Appraisers fees
(f) Clerk hire
(g) Costs of preserving and distributing the
estate
(h) Costs of storing or maintaining property of
the estate
(i) Brokerage fees for selling property of the
estate
Not deductible

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collect from the decedent must not have


prescribed.
(e) They must be reasonably certain in amount,
and substantiated.

therein, should always form part of the taxable


gross estate. (RR 2-2003)
UNPAID TAXES
Requisites for Deductibility
(a) Taxes which have accrued as of or before the
death of the decedent (if it was incurred after,
it is chargeable to the income of the estate),
and
(b) Unpaid as of the time of his death, regardless
of whether or not it was incurred in
connection with trade or business

CLAIMS AGAINST INSOLVENT PERSONS


(SEC. 86 (A)(1)(D))
These are claims of the estate (i) against
insolvent persons (ii) which are not collectible. To
be deductible from the gross estate:
Additional Requirements:
(a) The incapacity of the debtor to pay his
obligation should be proven, although a
judicial declaration of insolvency is not
required;
(b) The full amount owed by the insolvent must
first be included in the decedents gross
estate; and
(c) If the insolvent could only pay a partial
amount, the full amount owed shall be
included in the gross estate, and the amount
uncollectible shall be allowed as a deduction.

UNPAID MORTGAGES,
TAXES (SEC. 86(A)(1)(E))

LOSSES

TAXATION LAW

Not included:
(a) Income tax upon income received after death,
or
(b) Property taxes not accrued before his death,
or
(c) The estate tax due from the transmission of
his estate
CASUALTY LOSSES
Requisites for Deductibility
(a) Incurred during the settlement of the estate
(b) Arising from fires, storms, shipwreck, or other
casualties
from
robbery,
theft,
or
embezzlement
(c) Not compensated by insurance or otherwise
(d) At the filing of the estate tax return, such
losses have not been claimed as a deduction
for income tax purposes in an income tax
return
(e) Incurred not later than the last day for the
payment of the estate tax as prescribed by
law.

AND

UNPAID MORTGAGES
Requisites for Deductibility [Sec. 6-A5(a), RR 22003]
(a) The value of the decedents interest therein,
undiminished by such mortgage or
indebtedness, is included in the value of the
gross estates.
(b) The mortgages were contracted bona fide
and for an adequate and full consideration in
money or moneys worth.

Casualty loss can be allowed as deduction in one


instance only, either for income tax purposes or
estate tax purposes. (Sec. 6(A)(5)), Rev. Reg 22003)

In case the loan of the decedent is only an


accommodation loan where the loan proceeds
went to another person, the value of the unpaid
loan must be included as a receivable of the
estate. If there is a legal impediment to recognize
the same as a receivable of the estate, the said
unpaid obligation shall not be allowed as a
deduction. In all instances, the mortgaged
property, to the extent of the decedents interest

NOTE: See Formula for computing Ordinary


Deductions of NRA above.

B. PROPERTY PREVIOUSLY TAXED/PPT


(SEC. 86(A)(2)) ALSO CALLED AS
VANISHING DEDUCTIONS
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This is an amount allowed to reduce the taxable


estate of a decedent where property:
(1) Received by him from a prior decedent by gift,
bequest, device, or inheritance
(2) Transferred to him by gift, has been the
object of previous transfer transaction

(2)

Conditions
(1) There must be 2 deceased persons and the
first one is the donor
(2) The second decedent dies within 5 years after
the death of a prior decedent, or in case of
gift, the decedent-donee dies within the
same period after the date of the gift.
Requisites
(1) Death The present decedent died within 5
years from the date of the prior decedent OR
date of gift.
(2) Identity of the property The property with
respect to which deduction is sought can be
identified as the one who received from prior
decedent, or from the donor, or as the
property acquired in exchange for the
original property so received.
(3) Inclusion of the property The property must
have formed part of the gross estate situated
in the Philippines of the prior decedent, or
have been included in the total amount of
the gifts of the donor made within 5 years
prior to the present decedents death.
(4) Previous taxation of property The estate tax
on the prior succession, or the donors tax on
the gift must have been finally determined
and paid by the prior decedent or by the
donor, as the case may be.
(5) No previous vanishing deduction on the
property No such deduction on the property,
or the property given in exchange therefor,
was allowed in determining the value of the
net estate of the prior decedent. This is
intended to preclude the application of the
vanishing deduction on the same property
more than once.

(3)

(a)
(b)

(4)

TAXATION LAW
the aggregate value of such property if more
than one item, as finally determined for the
purpose of the prior estate tax (or gift tax) or
the value of such property in present
decedents gross estate, whichever is lower.
Deduction for mortgage or lien The initial
value (in number 1 above) shall be reduced by
the total amount paid, if any, by the present
decedent on any mortgage or other lien on
the property where a deduction was allowed,
by reason of the payment, of such mortgage
or other lien from the gross estate of the prior
decedent, or gift or donor, in determining the
estate tax of the prior decedent or the
donors tax.
Deductions for expenses, etc. The value as
reduced in #2 shall be further reduced by an
amount which bears the same ratio to the
amounts allowed as deductions for:
Expenses, losses, indebtedness, and taxes
(ordinary deductions), and
Transfers for public use as the amount
otherwise deductible for property previously
taxed bears to the value of the decedents
gross estate; and
Percentage of deductions The vanishing
deduction shall be the value (final basis) in
#3 multiplied by the ff. percentages:

VD
If received by inheritance or gift
Rate
100% Within one (1) year prior to the death of
the present decedent
80% More than one year but not more than
two years prior to the death of the
decedent
60% More than two years but not more than
three years
40%

20%

Limitations
(1) Value of property The deduction is limited
by the value of property previously taxed or
89

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

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TAXATION LAW
FORMULA FOR VANISHING DEDUCTIONS:
(please take note of the limitations above)
death of the decedent-employee in accordance
with RA 4917, provided that such amount is
Value Taken of Property
included in the gross estate of the decedent.
Less: Mortgage debt paid, if any
These include:
(1) Retirement benefits from private firms with
= Initial Basis
private benefit plan, if the retiring employee
Less: Proportionate Deduction**
is 50 years old or older. This can only be once
availed.
= Final Basis
(2) Benefits granted in case of separation
Multiplied by Deduction Rate
beyond the control of the employee.
VANISHING DEDUCTION

RA 4917 provides that retirement benefits of


private employees shall not be subject to
attachment, levy execution or any tax.

**Proportionate Deduction
=

( +

SPECIAL DEDUCTIONS

A. FAMILY HOME (SEC. 86(A)(4))

Note: Amount of Vanishing Deductions is NOT


subtracted from the value of the CPG to
determine the share of surviving spouse. It is
deducted from the exclusive property of the
decedent.

Requisites for Deductibility (Sec. 6(D)(b), RR 22003)


(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, or the extent of the decedents
interest (whether conjugal/community or
exclusive property), whichever is lower, but in
no case shall the deduction exceed
P1,000,000.
(4) The decedent was married or if single, was a
head of the family.
(5) Along with the decedent, any of the
beneficiaries must be dwelling in the family
home.
(6) The family home as well as the land on which
it stands must be owned by the decedent.
Therefore, the FMV of the family home
should have been included in the
computation of the decedents gross estate.

C. TRANSFERS FOR PUBLIC PURPOSE


(SEC. 86(A)(3))
These are (i) dispositions in a last will and
testament or transfers to take effect after death
(ii) in favor of the Government of the Republic of
the Philippines, or any political subdivision
thereof, for exclusively public purposes. The
whole amount of all the bequests, legacies,
devises, or transfers to or for the use of shall be
deductible from gross estate, (iii) provided such
amount or value had been included in the
computation of the gross estate. Thus, there is no
limitation for the amount to be deducted.

D. AMOUNTS RECEIVED BY HEIRS UNDER


RA 4917 (AN ACT PROVIDING THAT
RETIREMENT BENEFITS OF EMPLOYEES
OF PRIVATE FIRMS SHALL NOT BE
SUBJECT
TO
ATTACHMENT,
LEVY,
EXECUTION, OR ANY TAX WHATSOEVER.
(SEC. 86(A)(7))
Any amount received by the heirs from the
decedents employer as a consequence of the

Limitation: P 1,000,000.00
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TAXATION LAW

estate is taxed. Net share of the surviving spouse


is neither an ordinary nor a special deduction.

B. STANDARD DEDUCTION (SEC. 86(A)(5),


SEC. 6(E), RR 2-2003)
An amount equivalent to one million pesos
(P1,000,000) shall be deducted from the gross
estate without need of substantiation.

EXCLUSIONS FROM ESTATE


CAPITAL OF THE SURVIVING SPOUSE (SEC.
85(H))

C. MEDICAL EXPENSES (SEC. 86(A)(6),


NIRC; SEC. 6(F), RR 2-2003)

Capital: property of the spouses brought into


marriage. Strictly speaking, capital under the
Civil Law refers to the property brought by the
husband to the marriage while that brought into
the marriage by the wife known is as paraphernal
property. (Domondon)

All medical expenses (cost of medicine, hospital


bills, doctors fees, etc.) incurred (whether paid or
unpaid).
Requisites for Deductibility
(1) The expenses were incurred by the decedent
within 1 year prior to his death
(2) The expenses are duly substantiated with
receipts and other documents in support
thereof

EXCLUSIVE PROPERTY OF EACH SPOUSE


If ACP governs property If CPG governs property
relations
relations
The community of
property shall consist of
all the property owned
by the spouses at the
time of the celebration
of the marriage or
acquired
thereafter.
(Art. 91 Family Code)

Limitation Provided, that in no case shall the


deductible medical expenses exceed Five
Hundred Thousand Pesos (P500,000).
Not allowed as deduction: (i) Any amount of
medical expenses incurred within one year from
death in excess of P500,000 shall no longer be
allowed as a deduction under this subsection.
Neither can (ii) any unpaid amount thereof in
excess of the P500,000 threshold nor (iii) any
unpaid amount for medical expenses incurred
prior to the one-year period from date of death
be allowed to be deducted from the gross estate
under Claims against the estate. (RR 2-2003,
Sec. 6-F)

1. The following are


excluded from the
community property:
a. Property acquired by
gratuitous title by either
spouse, and the fruits
as well as the income
thereof, if any, unless it
is expressly provided by
the donor, testator, or
grantor that they shall
form part of the
community property.
b. Property for personal
and exclusive use of
either spouse; however,
jewelry shall form part
of
the
community
property.
c. Property acquired

NET SHARE OF THE SURVIVING spouse in the


conjugal partnership property (Sec. 86(C), NIRC;
Sec. 6(H), RR 2-2003)
The amount deductible is the net share of the
surviving spouse in the conjugal partnership
property. The net share is equivalent to of 50%
of the conjugal property after deducting the
obligations chargeable to such property. The
share of the surviving spouse must be removed to
ensure that only the decedents interest in the

91

The husband and wife


place in a common fund
the proceeds, products,
fruits, and income from
their
separate
properties and those
acquired by either or
both spouses through
their efforts or by
chance, and, upon
dissolution
of
the
marriage or of the
partnership, the net
gains
or
benefits
obtained by either or
both spouses shall be
divided
equally
between them, unless
otherwise agreed in
marriage settlements.
(Art. 106, Family Code)
1. The following are
exclusive property of
each spouse:
a. That which is
brought to the marriage
as his or her own
b. That which each

UP LAW BOC
before the marriage by
either spouse who has
legitimate descendants
from a former marriage,
and the fruits as well as
the income, if any, of
such property. (Art. 92
Family Code)
2. Property acquired
during the marriage is
presumed to belong to
the community, unless
it is proved that it is one
of
those
excluded
therefrom.

TAXATION 2
acquires DURING the
marriage by gratuitous
title
c. That which is
acquired by right of
redemption, by barter
or by exchange with
property belonging to
only one of the spouses
d. That which is
purchased
with
exclusive money of the
wife or the husband
(Art. 109, Family Code)
2. Property bought on
instalments paid partly
from exclusive funds of
either or both spouses
and
partly
from
conjugal funds belong
to the buyer or buyers if
full ownership was
vested BEFORE the
marriage subject to
reimbursement
advanced
by
the
conjugal partnership or
by either or both
spouses.
(Art.
118,
Family Code)
3. Whenever an amount
or credit payable within
a period of time
belongs to one of the
spouses, the sums
collated during the
marriage in partial
payments
or
by
instalments on the
principal are considered
the exclusive property
of the spouse. However,
interest falling due
during the marriage on
the principal belong to
the
conjugal
partnership.

TAXATION LAW
4. All property acquired
during the marriage
whether the acquisition
appears to have been
made, contracted or
registered in the name
of one or both spouses,,
is presumed to belong
to
the
conjugal
partnership, unless it is
proved that it pertains
exclusively
to
the
husband or to the wife.

If separation of property governs property


relations
Separation of property may refer to present or
future property or both. It may be total or partial.
In the latter case, the property not agreed upon
as separate shall pertain to the absolute
community. (Art. 144, Family Code)
To each spouse shall belong all earnings from
his or her profession, business or industry, and
all fruits, natural, industrial, or civil, due or
received during the marriage from his or her
separate property. (Art. 145, Family Code)
Exemptions:
1. Where net estate does not exceed P200,000.
(Sec. 84)
2. The following transmissions shall not be
taxed:
a. Merger of the usufruct in the owner of the
naked title
b. Transmission or delivery of the inheritance or
legacy by the fiduciary heir or legatee to the
fideicomissary
c. The transmission from the first heir, legatee, or
done in favor of another beneficiary in
accordance with the desire of the predecessor
d. All bequests, devises, legacies, or transfers to
social welfare, cultural and charitable
institutions, no part of the net income of which
inures to the benefit of any individual, and
provided that not more than 30% of the said
bequests, etc shall be used by such institution
for administration purposes.
Note: Effectivity of Family Code (Aug 3, 1988)
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TAXATION 2

TAXATION LAW

=
( )

Exemptions under special laws


(1) Benefits received by members from the GSIS
and the SSS by reason of death
(2) Amounts received from the Philippines and
US governments for damages suffered
during the last war.
(3) Benefits received by beneficiaries residing in
the Philippines under laws administered by
the US Veteran Administration
(4) Bequests, legacies, or donations mortis
causa to social welfare, cultural, or charitable
organizations. Bequests to be used actually,
directly and exclusively for educational
purposes are also exempt from tax.
(5) Grants and donations to the Intramuros
Administration

B. For estate taxes paid to 2 or more foreign


countries (Global Limitation)
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 tax code bears to his entire net estate.
=

( )

TAX CREDIT FOR ESTATE TAXES PAID IN


A FOREIGN COUNTRY

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.

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.
Who may claim: RC/NRC/RA. 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.

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.

General Rule
The estate tax imposed by the NIRC shall be
credited with the amounts of any estate tax
imposed by the authority of a foreign country.

EXEMPTION OF CERTAIN ACQUISITIONS


AND TRANSMISSIONS

Limitations on Credit
A. For Estate Taxes paid to one foreign country
(Specific Country Limitation)
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 tax code
bears to his entire net estate.

Merger of usufruct in the owner of the naked title


Transmission or delivery of the inheritance or
legacy by the fiduciary heir (1st heir) to the
fideicomissary (2ndheir). Pending transmission of
the property, the fiduciary is entitled to all the
rights of a usufructuary, although the
fideicomissary is entitled to all the rights of a
naked owner.
Transmission from the first heir, legatee or done
in favour of another beneficiary, in accordance
with the desire of the predecessor.
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TAXATION 2

All bequests, devises, legacies or transfers to


social welfare, cultural and charitable
institutions, no part of the net income of which
inures to the benefit of any individual; provided,
however, that not more than 30% of said bequest,
devises, legacies or transfers shall be used by
such institutions for administration purposes.

Tax Rates:
If the Net Estate is
Over

But not Over

The Tax Shall be

P 200,000.00

Exempt

P 200,000.00 500,000.00
500,000.00

2,000,000.00 P 15,000.00

2,000,000.00 5,000,000.00 135,000.00


5,000,000.00 10,000,000.00 465,000.00
10,000,000.00

1,215,000.00

TAXATION LAW

C. DONORS TAX
The donors tax is imposed on donations inter
vivos or those made between living persons to
take effect during the lifetime of the donor. It
shall not apply unless and until there is a
completed gift.
A donors tax is levied, assessed, collected and
paid upon the transfer by any person, resident or
nonresident, of the property by gift. (Sec. 98(A),
NIRC). It shall apply
the transfer is in
Plus
Of thewhether
Excess Over
trust or otherwise, whether the gift is direct or
indirect, and whether the property is real or
or intangible. [Sec. 98(B),
5 %personal, tangible
P 200,000.00
NIRC]
8%
500,000.00
a property tax but a tax
11 %Donors tax is not
2,000,000.00
imposed on the transfer of property by way of gift
15 %
5,000,000.00
inter vivos. [Sec 11, RR 2-2003 citing Lladoc v. CIR
20 (1965)]
%
10,000,000.00
NB: If donor is RC/NRC/RA = liable for donors
tax REGARDLESS of where the gift was made or
where property is located
NRA = liable for donors tax only if the
property donated is w/in the Phil.

Exempt: If net taxable estate 200,000

REQUISITES OF VALID DONATION


(ART 725, NCC)
A gift that is incomplete because of reserved
powers becomes complete when either:
(a) the donor renounces the power OR
(b) his right to exercise the reserved power
ceases because of the happening of some
event or contingency or the fulfillment of
some condition, other than because of the
donors death. [Sec. 11, RR 2-2003]

TRANSFERS
WHICH
MAY
CONSTITUTED AS DONATION

BE

(1) Sale, exchange or transfer of property for


insufficient consideration

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TAXATION 2

(2) Condonation or remission of debt where the


debtor did not render service in favor of the
creditor
(3) Renunciation in favor of other heirs (Sec 11,
RR 2-2003)
(a) Renunciation by the surviving spouse of their
share in the ACP/CPG after the dissolution of
the marriage in favor of heirs of the deceased
spouse or any other person/s
(b) Renunciation by an heir, specifically and
categorically in favor of identified heir/s to
the exclusion or disadvantage of the other
co-heirs in the hereditary estate
(c) However, general renunciation by an heir,
including the surviving spouse, of their share
in the hereditary estate left by the decedent
is NOT subject to DT

TAXATION LAW

the residence/domicile of owner thereof. Situs is


the domicile or residence of the owner. (Collector
v Fisher)
Exceptions:
(1) When it is inconsistent with express
provisions of law
(2) When justice does not demand that it should
be, as where the property in fact has a situs
elsewhere
Intangible Properties which are considered
situated in the Philippines (Sec 104)
(1) Franchise which must be exercised in the
Philippines
(2) Shares, obligations or bonds issued by any
corporation or sociedad anonima organized
or constituted in the Philippines in
accordance with its laws
(3) Shares, obligations or bonds issued by any
foreign corporation 85% of the business of
which is located in the Philippines
(4) Shares, obligations or bonds issued by any
foreign corporation if such shares,
obligations or bonds have acquired a
business situs in the Philippines
(5) Shares or rights in any partnership, business
or industry established in the Philippines

TRANSFER FOR LESS THAN ADEQUATE


AND FULL CONSIDERATION
In order for the rule to apply, there must be 1) a
transfer of property, other than real property
classified as a capital asset and subject to capital
gains tax under Sec. 24 (D) and 2) the transfer
was for less than an adequate and full
consideration in money or moneys worth.
In this case, the amount by which the fair market
value of the property exceed the value of the
consideration shall be considered a gift.

Rule of Reciprocity
There is reciprocity if the foreign country of which
the decedent was a citizen and resident at the
time of his death:
(a) 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
(b) Allowed a similar exemption from transfer
tax in respect of intangible personal property
owned by citizens of the Philippines not
residing in that country
If there is reciprocity, the intangible personal
property of an NRA shall not be included in his
gross estate. If there is no reciprocity, such
intangible personal property will be included.

CLASSIFICATION OF DONOR
Donors Tax applies to individuals and
corporations (in their secondary purpose). They
may be classified into:
Residents (RC/RA/DC/RFC)
Non-Residents (NRC/NRA/NRFC)
Such classification is important in determining
the deductions from the gross gift of the donor,
and in filing the return.
Situs of Intangible Personal Properties
General Rule: Mobilia Sequuntur Personam
Principle: Taxation of intangible personal
properties (such as credits, bills, bank deposits
promissory notes, and corporate stocks) follows
95

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TAXATION 2

DETERMINATION
OF
GROSS
GIFT
(INCLUDING COMPOSITION OF GROSS
GIFT)
RESIDENT

RESIDENT
2. Gifts made to or for
the use of the National
Government or any
entity created by any of
its agencies which is
not
conducted
for
profit, or to any political
subdivision of the said
Government.

NON-RESIDENT

Composition and Determination of GROSS Estate


Gifts made by donor
who is either a resident
or citizen at the time of
the donation:
a.
Real
property
wherever situated
b. Tangible personal
property
wherever
situated, and
c. Intangible personal
property
wherever
situated

Gifts made by donor


who is non-resident
alien at the time of the
donation:
a. Real property located
in the Phil.
b. Tangible personal
property located in the
Phil., and
c. Intangible personal
property with a situs in
the Phil. (subject to the
rule of reciprocity)

3. 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.

Note: If there is
reciprocity, intangible
assets are excluded
from gross gifts
Deductions and Exemptions from GROSS gift to
arrive at NET Gifts
Deductions (These are
exempt donations but
are deductible from,
and not treated as
exclusions from the
gross gift)
1. Dowries or donations
made:
a. On account of
marriage
b. Before its celebration
or within one year
thereafter
c. By parents to each of
their
legitimate,
recognized natural, or
adopted children
d. To the extent of the
first P10,000

TAXATION LAW

Deductions (These are


exempt donations but
are deductible from,
and not treated as
exclusions from the
gross gift)

Common Exemptions
1. Encumbrances on the
property donated if
assumed by the donee
in the deed of donation.
2. Donations made to
entities
exempted
under special laws

NON-RESIDENT
profit, or to any political
subdivision of the said
Government.
2. 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.
Common Exemptions
1. Encumbrances on the
property donated if
assumed by the donee
in the deed of donation.
2. Donations made to
entities
exempted
under special laws.

Note:
NOT SUBJECT TO DONORS TAX
(1) Contributions to candidate or political party
for campaign purposes duly reported to
COMELEC
(2) (ii) Gift to Parish Priest or Church (applies
only to real property tax)

1. 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
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TAXATION 2

TAXATION LAW

(3) (iii) Onerous Donations or Donations in


exchange for goods/services (since they are
subject to income tax)

are adjusted to fair market values. The net of


adjusted asset minus the adjusted liability value
is the indicated value of the equity.

SUBJECT TO DONORS TAX


Gratuitous
Donations
to
Association

Note:
Where property is transferred for less than an
adequate and full consideration in money or
moneys worth, then the amount by which the
FMV of the property at the time of the execution
of the Contract to Sell or execution of the Deed of
Sale which is not preceded by a Contract to Sell
exceeded the value of the agreed or actual
consideration or selling price shall be deemed a
gift, and shall be included in computing the
amount of gifts made during the calendar year.
[Sec. 11, RR 2-2003]

VALUATION
PROPERTY

OF

GIFTS

Homeowners

MADE

IN

Taxable Base: Net gifts i.e. net economic benefit


from the transfer that accrues to the done AT
THE TIME OF DONATION
If gift is personal property = FMV at the time of
donation
If gift is real property = whichever is HIGHER
FMV as determined by the Commissioner of
Internal Revenue (Zonal Value) or
FMV in the latest schedule of values fixed by the
provincial and city assessor (MV per Tax
Declaration)

However, where the consideration is fictitious,


the entire value of the property shall be subject
to donors tax.

TAX CREDIT FOR DONORS TAXES PAID IN


A FOREIGN COUNTRY

NOTE: Real property considered as capital assets


under the Tax Code are excepted from this rule
because the taxable value taken into account in
the computation of tax is the higher of either the
zonal value or the assessors value; not the
consideration. Therefore, the insufficiency and
inadequacy of the consideration paid would not
affect the computation of the tax due and
payable [Sec. 100 in relation to Sec. 24(d), NIRC]

Who may claim the tax credit


(1) Resident citizen
(2) Non-resident citizen
(3) Resident alien
1. Per Country Limit
( )

Under Section 24(d), the fair market value itself, if


higher than the gross selling price, is the basis
for computing the capital gains tax imposed
upon the sale of such capital assets.

2. Worldwide Limit

Thus, what the seller avoids in the payment of


the donors tax, it pays for in the capital gains tax.

EXEMPTIONS OF GIFTS FROM DONORS


TAX

( )

(See table above)

(1) Encumbrances on the property donated if


assumed by the donee in the deed of
donation.
(2) Donations made to entities exempted under
special laws.
Aquaculture Department of the Southeast Asian
Fisheries Development Center of the Philippines

If there is an improvement = construction cost


(based on the building permit and/or occupancy
permit ) + 10% per year after the year of
construction; or the FMV based on the latest tax
declaration.
If unlisted stocks = Adjusted Net Asset Method
shall be used whereby all assets and liabilities
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TAXATION 2

TAXATION LAW

Development Academy of the Philippines


Integrated Bar of the Philippines
International Rice Research Institute
National Museum
National Library
National Social Action Council
Ramon Magsaysay Foundation
Philippine Inventors Commission
Philippine American Cultural Foundation
Task Force on Human Settlement on the
donation of equipment, materials and services

=Aggregate Net Gifts


Multiply by: Tax rate
------------------------------------------------------= Donors Tax on Aggregate Net Gifts
Less: Donors Tax Paid on Prior Net Gifts
------------------------------------------------------Donors Tax Due on the Net Gifts to Date
Less: Tax Credit, if any
------------------------------------------------------= Donors Tax Due, if any

TAX BASIS

Tax Rate
IF NOT A STRANGER

The tax for each calendar year shall be computed


on the basis of the total net gifts made during
the calendar. (Sec. 99, NIRC)

Net Gift But


Over
Over

Net gifts
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.
(Sec. 11, RR 2-2003)

not

100,000.
00
100,000.
00

The
Of
the
Pl
Tax Shall
Excess
us
be
Over
Exempt

200,000.
0
00

P
200,000. 500,000.
2,000.0
00
00
0
500,000. 1,000,00
00
0.00

General Formula
Gross Gifts
Less: Deductions from gross gifts
------------------------------------------------------Net gifts
Multiply by: Tax rate
------------------------------------------------------= Estate Tax Due
Less: Tax Credit, if any
------------------------------------------------------= Donors Tax Due, if any

1,000,00
0.00

2 100,000.
% 00
4 200,000.
% 00

14,000.0 6 500,000.
0
% 00

3,000,00 44,000.
0.00
00

8 1,000,00
% 0.00

3,000,00 5,000,00 204,000 10 3,000,00


0.00
0.00
.00
% 0.00
5,000,00 10,000,0
0.00
00.00

404,000 12 5,000,00
.00
% 0.00

10,000,0
00.00

1,004,00 15 10,000,0
0.00
% 00.00

and over

2) IF A STRANGER: 30%

If there are several gifts during the year


Gross Gifts made on a certain date
Less: Deductions from gross gifts
------------------------------------------------------Net gifts made on a certain date
Add: Prior Net gifts during the year
-------------------------------------------------------

(1) Rate applicable shall be based on the law


prevailing at the time of donation.
(2) When the gifts are made during the same
calendar year but on different dates, the
donor's tax shall be computed based on the
total net gifts during the year.
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TAXATION 2

TAXATION LAW

Donation made to a stranger is subject to 30% of


the net gift. A stranger is a person who is not a:
brother, sister (whether by whole or half blood),
spouse, ancestor and lineal descendants; or
relative by consanguinity in the collateral line
within the fourth degree of relationship.
Exempt: If gift/donation 100,000
SUMMARY OF TRANSFER TAXES
TRANSFER TAXES
Estate Tax
Donors Tax
Time for filing a return and payment of tax
FILED: within six (6) months from the decedent's death.
NOTE: separate return is filed for each gift
E: not exceeding 30 days (in meritorious cases)
made on different dates during the year
reflecting therein any previous net gifts
NB: Written notice of death to CIR w/in 2 mos. After death
made in the same calendar year.
PAID: before the delivery of the distributive share in the
inheritance to any heir or beneficiary; upon filing of return.
E: extension (when payment on the due date would impose
undue hardship) not to exceed
1. 5 years, in case the estate is settled through the courts; or
2. 2 years in case the estate is settled extra-judicially.

FILED: within thirty (30) days after the gift


(donation) is made
In case of donation to relatives, only one
return shall be filed for several gifts by the
donor to the different donees on the same
date.

NB: when extension is granted, a bond may be required by


If the gift involves CPG, each spouse shall
CIR 2x amount of tax
file separate return wrt his/her respective
share in the CPG.
Where to file and to whom paid
GR: to the Authorized Agent Bank (AAB), Revenue Resident
Collection Officer (RCO) or duly authorized Treasurer of the GR: to AAB of the RDO having jurisdiction
city or municipality in the Revenue District Office having over the place of the domicile of the donor
jurisdiction over the place of domicile of the decedent at the at the time of the transfer.
time of his death
E:
E: if NRA/NRC,
1.If no AAB = to the RCO or duly Authorized
If w/ Aor, Eor in Phil = to the AAB of the RDO where such City or Municipal Treasurer where the donor
Aor,Eor is registered/domiciled, if not yet registered with the was domiciled at the time of the transfer,
BIR.
if w/o Aor,Eor in Phil = to AAB under the jurisdiction of RDO 2. if no legal residence in Phil or NRA = with
No. 39
Revenue District No. 39 - South Quezon
City or with the Philippine Embassy or
Consulate in the country where donor is
domiciled at the time of the transfer.
Non-resident
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.
Who should file
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TAXATION 2

The Eor/Aor or any of the legal heirs of the decedent,


whether resident or non-resident of the Philippines, under
any of the following situations:
In all cases of transfers subject to estate tax;
Where though exempt from estate tax, the gross value of
the estate exceeds two hundred thousand (P200,000)
pesos; or
Regardless of the gross value of the estate, where 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 BIR is required as a
condition precedent for the transfer of ownership therof in
the name of the transferee; or
2. If there is no executor or administrator appointed,
qualified, and acting within the Philippines, then any person
in actual or constructive possession of any property of the
decedent.

TAXATION LAW
Any person, 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.

NB: Eor/Aor has the primary obligation to pay the estate tax
but the heir or beneficiary has 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 extent of
his liability, however, shall in no case exceed the value of his
share in the inheritance.
ESTATE TAX FORMULAE
EXCLUSIVE
COMMUNITY TOTAL
4
Gross Estate
Add:
Taxable Transfers & Others
Revocable Transfers/Donation Mortis Causa
Transfers in contemplation of death
Property passing under GPoA
Transfers for insufficient consideration5
Decedents Interest Accrued6
Proceeds of Life Insurance w/
revocable beneficiary7
Family Home
Claims against an Insolvent Person8
Amount received by heirs

Value Taken of Property


Less: Mortgage debt paid, if any
Initial Basis
Less: Proportionate Deduction
Final Basis
Multiplied by Deduction Rate
VANISHING DEDUCTION
**Proportionate Deduction
=

( + )

Less: (Ordinary Deductions)


7 ELIT9
DO NOT INCLUDE: EXEMPTIONs
Amount included in the GE = FMV at the time of death consideration amount
6 Accrued before his death but only received after his death, e.g. dividends declared on/before, and received after death;
partnerships profit earned on/before and received after, accrued interest and rents on/before and collected after death
7 Beneficiary must be the estate of the decedent, Eor/Aor or a third person. If premiums are paid using conjugal funds, part of
conjugal funds.
8 Full amount of the receivable. However, the uncollectible amount may be deducted from GE under ELIT.
4
5

100

UP LAW BOC

TAXATION 2

Vanishing Deductions
Transfers for Public Use

If NRA, Allowable Deduction wrt ELIT =

101

TAXATION LAW

UP LAW BOC

TAXATION 2

TAXATION LAW

2. Donors Tax

Retirement Benefits received by heirs

ON FIRST DONATION

Net Estate
Less: (Special Deductions10)
Standard Deduction
Family Home
Medical Expenses
Amounts received by heirs

Gross Gift
xxx
Less: Deductions (those not beneficial
to the done e.g. mortgage)
xxx
Net Gift
Less: Exemptions, if applicable
xxx

Net Taxable Estate (before share of surviving


spouse)
Less: Share of Surviving Spouse

Net Taxable Estate


Multiply by Tax Rate

Net Taxable Gift


xxx
Multiply by Tax Rate
xx%

Estate Tax Due


Less: Tax Credit11, if any

Donors Tax Due


xxx

xxx

ESTATE TAX DUE


If only 1 country is involved: (whichever is lower)
Estate Tax Credit =

OR actual estate tax paid to foreign country


If two or more countries are involved: (whichever is lower)
Estate Tax Credit =
OR

OR actual estate tax paid to foreign country

10
11

These are not allowable deductions when TP is NRA.


Applies only to RC/NRC/RA

102

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TAXATION 2

TAXATION LAW

Less: Tax Credit12, if any


xxx
DONORS TAX DUE
xxx
ON SUBSEQUENT DONATIONS w/in the same
calendar year
Gross Gift
xxx
Less: Deductions (those not beneficial
to the done e.g. mortgage)
xxx
Net Gift
Less: Exemptions, if applicable
xxx

If only 1 country is involved: (whichever is lower)

xxx

Tax Credit =

Tax

Credit


/ /

OR
/
/ /

Donors Tax on Aggregate Net Gifts


xxx
Less: Donors tax on previous net gifts during the
year xxx
Donors Tax Due
xxx
Less: Tax Credit13, if any
xxx
DONORS TAX DUE
xxx

13

If two or more countries are involved: (whichever is lower)

Net Taxable Gift


xxx
Add: All previous net gifts during the year
xxx
Aggregate Net Gifts
xxx
Multiply by Tax Rate
xx%

12


/ /

Applies only to RC/NRC/RA


Applies only to RC/NRC/RA

103

UP LAW BOC

TAXATION 2

TAXATION LAW

ESTATE TAX

GR: w/in 6m after death


E: extension of 30d

DEATH

NOTICE OF DEATH to RDO


by Eor/Aor

Get TIN for ESTATE

CANCEL TIN

Prepare the LIST of assets


and liabilities and their
supporting documents

Transfer
properties to
the heirs

ESTATE TAX RETURN + PAYMENT


(NB: Date of payment may be extended, 5yrs or
2yrs), if estate exceeds 200,000php
DONORS TAX

Full Exemption
COMPLETION/
PERFECTION OF
DONATION

Exempt

NO TAX RETURN
NECESSARY

Partial Exemption
w/in 30d after
gift was made

DONORS TAX RETURN + PAYMENT


(NB: Date of payment may be extended
6 months)

Liable

104

No
Notice
of
Donation Necessary

UP LAW BOC

TAXATION 2

TAXATION LAW

provided for mitigating measures to cushion


the impact of the imposition of the tax on those
previously exempt. Excise taxes on petroleum
products and natural gas were reduced.
Percentage tax on domestic carriers was
removed. Power producers are now exempt
from paying franchise tax.
VAT, by its very nature, is regressive. BUT the
Constitution does not really prohibit the
imposition of indirect taxes (which is essentially
regressive).
What it simply provides is that Congress shall
evolve a progressive system of taxation.
In Tolentino v. Sec. of Finance (1995), 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.

D. VALUE-ADDED TAX (VAT)


CONCEPT
VAT is a consumption tax imposed at every
stage of distribution process on (i) the sale,
barter, exchange, or lease of goods or
properties and (ii) rendition of services in the
course of trade or business, or the (iii)
importation of goods, whether such imported
goods are for use in business or non-business
purposes. (Sec. 4.105-2, RR 16-2005)
The taxpayer (seller) determines his tax liability
by computing the tax on the gross selling price
or gross receipt (output tax), and subtracting or
crediting the earlier VAT on the purchase or
importation of goods or on the purchase of
service (input tax) against the tax due on his
own sale

Tolentino v. Secretary of Finance (1995):


Regressivity is not a negative standard for
courts to enforce.
What Congress is required by the Constitution
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 regressive effects are corrected by the zero
rating of certain transactions and through the
exemptions

Constitutionality of VAT
ABAKADA Guro Party List, et. al. v Ermita
(2005):
The validity of raising the VAT rate from 10% to
12% by the President was upheld by SC.
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

CHARACTERISTICS/ELEMENTS
VAT-TAXABLE TRANSACTION

OF

General Characteristics/Nature:
Privilege/Percentage Tax imposed by law
directly not on the thing or service but on the
ACT (sale, barter, exchange, lease, importation,
or perfrormance of service)
Ad Valorem Tax the amount is based on the
gross selling price or gross value in money of
the goods or service, including the use or lease
or properties.
Indirect Tax it may be shifted or passed on to
the buyers, transferee, or lessee of the goods,
105

UP LAW BOC

TAXATION 2

properties or services as part of the purchase


price.
Excise Tax - a tax on the privilege of engaging
in the business of selling goods or services, or
in the importation of goods but unlike excise, it
is not applied only to a few selected goods

TAXATION LAW

(1) Seller (w/n natural) executes contract to


SBE of RP
(2) RP is in the Phil
(3) Seller is engaged in sale or exchange of RP
or real estate (dealer, developer, lessor)
(4) RP is held primarily for sale/lease ICT/B or
an ordinary asset used in T/B as an
incident to his vatable activity (NOT a
capital asset)
(5) not exempt from VAT (NIRC, special law,
special agreement)

Transactions Covered and their elements


(summary):
General Requirements
Done in the course of trade or business (ICT/B)
w/n profit-oriented: rule of regularity +
incidental thereto (inc isolated)
Exception:
(a) NRC/NRA who perform services in Phil,
even if no regularity
(b) Importation of Goods may be for business
or non-business use
Gross sales or receipts for the past 12 months
or the next 12 months > 1,919,500php
OR there are reasonable grounds to believe
that gross sales or receipts for the past 12
months or the next 12 months will exceed
1,919,500php.

Sale of Services16
(1) for
a
valuable
consideration
(actually/constructively received)
(2) performed ICTB in the Phil.
(3) not exempt from VAT (NIRC, special law,
special agreement)
(4) person rendering service is VAT-liable
(5) no ee-er relationship
(6) Importation of Goods
The transfer must be made in the Philippines.
If the title to the goods were transferred
outside the Philippines, then the same is not
subject to VAT.

Taxable
Transactions
and
Specific
Requirements
Sale, Barter, Exchange or Lease (SBEL) of
Goods or Properties14

TAX CREDIT METHOD


A VAT-registered person is entitled to credit
input taxes evidenced by VAT invoice or official
receipt against the output tax payable. The tax

Goods/Personal Properties
(1) Actual/deemed sale for a valuable
consideration
(2) for use or consumption in the Phil
(regardless of the payment arrangements)
(3) not exempt from VAT (NIRC, special law,
special agreement)

Commercial
Property
(Sale/Lease
)
Residential
Units
(Lease)

Real Properties (RP) 15:

14

Sec 106

Residential
Lot
Residential
House and
Lot

15

Casual
Sale
(Capital
Assets)
Regular Sales
(Ordinary
Assets)

Subject to CGT (6%)

16

106

Sec 108

Subject to 12% VAT

If monthly rental 12,800 = VAT and


OPT-exempt
If monthly rental > 12,800 but
aggregate annual rentals 1,919,500
= subject to OPT
If monthly rental > 12,800 and
aggregate annual rentals > 1,919,500
= subject to VAT
If SP > 1,919,500.00 = subject to VAT
IF SP 1,919,500.00 = VAT-exempt
If SP > 3,199,200.00 = subject to VAT
IF SP 3,199,200.00 = VAT-exempt

UP LAW BOC

TAXATION 2

credit method refers to the manner by which


the value added tax of a taxpayer is computed.
The input taxes shifted by the sellers to the
buyer are credited against the buyers output
taxes when he sells the taxable goods,
properties or services.

TAXATION LAW

Atlas Consolidated Mining & Dev. Corp. v. CIR


(2007): Hence, actual export of goods and
services from the Philippines to a foreign
country must be free of VAT, while those
destined for use or consumption within the
Philippines shall be imposed with 12% VAT.
[Deoferio Jr. and Mamalateo, p. 422]

Under this method, the tax is computed by


determining the difference between the output
tax on his sales and the input tax on the
purchases of goods, services, capital goods,
supplies, and materials.

CIR v. American Express (2005):


The court enumerated the exceptions to the
destination principle.

Input tax 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.
Output tax the VAT due on the sale or lease
of taxable goods or properties or services by
any person registered or required to register
under Section 236 of the Code.
If at the end of any taxable month or quarter:
The output tax exceeds the input tax, the
excess shall be paid by the VAT-registered
person
The input tax exceeds the output tax, the
excess shall be carried over to the succeeding
quarter or quarters

As a general rule, the value-added tax (VAT)


system uses the destination principle.
However, our VAT law itself provides for a clear
exception, under which the supply of service
shall be zero-rated when the following
requirements are met:
the service is performed in the Philippines;
the service falls under any of the categories
provided in Section 102(b) of the Tax Code; and
it is paid for in acceptable foreign currency that
is accounted for in accordance with the
regulations of the BSP.

PERSONS LIABLE
Persons Liable:
Any persons who sells, barters, exchanges, or
leases goods or properties, or who renders
services, in the course of trade or buesiness,
and any person who imports goods, whether or
not in the course of business, is liable to pay
either VAT or 3% percentage tax.

DESTINATION PRINCIPLE
This provides that the destination of goods
determines the taxation or exemption from
VAT.
CIR v. American Express International (2005):
As a general rule, goods and services are taxed
only in the country where they are consumed.
(Deoferio Jr. and Mamalateo. The Value Added
Tax in the Philippines, p. 43)

The term person refers to any individual,


trust, estate, partnership, corporation, joint
venture, cooperative or association (Sec. 4.1051, RR 16-2005).
The following are liable to pay VAT:
(1) any person who sell, barters, exchange or
leases goods or properties
(2) if real property: persons engaged in real
estate business:

Corollarily, the Cross Border Doctrine


mandates that no VAT shall be imposed to
form part of the cost of the goods destined for
consumption outside the territorial border of
the taxing authority.
107

UP LAW BOC

(3)
(4)
(5)

(6)
(7)

TAXATION 2

(a) Any person who SBE of real properties


ICT/B
(b) Real estate lessors/ sub-lessors
(c) NRA/NRC lessors when RP is in Phil
(d) non-stock, non-profit corp engaged in
SBE of real properties ICT/B,
regardless of disposition of income
(e) Govt inc GOCCs in SBEL of RP ICT/B
who renders services
who imports goods
if importer is tax-exempt/VAT-exempt
AND goods are subsequently SBE to nonexempt persons,
purchasers/recipients will be deemed the
importer
if the Philippine branch of an NRFC
imported, first local buyer will be
deemed the importer

TAXATION LAW

General Rule: VAT and Percentage Tax cannot


be charged together. Its either the transaction
is under VAT or Other Percentage Tax.
Exception: When one erroneously declares
himself to VAT registered.

VAT ON SALE
PROPERTIES

OF

GOODS

OR

Rate: 12% VAT beginning 1 February 2006


[RMC No. 7-06]
Transactions: Every sale, barter or exchange, or
transactions deemed sale of taxable goods or
properties (RR 16-2005)
Basis: Gross selling price or gross value in
money of the goods or properties sold,
bartered or exchanged.

Additional Requirements to be subject to VAT:


(1) As regards person who sells, barters or
exchanges goods or properties, or sale of
services, is required to register for VAT
when: (i)such act is done in the course of
trade or business, and (ii) if his gross sales
or receipts for the past 12 months or the
next 12 months exceed P1,919,500;
(2) As regards person who imports, it is not
necessary that such importation is made in
the course of trade or business.
(3) Any person who elects to register for VAT
(cf Optional VAT Registration)

Who Pays: Paid by SELLER/TRANSFEROR.


(Sec. 106, NIRC)
Goods or properties all tangible and
intangible objects which are capable of
pecuniary estimation, including:
(1) Real properties held primarily for sale to
customers or held for lease in the ordinary
course of trade or business;
(2) 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;
(3) The right or the privilege to use in the
Philippines of any industrial, commercial or
scientific equipment;
(4) The right or the privilege to use motion
picture films, films tapes and discs;
(5) Radio, television, satellite transmission
and cable television time.

Persons NOT LIABLE to pay VAT:


(1) Any person whose gross sales or receipts
are less than P,1919,500 AND is not VAT
registered. (subject to OPT)
(2) Is exempt under Section 109;
(3) Marginal income earners are not subject to
business taxes because they are not
considered as engaged in trade or business.
A marginal income earner is an individual
deriving gross sales or receipts of not
exceeding P100,000 during any 12-month
period (Rev. Reg. 11-2000)

Requirements
(1) Done in the course of trade or business (w/n
profit-oriented): rule of regularity +
incidental thereto (including isolated
transactions)
108

UP LAW BOC

TAXATION 2

(2) Gross sales or receipts for the past 12


months or the next 12 months >
1,919,500php
(3) OR there are reasonable grounds to
believe that gross sales or receipts for the
past 12 months or the next 12 months will
exceed 1,919,500php.

incident to his vatable activity (NOT a


capital asset)
(5) not exempt from VAT (NIRC, special law,
special agreement)
Gross (Sales) Selling Price (GSP): 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 VAT.
The excise tax, if any, on such goods or
properties shall form part of the gross selling
price.

Additional Requirements depending on the


nature of property:
Goods/Personal Properties
(1) Actual/deemed sale for a valuable
consideration
(2) for use or consumption in the Phil
(regardless of the payment arrangements)
(3) not exempt from VAT (NIRC, special law,
special agreement)

General Rule: GSP is the total amount of


money paid in consideration of SBEL
Excludes: VAT, sales discounts 18
and,
allowances and returns
Includes: Excise tax paid, initial payments 19 ,
interests and penalties (if instalment),
commission income (if exported), purchase
price, charges for packing, delivery and
insurance

Real Properties (RP) 17:


(1) Seller (w/n natural) executes contract to
SBE of RP
(2) RP is in the Phil
(3) Seller is engaged in sale or exchange of RP
or real estate (dealer, developer, lessor)
(4) RP is held primarily for sale/lease ICT/B or
an ordinary asset used in T/B as an

If goods/personal properties
GSP = amount paid in consideration
IF DEEMED SALE: FMV at the time of the
transaction
NB: in retirement/cessation, inventory (raw
materials,
finished
goods,
machinery,
equipment, furniture, fixture), tax base =
whichever is lower,
(1) acquisition cost
(2) current market price of goods

17

Casual
Sale
(Capital
Assets)
Regular Sales
(Ordinary
Assets)
Commercial
Property
(Sale/Lease
)
Residential
Units
(Lease)

Residential
Lot
Residential
House and
Lot

TAXATION LAW

Subject to CGT (6%)

Subject to 12% VAT

If real property,
GSP = amount higher:
(1) consideration stated in the sales document

If monthly rental 12,800 = VAT and


OPT-exempt
If monthly rental > 12,800 but
aggregate annual rentals 1,919,500
= subject to OPT
If monthly rental > 12,800 and
aggregate annual rentals > 1,919,500
= subject to VAT
If SP > 1,919,500.00 = subject to VAT
IF SP 1,919,500.00 = VAT-exempt
If SP > 3,199,200.00 = subject to VAT
IF SP 3,199,200.00 = VAT-exempt

It should be determined at the time of the sale,


indicated in the invoice and granting does not depend on
the happening of a future event
19 Initial payments does not include the amount of
mortgage on RP sold (except excess when mortgage
exceeds the cost of the property), notes and other
evidence on=f indebtedness issued by the purchaser at
the time of the sale
18

109

UP LAW BOC

TAXATION 2

(2) FMV, whichever is higher of:


(a) Zonal value: FMV as determined by CIR
(b) Real Property Tax Value: FMV as
determined by provincial & city
assessors

TAXATION LAW

and 2) when GSP is unreasonably lower than


AMV22
AS REGARDS SALE OF REAL PROPERTY

Taxable:
IF ON INSTALLMENT (RR16-2005) :
(1) On installment plan
GSP = down payments received + interests +
(2) Pre-selling by real estate dealers
penalties + other charges amount of
(3) Sale of residential lot >P1,919,500 ; or
mortgage (paid)
house and lot/other residential dwelling
Note:
>P3,199,200
If
zonal/FMV,
tax
base
=
(4) Lease of residential units (rental per unit >
( )
12,800/month OR total rental from ALL
,
( )
units>P1,919,500/year)
20

Upon full collection, if a difference is


uncovered because the zonal value or market
value at the date of sale is higher than the total
receipts or collections based on the agreed
consideration, the additional VAT shall be paid
accordingly (RMC 03-96)

Not taxable: (Sec. 109 (P)(Q)(V))


(1) Not primarily held for sale or lease in the
course of trade or business OR those held
for sale or lease in the course of trade or
business BUT does not exceed P 1,919,000.
(2) Low cost or socialized housing
(3) Residential lot when value does not exceed
P1,919,500
(4) House and lot/other residential dwelling <
P3,199,200
(5) Lease (rental per unit < 12,800/month and
total rental from all units < P1,919,500/
year)
(6) Transmission to a trustee (Except:
transmission is deemed sale transaction)

IF DEFERRED21
GSP = entire selling price or zonal/FMV,
whichever is higher
Thus, subsequent receipt of unpaid balance is
NOT subject to VAT
Note: CIR has the power to determine the
appropriate tax base in 1) SBE in deemed sales

GR: 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.
Exception: However, if the property transferred
is originally intended 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

Considered instalment when the initial payment is less


than or equal to 25% of GSP. Taxable only on the
payment actually or constructively received.
Initial payments payment/payments which the seller
receives before or upon execution of the instrument of
sale and payments which he expects or is scheduled to
receive in cash or property during the year when the sale
or disposition of the real property was made.
20

constructively received during the year of sale.


property sold (except as to the excess when such
mortgage exceeds the cost or other basis of the property
to the seller) and notes or other evidence of indebtedness
issued by the purchaser to the seller at the time of the
sale.
21 Considered deferred payment when the initial payment
is more than 25% of GSP. Treated as cash sale and the
entire selling price is taxable on the month of sale

GSP is unreasonably lower than the actual market


value if it is lower than 30% of AMV of the same goods of
the same quantity or quality sold in the immediate
locality or the nearest date of sale.
22

110

UP LAW BOC

TAXATION 2

TAXATION LAW

ZERO-RATED SALES OF GOODS OR


PROPERTIES, AND EFFECTIVELY ZERORATED
SALES
OF
GOODS
OR
PROPERTIES

control over the property, i.e., irrevocable


transfer of corpus and/or irrevocable
designation of beneficiary.
7. Transfer to corporation in exchange of
shares of stocks (see Sec. 40, NIRC for Tax-free
exchange)
8. Advance payment by the lessee
9. Security deposits for lease agreements.23

Rate: 0% VAT
Transactions: Every sale, barter or exchange, or
transactions deemed sale of taxable goods or
properties (RR 16-2005)
Zero-Rated Sales on Goods or Property (RR 162005)
A zero-rated sale of goods or properties 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.
(1) Export Sales
(2) Foreign Currency Denominated Sales
(3) Sales of Goods or Property to perons or
entites who are tax-exempt/Effectively
Zero-Rated Sales
Export Sales [Sec. 106(A)(2)(a), NIRC]
(1) The (i) sale and actual shipment of goods
from the Philippines to a foreign country
AND (ii) paid for in acceptable foreign
currency or its equivalent in goods or
services, AND (iii) accounted for in
accordance with the rules and regulations
of the BSP
(2) 2.(i) Sale of raw materials or packaging
materials to a nonresident buyer (ii) for
delivery to a resident local export-oriented
enterprise (iii) to be used in manufacturing,
processing, packing or repacking in the
Philippines of the said buyer's goods AND
(iv) paid for in acceptable foreign currency
AND (v) accounted for in accordance with
the rules and regulations of the BSP.

23 Please take note of the difference between security


deposits and those applied to rent.

111

UP LAW BOC

TAXATION 2

a. (i) Sale of raw materials or


packaging materials (ii) to exportoriented enterprise (iii) whose
export sales exceed seventy
percent (70%) of total annual
production.
(3) 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)

TAXATION LAW

(2) 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) evidenced
by landing certificates.
Constructive
Exports
(without
actual
exportation):
(1) Sales
to
bonded
manufacturing
warehouses
of
export-oriented
manufacturers;
(2) Sales to export processing zones (RA
7916);
(3) Sales to registered export traders
operating bonded trading warehouses
supplying
raw
materials
in
the
manufacture of export products (RA 7227)
(4) 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.
(5) Sales by a VAT-registered supplier to a
manufacturer/producer whose products
are 100% exported are considered export
sales. A certification to this effect must be
issued by the Board of Investment which
shall be good for 1 year unless
subsequently re-issued. (RR 16-2005)

a. Sale of gold to the Bangko Sentral


ng Pilipinas (BSP)
b. The sale of goods, supplies,
equipment and fuel to persons
engaged in international shipping
or international air transport
operations (RA 9337)
c. 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.
d. If any portion of such fuel, goods,
or supplies is used for purposes
other than that mentioned, such
portion of fuel, goods, and supplies
shall be subject to 12% VAT. (RR
16-2005)

Export sales of registered export traders shall


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.

e. Those considered export sales


under the Omnibus Investment
Code of 1987, and other special
laws (ex. Bases Conversion &
Development Act of 1992)

Foreign Currency Denominated Sale (FCDS)


(1) (i) Sale to a nonresident of goods (except
those mentioned in Sections 149 and 150
i.e.automobiles and non-essential goods
like jewelry, perfume, and yachts), (ii)
assembled or manufactured in the
Philippines (iii) for delivery to a resident in
the Philippines (iv) paid for in acceptable
foreign currency AND (v) accounted for in

Under Omnibus Investment Code (EO 226):


Considered Export Sales
(1) Phil. port FOB value of export products
exported directly by a registered export
producer; OR
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TAXATION 2

accordance with the rules and regulations


of the BSP.
(2) (i) Sales of locally manufactured or
assembled goods (ii) for household and
personal use (iii) to Filipinos abroad and
other non-residents of the Philippines as
well as returning Overseas Filipinos under
the Internal Export Program of the
government (iv) paid for in convertible
foreign currency AND (v) accounted for in
accordance with the rules and regulations
of the BSP shall also be considered export
sales. (RR 16-2005)

TAXATION LAW

from the Customs Territory** to any


registered enterprise operating in the
ecozone, REGARDLESS of the class or
type of the latters PEZA registration, is
actually qualified and thus LEGALLY
ENTITLED TO THE 0% VAT.
(2) Customs Territory shall mean the national
territory of the Philippines outside of the
proclaimed boundaries of the ECOZONES
except those areas specifically declared by
other
laws
and/or
presidential
proclamations to have the status of special
economic zones and/or free ports. [Sec.
2(g), Rule 1, Part I, RA 7916-IRR]
(a) By a VAT-Exempt Supplier from the
Customs Territory to a PEZA registered
enterprise
(3) 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.
(a) By a PEZA Registered Enterprise
(b) 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.
(c) 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 12% VAT.
(d) 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.
(e) Sale of Services by ECOZONE
enterprise, to Another ECOZONE

Effectively Zero-Rated Sales


(1) 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.
(2) (i) The local sale of goods and properties
(ii) by a VAT-registered person (iii) to a
person or entity who was granted indirect
tax exemption under special laws or
international agreement. (RR 16-2005)
ECOZONES
CIR v. Seagate Technology (2005): The
ECOZONES shall be managed and operated by
the PEZA as separate customs territory. (Sec. 8,
RA 7916 Special Economic Zone Act of 1995)
This means that in such zone is created the
legal fiction of foreign territory. (Deoferio Jr.
and Mamalateo, p. 227) Consequently, sales
made by a person in the customs territory to a
PEZA-registered entity are considered exports
to a foreign country and thus, zero-rated.
Conversely, sales by a PEZA-registered entity
to a person in the customs territory are
deemed imports from a foreign country.
(1) Tax treatment of sales to & by PEZAregistered enterprise within & without the
ecozone [rmc 74-99]:
(a) Any sale of goods, property or services
made by a VAT registered supplier
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enterprise (Intra-ECOZONE enterprise


Sale of Service)
(f) if PEZA registered seller is subject to
5% special tax regime - EXEMPT from
VAT
(g) 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

TAXATION LAW
existing as of such retirement or
cessation

Distribution or transfer to shareholders,


investors or creditors
As regards distribution to shareholders or
investors as share in the profits of the VATregistered persons, property dividends which
constitute stocks in trade or properties
primarily held for sale or lease declared out of
retained earnings on or after Jan. 1, 1996 and
distributed by the company to its shareholders
shall be subject to VAT based on the zonal
value or FMV at the time of the distribution,
whichever is applicable. (RR 16-2005)

TRANSACTIONS DEEMED SALE (SEC.


106 (B)
Rate: 12% VAT
Basis: Market value of the goods deemed sold
as of the time of the occurrence of the
transactions or as the Commissioner shall
prescribe. In the case of retirement/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.
The gross selling price is unreasonably lower
than the actual market value if it is lower by
more than 30% of the actual market value of
the same goods of the same quantity and
quality sold in the immediate locality on or
nearest the date of sale. (RR 16-2005)

Consignment of goods
Consigned goods returned by the consignee
within the 60-day period are not deemed sold.
(RR 16-2005)
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 ARE
CONSIDERED DEEMED SALES
Examples: change of ownership of the business
(e.g. when a sole proprietorship incorporates,
or the proprietor sells his entire business) and
dissolution of a partnership and creation of a
new partnership which takes over the business.
(RR 16-2005)

Transactions Deemed Sale


(1) Transfer, use or consumption not in the
course of business of goods or properties
originally intended for sale or for use in the
course of business.
(2) Distribution or transfer to shareholders,
investors or creditors
(3) Shareholders or investors as share in the
profits of the VAT-registered persons;
(4) Creditors in payment of debt;
(5) Consignment of goods if actual sale is not
made within 60 days following the date
such goods were consigned
a. Retirement from or cessation of
business,
with
respect
to
inventories of taxable goods

CHANGE OR CESSATION OF STATUS AS


VAT-REGISTERED PERSON (SEC 106 C)
Rate: 12% VAT
Basis: the acquisition cost or the current
market price of the goods or properties,
whichever is LOWER.
VAT shall apply to goods disposed of or
existing as of a certain date if under the
circumstances to be prescribed in rules and
regulations to be promulgated by the
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TAXATION 2

Secretary of Finance, upon recommendation of


the Commissioner, the status of a person as a
VAT-registered person changes or is
terminated.

TAXATION LAW

transferor, for shares of stocks, whether


resulting in corporate control or not, is
SUBJECT TO VAT (RR 10-11)
(2) Change in the trade or corporate name of
the business
(3) 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 corporation.
Note: The INPUT VAT of the dissolved
corporation will be absorbed by the
surviving corporation
(4) Inventory used for promotions and Office
Supplies

Subject to output VAT (RR 16-2005 sec. 4.106


(b))
12%VAT is 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:
(1) Change of business activity from VAT
taxable status to VAT-exempt status
(2) Example: A VAT-registered person
engaged in a taxable activity like
wholesaler or retailer who decides to
discontinue such activity and engages
instead in life insurance business or in any
other business not subject to VAT.
(3) Approval of request for cancellation of a
registration due to reversion to exempt
status
(4) Approval of request for cancellation of
registration due to desire to revert to
exempt status after lapse of 3 consecutive
years from the time of registration by a
person who voluntarily registered despite
being exempt under Sec. 109 (2)
(5) Approval of request for cancellation of
registration of one who commenced
business with the expectation of gross
sales/receipts exceeding P1,919,500 (per
RR 16-2011) but who failed to exceed this
amount during the first 12 months of
operation

VAT ON IMPORTATION OF GOODS


Rate: 12% VAT
Basis: total value used by the Bureau of
Customs in determining tariff and customs
duties, plus customs duties, excise taxes, if any,
and other charges (such as postage,
commission).
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.
Landed Cost = invoice amount + customs
duties + freight + insurance + other charges +
excise tax (if any)
Who Pays: IMPORTER prior to the release of
such goods from customs custody (Sec. 107 (A),
NIRC)
Importer: any person who brings goods into the
Philippines, whether or not made in the course
of his trade or business, including non-exempt
persons or entities who acquire tax-free
imported goods from exempt persons, entities
or agencies (RR 16-2005)

Not Subject to Output Vat goods or


properties existing as of the occurrence of the
following:
(1) Change of control of a corporation by the
acquisition of the controlling interest of
such corporation by another stockholder
(individual or corporate) or group of
stockholders.
Note: Exchange of goods or properties
including the real estate properties used in
business or held for sale or for lease by the

Importation of goods BEGINS when the


carrying vessel/aircraft enters the Philippine
jurisdiction with an intention to unload its
cargoes. It ENDS when there is already
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TAXATION 2

TAXATION LAW

paymentof duties/taxes/other charges and


issuance of permit to withdraw.

VAT ON SALE OF SERVICE AND USE OR


LEASE OF PROPERTIES (SEC 108)

Note: Importation of goods to bonded


warehouse for processing is not importation.
Importation connotes permanency and gain.
Thus, if goods are only for exhibit, such goods
are VAT-exempt.

Rate: 12%
Basis: Gross receipts derived from the sale or
exchange of services, including the use or lease
of properties.
Gross Receipts - the total amount of money or
its equivalent representing the contract price,
compensation, service fee, rental or royalty,
including the amount charged for materials
supplied with the services and deposits and
advanced payments actually or constructively
received during the taxable quarter for the
services performed or to be performed for
another person, excluding VAT. (Sec. 108 (A),
NIRC)

Customs duty amount of customs duty


legally due and paid by the importer. Therefore,
if importer is entitled to 90% customs duty
exemption, the 10% duty paid should be the
base in computation of the VAT.
Other similar chargers specific charges which
an importer has to pay.
Other taxes (special import tax)
Bank charges
Arrastre charges
Wharfage dues
Brokerage fees
All other charges or expeses

Constructive receipt occurs when the money


consideration or its equivalent is placed at the
control of the person who rendered the service
without restrictions by the payor.

Landed Cost - invoice amount including costs


of loading, shipping and unloading, customs
duties, freight, insurance, other charges, excise
tax (if any)

Deposit in banks which are made available to


the seller of services without restrictions
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 account of the contractor.
(RR 16-2005)

Expenses incurred after the release of the


goods such as those incurred in delivering
goods do not form part of the landed cost.
Transfer of goods by tax exempt persons:
(1) If importer is tax-exempt, the subsequent
purchasers, transferees or recipients of
such imported goods shall be considered
as importers who shall be liable for the tax
on importation.
(2) 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)

Requisites for taxability


(1) The service must be performed or is to be
performed (which may be performed by a
subcontractor) in the course of trade or
business in the Philippines;
(2) For a valuable consideration actually or
constructively received; and
(3) The service is not exempt under the Tax
Code, special law or international
agreement
(4) Person selling or rendering service is liable
to VAT

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Sale/Exchange of Services: means the


performance of all kinds of services in the
Philippines for others for a fee, remuneration
or consideration. (Sec 108, Diaz v Secretary of
Finance, 2011). It includes:

(11) 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
(12) 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
(13) Sales of electricity by generation,
transmission,
and/or
distribution
companies
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).
(14) Franchise grantees of electric utilities,
telephone and telegraph, radio and/or
television broadcasting and all other
franchise grantees (including PAGCOR and
its licensees/franchisees)
EXCEPT franchise grantees of radio and/or
television broadcasting whose annual
gross receipts of the preceding year do not
exceed
Ten
Million
Pesos
(P10,000,000.00) (which shall be subject
to 3% franchise tax under Sec. 119, subject
to optional registration), and franchise
grantees of gas and water utilities (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
(15) Non-life insurance companies including
surety, fidelity, indemnity and bonding
companies;

(1) Construction and service contractors


(2) Stock, real estate, commercial, customs
and immigration brokers
(3) Lessors of property, whether personal or
real24
(4) Persons engaged in warehousing service.
(5) Lessors or distributors of cinematographic
films
(6) Persons engaged in milling, processing,
manufacturing or repacking goods for
others are subject to VAT,
EXCEPT palay into rice, corn into corn grits,
and sugarcane into raw sugar (not subject
to VAT)
(7) Proprietors, operators, or keepers of hotels,
motels, rest houses, pension houses, inns,
resorts, theaters, and movie houses
(8) Proprietors or operators of restaurants,
refreshment parlors, cafes and other
eating places, including clubs and caterers
(9) Dealers in securities including pre-need
companies
Gross receipts means gross selling price
less cost of the securities sold. RR 7-95:
(10) Lending investors: All persons OTHER than
banks, non-bank financial intermediaries,
finance companies and other financial
intermediaries NOT performing quasibanking functions who make a practice of
lending money for themselves or others at
interest.
24
SUBJECT TO VAT
Pre-Paid Rental
Security
deposit
when applied to the
rental

TAXATION LAW

NOT SUBJECT TO VAT


Loan to the lessor from
the lessee
Option money for the
property
Security deposit to
insure the faithful
performance of certain
obligations
of
the
lessee to the lessor

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EXCEPT crop insurance, life and disability


insurance, and health and accident
insurance
(16) Insurance and reinsurance commissions,
as opposed to premiums, whether life or
non-life, are subject to VAT while non-life
insurance premiums are subject to VAT.
(17) Similar services regardless of whether or
not the performance thereof calls for the
exercise or use of the physical or mental
faculties

TAXATION LAW

(8) The lease or the use of or the right to use


radio, television, satellite transmission and
cable television time
Additional services subject to VAT:
(1) Services performed in the exercise or
practice of profession or calling by
individuals subject to professional tax
under the LGC, and professional services
rendered
by
general
professional
partnerships (GPPs);
(2) Services performed by actors/actresses,
talents, singers, emcees, radio/television
broadcasters,
choreographers,
musical/radio/movie/television/stage
directors, and professional athletes;
(3) Services rendered by customs, real estate,
stock, immigration and commercial
brokers;
(4) Services rendered by doctors, and lawyers.
(5) Association dues or membership fees and
other assessment or charges for the
beneficial services of the homeowners
association (RMC No. 9-2013)
(6) Lease/use of sports facilities and
equipment (RA 6847)

Lease of Properties: subject to the VAT


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.
(1) The lease or the use of or the right or
privilege to use any copyright, patent,
design or model, plan secret, formula or
process, goodwill, trademark, trade brand
or other like property or right
(2) The lease of 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 #2 or any such knowledge
or information as is mentioned in #3
(5) The supply of services by a nonresident
person or his employee in connection with
the use of property or rights belonging to,
or the installation or operation of any
brand, machinery or other apparatus
purchased from such nonresident person
(6) The supply of technical advice, assistance
or services rendered in connection with
technical management or administration
of any scientific, industrial or commercial
undertaking, venture, project or scheme
(7) The lease of motion picture films, films,
tapes and discs

The performance of the services should not be


in pursuit of an employer-employee
relationship between the service-provider and
the service-recipient.

ZERO-RATED SALE OF SERVICES


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.
The following services performed in the
Philippines by VAT-registered persons
areeffectively 0% VAT sales of services:
(1) Processing, manufacturing or repacking
goods for other persons doing business
outside the Philippines which goods are
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(2)

(3)

(4)

(5)

(6)

TAXATION 2

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 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
The services referring to processing,
manufacturing, repacking and services
other than those in (1) both require (i)
payment in foreign currency; (ii) inward
remittance; (iii) accounted for by the BSP;
AND (iv) that the service recipient is doing
business outside the Philippines. If this is
not the case, taxpayers can circumvent just
by stipulating payment in foreign currency.
(CIR v. Burmeister)
Services rendered to persons or entities
whose exemption under special laws or
international agreements to which the
Philippines is a signatory effectively
subjects the supply of such services to zero
percent (0%) rate (as amended by RA
9337)
Services rendered to persons engaged in
international shipping or international air
transport operations, including leases of
property for use thereof [as amended by
RA 9337];
Provided, however, that the services
referred to herein shall not pertain to those
made to common carriers by air and sea
relative to their transport of passengers,
goods or cargoes from one place in the Phil.
to another place in the Phil. (the same
being subject to 12% VAT under Sec. 108)
Services performed by subcontractors
and/or
contractors
in
processing,
converting, or manufacturing goods for an
enterprise whose export sales exceed

TAXATION LAW

seventy percent (70%) of total annual


production.
(7) Transport of passengers and cargo by air
or sea vessels from the Philippines to a
foreign country (as added by RA 9337) and;
(8) Sale of power or fuel generated through
renewable sources of energy such as, but
not limited to, biomass, solar, wind,
hydropower, geothermal, ocean energy,
and other emerging energy sources using
technologies such as fuel cells and
hydrogen fuels. (as added by RA 9337)
Zero-rating shall apply strictly to the sale of
power or fuel generated through renewable
sources of energy, and shall not extend to the
sale of services related to the maintenance or
operation of plants generating said power.
Effectively zero-rated sale of service a local
sale of services by a VAT-registered person to a
person or entity granted indirect tax exemption
under special laws or international agreement.
The taxpayer must seek prior approval or prior
confirmation from the appropriate offices of
the BIR so that a transaction is qualified for
effective zero-rating except in export sales and
foreign denominated sales.
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 from the BIR.

VAT EXEMPT TRANSACTIONS


Vat Exempt Transactions, in general
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. (RR 16-2005)
But, the VAT-registered person may elect that
the exemption not apply to its sale of goods or
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TAXATION 2

properties or services; provided that the


election made shall be irrevocable for a period
of three (3) years from the quarter the election
was made (Sec. 109(2), NIRC).

TAXATION LAW

Philippines is a signatory or under special


laws, except those under PD No. 529
[Petroleum Exploration Concessionaires
under the Petroleum Act of 1949]
(12) Sales by agricultural cooperatives duly
registered
with
the
Cooperative
Development Authority to their members
as well as sale of their produce to nonmembers. Exemption includes importation
of direct farm inputs, machineries and
equipment, including spare parts thereof,
to be used directly and exclusively in the
production and/or processing of their
produce.
(13) Gross receipts from lending activities by
credit or multi-purpose cooperatives duly
registered
with
the
Cooperative
Development Authority
(14) Sales by non-agricultural, non- electric and
non-credit cooperatives duly registered
with the Cooperative Development
Authority are exempt BUT their
importation of machineries and equipment,
including spare parts thereof, to be used by
them are SUBJECT to VAT.
(15) Export sales by persons who are not VATregistered
(16) Sale of real properties the ff. sales are
exempt:
(a) Sale of real properties NOT primarily
held for sale to customers or held for
lease in the ordinary course of trade or
business.
However, even if the real property is
not primarily held for sale to
customers or held for lease in the
ordinary course of trade or business
but the same is used in the trade or
business of the seller, the sale thereof
shall be subject to VAT being a
transaction
incidental
to
the
taxpayers main business. [RR 42007]
(b) Sale of real properties utilized for lowcost housing as defined by RA No.
7279, otherwise known as the "Urban
Development and Housing Act of

Exempt Transactions Enumerated


(1) Sale/import of agricultural, marine food
products in original state; of livestock and
poultry; breeding stock and genetic
materials
(2) Sale/ import of fertilizers; seeds, seedlings
and fingerlings; fish, prawn, livestock and
poultry feeds (including ingredients)
(3) Import of personal and household effects
of Phil resident returning from abroad and
nonresident citizens coming to resettle in
the Philippines
(4) Import of professional instruments and
implements, wearing apparel, domestic
animals, and personal household effects
belonging to persons coming to settle in
the Philippines, for their own use and not
for sale, barter or exchange
(5) Services subject to percentage tax
(6) Services by agricultural contract growers
and milling for others of palay into rice,
corn into grits and sugar cane into raw
sugar
(7) Medical, dental, hospital and veterinary
services except those rendered by
professionals:
(8) Educational services rendered by private
educational institutions, duly accredited by
DEPED, CHED, TESDA, and those rendered
by government educational institutions;
(9) Services rendered by individuals pursuant
to an employer-employee relationship
(10) Services rendered by regional or area
headquarters
established
in
the
Philippines by multinational corporations
which act as supervisory, communications
and coordinating centers for their affiliates,
subsidiaries or branches in the Asia-Pacific
Region and do not earn or derive income
from the Philippines
(11) Transactions which are exempt under
international agreements to which the
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TAXATION 2

1992" and other related laws, such as


RA No. 7835 and RA No. 8763.
Low-cost housing" refers to housing
projects intended for homeless lowincome
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.
(c) 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. 7279
and RA No. 7835 and RA No. 8763.
"Socialized housing" shall also refer to
projects
intended
for
the
underprivileged
and
homeless
wherein the housing package selling
price is within the lowest interest rates
under the Unified Home Lending
Program (UHLP) or any equivalent
housing program of the Government,
the private sector or non-government
organizations.

TAXATION LAW

(d) Sale of residential lot valued at


P1,919,500 and below, or house & lot
and other residential dwellings valued
at P3,199,200 and below
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 P1,919,500. [RR 13-2012]
Adjacent residential lots, although
covered by separate titles and/or
separate tax declarations, when sold
or disposed to one and the same
buyer, whether covered by one or
separate Deed of Conveyance, shall
be presumed as a sale of one
residential lot. [RR 16-2005]
Sale, transfer or disposal within a 12month period of 2 or more adjacent
residential lots, house and lots or
other residential dwellings to one
buyer, whether from the same or from
different sellers shall be considered
one single transaction. Hence, the
sale of the adjacent lots shall be
subject to VAT if the aggregate value
exceeds P1,919,500 for residential lots
and P3,199,200 for residential house
lots
or
residential
dwellings,
notwithstanding that the value of the
individual properties do not exceed
the VAT exemption thresholds.
Sale/purchase of parking lots shall
not be considered a sale of residential
lot/dwelling. Hence, it shall be
subject to VAT regardless of its selling
price. [RR 13-2012]
(17) Lease of residential units with a monthly
rental per unit not exceeding P12,800,
regardless of the amount of aggregate
rentals received by the lessor during the
year.
Lease of residential units where the
monthly rental per unit exceeds P12,800
but the aggregate of such rentals of the
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TAXATION 2

lessor during the year do not exceed One


Million Five Hundred Pesos P1,919,500
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 P12,800 while others are leased
out for more than P12,800 per unit, his tax
liability will be as follows:
(a) The gross receipts from rentals not
exceeding P12,800 per month per unit
shall be exempt from VAT regardless
of the aggregate annual gross receipts.
(b) The gross receipts from rentals
exceeding P12,800 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 P12,800 ) exceeds P1,919,500 .
Otherwise, the gross receipts will be
subject to the 3% tax imposed under
Section 116 of the Tax Code.
The term 'residential units' shall refer
to apartments and houses & lots used
for residential purposes, and buildings
or parts or units thereof used solely as
dwelling places (e.g., dormitories,
rooms and bed spaces) except motels,
motel rooms, hotels and hotel rooms.
The term 'unit' shall mean an
apartment unit in the case of
apartments, house in the case of
residential houses; per person in the
case of dormitories, boarding houses
and bed spaces; and per room in case
of rooms for rent. [RR 16-2005]
(18) Sale, importation, printing or publication
of books and any newspaper, magazine
review or bulletin which appears at regular
intervals with fixed prices for subscription
and sale and which is not devoted
principally to the publication of paid
advertisements;

TAXATION LAW

(19) Transport of passengers by international


carriers (Added by RA 10378)
(20)
Sale, importation or lease of passenger
or cargo vessels and aircraft, including
engine, equipment and spare parts thereof
for domestic or international transport
operations [added by RA 9337];
The exemption from VAT on the
importation and local purchase of
passenger and/or cargo vessels shall be
limited to those of 150 tons and above,
including engine and spare parts of said
vessels;
Provided, further, that the vessels to be
imported shall comply with the age limit
requirement, at the time of acquisition
counted from the date of the vessel's
original commissioning, as follows:
(a) for passenger and/or cargo vessels,
the age limit is 15 years old,
(b) for tankers, the age limit is 10 years old,
and
(c) for high-speed passenger crafts, the
age limit is 5 years old [RR 16-2005]
(21) Importation of fuel, goods, and supplies by
persons engaged in international shipping
or air transport operations; [added by RA
9337]
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;
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 12% VAT starting Feb. 1, 2006.
[RR 16-2005]
(22)
Services of banks, non-bank financial
intermediaries performing quasi-banking
functions and other non-bank financial
intermediaries; and
(23)Sale or lease of goods or properties or the
performance of services other than the
transactions mentioned in the preceding
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TAXATION 2

paragraphs, the gross annual sales and/or


receipts do not exceed the amount of
P1,919,500
For purposes of the threshold of
P1,919,500, 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. [RR
16-2005]

TAXATION LAW

day clubs, boxing exhibitions, professional


basketball games, jai-alai and race tracks;
and
(8) Receipts on sale, barter for exchange of
shares of stock listed and traded through
the local stock exchange or through initial
public offering.

INPUT TAX AND OUTPUT TAX, DEFINED


Output tax the VAT due on the sale or lease
of taxable goods or properties or services by
any person registered or required to register
under Section 236 of the Code. (Sec 110 A)
Input tax 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.

Other Services Exempt from VAT such


services are those subject to percentage tax
(infra)
(1) Services rendered by domestic common
carriers by land for the transport of
passengers and keepers of garages;
(2) Services rendered by international
air/shipping carriers;
(3) Services rendered by franchise grantees of
radio and/or television broadcasting
whose annual gross receipts of the
preceeding
year
do
not
exceed
P10,000,000 and by franchise grantees of
gas and water utilities;
(4) Services rendered for overseas dispatch,
message, by franchise grantees or
conversation
originating
from
the
Philippines;
(5) Services by any person, company or
corporation (except purley cooperative
companies or associations) doing life
insurance business of any sort in the
Philippines;
(6) Services rendered by fire, marine or
miscellaneous insurance agents of foreign
insurance companies;
(7) Services rendered by proprietors, lessees or
operators of cockpits, cabarets, night or

(1) It includes the transitional input tax and


the presumptive input tax as determined in
accordance with Section 111 of the Code.
(2) 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.
(3) Input tax must be evidenced by a VAT
invoice or official receipt issued by a VATregistered person in accordance with Secs.
113 and 237 of the Code. [RR 16-2005]

SOURCES OF INPUT TAX


(1) Purchase or importation of goods
(evidenced by VAT invoice/receipt)
(a) For sale; or
(b) For conversion into or intended to form
part of a finished product for sale
including packaging materials; or
(c) For use as supplies in the course of
business; or
(d) For use as materials supplied in the
sale of service; or
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UP LAW BOC

(2)
(3)
(4)
(5)
(6)

TAXATION 2

(e) For use in trade or business for which


deduction
for
depreciation
or
amortization is allowed under the Code.
Purchase of real properties for which VAT
has actually been paid
Purchase of services in which VAT has
actually been paid
Transactions deemed sale
Presumptive Input Tax
Transitional Input Tax

TAXATION LAW

Who may avail: (i) By a person who becomes


VAT-liable for the 1st time, or (ii) any person
who elects to be a VAT-registered person
Rate: 2% Input VAT 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 VATregistered person.
Tax base: 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. (RR 162005)

Presumptive Input Tax (Sec. 111(B))


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 FOUR
PERCENT (4%) of the gross value in money of
their purchases of primary agricultural
products which are used as inputs to their
production.

Note: A real estate dealer is entitled to claim


transitional input VAT based on the value of
the entire (including the value of the land and
the improvements thereon) real property sold
regardless of whether there was in fact actual
payment of VAT on the purchase of the real
property. At the time the purchase was made,
there was still no VAT imposed. (Fort Bonifacio
Development Corp. v. CIR)

Processing means 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.

PERSONS WHO CAN AVAIL OF INPUT


TAX CREDIT
Input tax on domestic purchase or importation
of goods or properties shall be creditable:
(1) To the purchaser upon consummation of
sale and on importation of goods or
properties; and
(2) To the importer upon payment of the VAT
prior to the release of the goods from the
custody of the Bureau of Customs.
(a) 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 the 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

Claiming of input Tax on motor vehicles


subject to the ff conditions:
(1) Purchase of vehicle must be substantiated
with official receipts and other records;
(2) Taxpayer has to prove the direct
connection of the motor vehicle to the
business;
(3) Only one vehicle for land transport is
allowed for the use of an official/employee
with value not exceeding P2.4 million;
(4) No depreciation shall be allowed for yachts,
helicopters, airplanes
Transitional Input Tax (Sec 111)
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TAXATION 2

DETERMINATION OF OUTPUT/INPUT
TAX; VAT PAYABLE; EXCESS INPUT TAX
CREDITS

(P1,000,000). If the aggregate


acquisition cost does not exceed
P1,000,000, the total input taxes will
be allowable as credit against output
tax in the month of acquisition.25
(b) However, 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
(3) To the purchaser of services or the lessee or
licensee
upon
payment
of
the
compensation, rental, royalty or fee.

Output VAT Input VAT = VAT Payable


a) Determination of output tax (RR 16-2005)
Output VAT in a sale of goods/properties shall
be computed by multiplying the total amount
indicated in the invoice or receipt by 12%.

= ( 12%)

Input tax on purchase of services, lease or use


of properties shall be creditable:
(1) To the purchaser upon payment of the
compensation, royalty or fee
(2) To lessee or licensee upon payment of the
compensation, royalty or fee

Output VAT in a sale of services shall be


computed by multiplying the total amount
indicated in the invoice or receipt by 12%.


= ( 12%)

Transitional taxThe following persons shall be allowed INPUT


TAX in his beginning inventory of goods,
materials and supplies an equivalent to TWO
PERCENT (2%) of the value of such inventory;
OR the actual VAT paid on such goods,
materials and supplies, whichever is HIGHER,
which shall be creditable against the OUTPUT
TAX.
(1) Any person liable for VAT or
(2) who elects to be a VAT-registered person

b) Determination of input tax creditable


1. The sum of the excess input tax carried over
from the preceding month or quarter and the
input tax creditable to a VAT-registered person
during the taxable month or quarter shall be
reduced by the amount of claim for refund or
tax credit for value-added tax and other
adjustments, such as purchase returns or
allowances and input tax attributable to
exempt sale.

Presumptive input tax


There 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.
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

25

TAXATION LAW

2. The claim for tax credit referred to includes


not only those filed with the BIR but also those
filed with other government agencies, such as
the Board of Investments the Bureau of
Customs.
c) Allocation
transactions26

Please refer below for the example.

26

125

of

input

tax

Please refer below for the example

on

mixed

UP LAW BOC

TAXATION 2

There are four possible transactions a VATregistered person may enter into: (i) VAT
taxable, (ii) VAT-exempt, (iii) zero-rated VAT
and (iv) sale to governments.

TAXATION LAW

comprised of the gross selling price/gross


receipts plus the correct amount of VAT. Hence,
the output tax shall be computed by
multiplying the total invoice amount by a
fraction using the rate of VAT as numerator
and one hundred percent (100%) plus rate of
VAT as the denominator. Accordingly, the
input tax that can be claimed by the buyer
shall be the corrected amount of VAT
computed in accordance with the formula
herein prescribed.

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.
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 GOCCs shall not be
credited against output taxes arising from
sales to non-Government entities
(2) If any input tax cannot be directly
attributed to either a VAT taxable or VATexempt transaction, the input tax shall be
pro-rated to the VAT taxable and VATexempt transactions and ONLY the ratable
portion pertaining to transactions subject
to VAT may be recognized for input tax
credit.

There shall be allowed as a deduction from the


output tax the amount of input tax deductible
to arrive at VAT payable on the monthly VAT
declaration and the quarterly VAT returns.

SUBSTANTIATION
CREDITS

OF

INPUT

TAX

(1) 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:
(a) the importation of goods = Import
entry or other equivalent document
showing actual payment of VAT on the
imported goods.
(b) For the domestic purchase of goods
and properties = Invoice showing the
information required under Secs. 113
(Invoicing
and
Accounting
Requirements for VAT-Registered
Persons) and 237 (Issuance of Receipts
or Sales or Commercial Invoices) of the
Tax Code.
(c) For
the purchase of real property =
public instrument i.e., deed of absolute
sale, deed of conditional sale,
contract/agreement to sell, etc.,
together with VAT invoice issued by the
seller.
(d) For the purchase of services = official
receipt showing the information

d) Determination of the output tax and VAT


payable and computation of VAT payable or
excess tax credits
If at the end of any taxable month or quarter:
The output tax exceeds the input tax, the
excess shall be paid by the VAT-registered
person
The input tax exceeds the output tax, the
excess shall be carried over to the
succeeding quarter or quarters
In all cases where the basis for computing the
output tax is either the gross selling price or
the gross receipts, but the amount of VAT is
erroneously billed in the invoice, the total
invoice amount shall be presumed to be
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required under Secs. 113 and 237 of the


Tax Code.
(2) 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.
(3) TRANSITIONAL INPUT TAX shall be
supported by an inventory of goods as
shown in a detailed list to be submitted to
the BIR.
Input tax on "deemed sale" transactions
shall be substantiated with the invoice
required.
Input tax from payments made to nonresidents (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 nonresident evidencing remittance of VAT due
which was withheld by the payor.
Advance VAT on sugar shall be supported
by the Payment Order showing payment of
the advance VAT.

TAXATION LAW

(e) The claimed input tax are directly


attributable to 0%-rated transactions.
(f) Acceptable foreign currency exchange
proceeds must have been duly accounted
for
(g) Claimed input tax must be duly supported
by VAT invoices/receipts.
(h) VAT returns for the succeeding quarters
must have been submitted.
(2) Cancellation of VAT Registration.
(a) A person whose registration has been
cancelled due to (i) retirement from or
cessation of business, or due to
changes in or (ii) cessation of status
under Section 106(C) of the Code may,
within two (2) years from the date of
cancellation, apply for the issuance of
a tax credit certificate for any unused
input tax which may be used in
payment of his other internal revenue
taxes.
(b) He shall be entitled to a refund if he
has no internal revenue tax liabilities
against which the tax credit certificate
may be utilized.

REFUND OR TAX CREDIT OF EXCESS


INPUT
TAX
(CF
REFUND
OF
ERRONEOUSLY PAID TAXES)

Period to file claim/apply for issuance of tax


credit certificate this periods must be
distinguished from normal tax refunds for
erroneous payments where an administrative
claim and judicial claim may be made together,
and the reckoning point of the 2 years is from
the date of the erroneous payment.
(1) Application for issuance of tax credit
certificate or refund of creditable input tax
(except transitional input tax)
w/in 2 years after the close of the
taxable quarter when the sale was
made.
If the VAT registration has been
cancelled due to retirment or cessation
of business, or change of status, the 2
year period shall be after the date of
cancellation
(2) Administrative Claim

Who may claim for refund/apply for issuance of


tax credit certificate
(1) Zero-Rated Sales (Sec. 112(A), NIRC)
Requirements:(Summary)
(a) The claimant should be a VAT-registered
person
(b) There should be an application filed with
the BIR or DOF center, as the case may be,
within 2yrs after close of taxable quarter.
(c) The claimed input tax must not have been
applied to any output tax during the period
covered and subsequent periods covered
by the claim.
(d) The claimed input tax must have been
deducted from the VAT quarterly return.
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The CIR shall grant the tax


credit/refund within 120 days from the
date of submission of complete
documents in support of the
application
Complete Documents is determined
by taxpayer himself.
Taxpayer may only resort to a Judicial
Claim either after the end of the 120
day period or after a decision is made
by the Commission, whichever comes
first.
(3) Judicial Claim
In case of denial of the application or
the expiry of the 120 days, the taxpayer
may appeal to the CTA within 30 days
from the receipt of said denial or
inaction.

TAXATION LAW

Invoicing requirements in general


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
Only VAT-registered persons are required to
print their TIN followed by the word VAT in
their invoice or ORs. Said documents shall be
considered as a VAT Invoice or VAT official
receipt.
All
purchases
covered
by
invoices/receipts other than VAT Invoice/VAT
OR shall not give rise to any input tax. [RR 1605]
Note: VAT component of all transactions shall
be separately indicated in the VAT invoice or
receipt. (RR 18-2011)

Manner of giving refund


Revenue Memorandum Circular no. 57-2013
(August 23, 2013): Unutilized creditable input
taxes attributed to zero-rated sales can only be
recovered through the application for refund or
tax credit. There is no other mode of recovering
unapplied input taxes aside from an
application for refund or tax credit. The
Memorandum Circular also instructed the
disallowance of unutilized creditable input
taxes attributable to VAT zero-rated sales that
is claimed as a deduction for income tax
purposes.

Consequences of issuing erroneous vat invoice


or vat official receipt
Issuance of a VAT Invoice or VAT Receipt by a
non-VAT person
If a person who is not a VAT-registered person
issues an invoice or receipt showing his
Taxpayer Identification Number (TIN), followed
by the word "VAT", the erroneous issuance
shall result to the ff:
(1) The non-VAT person shall be liable to:
Percentage taxes applicable to his
transactions;
VAT due on transactions under Section 106
or 108 of the Code, without the benefit of
any input tax credit; and
A 50% surcharge under Section 248 (B) of
the code;
(2) The VAT shall, if the other requisite
information required is shown on the
invoice/receipt, be recognized as an input
tax credit to the purchaser.

Refunds shall be made upon warrants drawn


by the Commissioner or by his duly authorized
representative without the necessity of being
countersigned by the Chairman, Commission
on Audit, the provisions of the Administrative
Code of 1987 notwithstanding: provided that
refunds shall be subject to post audit by the
Commission on Audit. (Sec. 112(D), NIRC)
Destination principle or cross-border doctrine
(see above)

Issuance of a VAT Invoice or VAT Receipt on an


Exempt Transaction by a VAT-registered Person

INVOICING REQUIREMENTS (SEC 113)


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TAXATION 2

If a VAT-registered person issues a VAT invoice


or VAT official receipt for a VAT-exempt
transaction, but fails to display prominently on
the invoice or receipt the term "VAT-exempt
Sale:
(1) the transaction shall become taxable and
the
(2) issuer shall be liable to pay VAT thereon.
(3) The purchaser shall be entitled to claim an
input tax credit on his purchase. [RR 1605]

TAXATION LAW

(a) Failure to issue receipts and invoices.


(b) Failure to file VAT return as required
under the provisions of Sec. 114 of the
Tax Code.
(c) Understatement of taxable sales or
receipts by 30% or more of his correct
taxable sales or receipt for the taxable
quarter.
(d) Failure of any person to register as
required under the provisions of Sec.
236 of the Tax Code.
(2) 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 (VAT).

FILING OF RETURN AND PAYMENT(SEC


114)
VAT returns - VAT paid on a monthly basis.
Payments in the monthly VAT declarations
shall 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.
(1) Filed by person liable to pay the VAT
(2) Quarterly return of the amount of his gross
sales or receipts within twenty-five (25)
days after the close of each taxable quarter
prescribed for each taxpayer.
(3) The monthly VAT Declarations 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.

WITHHOLDING OF FINAL VAT ON SALES


TO GOVERNMENT (RR 16-2005)
General Rule: Withholding tax does not apply
on transactions subject to VAT. The exceptions
are:
Gross payments by the government shall be
subject to the 5% final withholding tax;
Gross payments by resident VAT-taxpayers to
non-resident foreign persons of rentals,
royalties, reinsurance premiums, and services
done in the Philippines12% (Sec. 114(c),
NIRC)

Note: VAT paid on a monthly basis. Payments


in the monthly VAT declarations shall be
credited in the quarterly VAT return to arrive at
the net VAT payable or excess input tax/overpayment as of the end of a quarter.

Beginning Nov. 1, 2005, when R.A. 9337


became effective, all sales of goods, properties,
or services to the government shall be subject
to the 5% final withholding tax. The
government shall, before making payment on
account of each purchase of goods and/or
services taxed at 12% VAT (Sec. 106 and 108)
deduct and withhold a final VAT due at the
rate of 5% of the gross payment thereof.
(Mamalateo, Reviewer on Taxation, 2008)

Administrative and Penal Provisions (Sec 115)


(1) 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:

Sales to Government
(1) The Government or any of its political
subdivisions, instrumentalities or agencies,
including GOCCs shall, before making
129

UP LAW BOC

TAXATION 2

payment on account of each purchase of


goods and services which are subject to the
VAT (Secs. 106 and 108, NIRC), deduct and
withhold a final VAT due at the rate of five
percent (5%) of the gross payment thereof.
(a) The payment for lease or use of
properties or property rights to
nonresident owners shall be subject to
12% withholding tax at the time of
payment.
(b) The payor or person in control of the
payment is considered as the
withholding agent.
(c) The VAT withheld shall be remitted
within ten (10) days following the end
of the month the withholding was
made.
(2) The 5% final VAT shall represent the net
VAT payable of the seller. The remaining
7% 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.

TAXATION LAW

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% final VAT shall be withheld with
respect to the following:
(a) Lease or use of properties or property
rights owned by non-residents;
(b) Services rendered to local insurance
companies, with respect to reinsurance
premiums payable to non-residents; and;
Other services rendered in the Philippines by
non-residents.

The 5% final VAT shall represent the net VAT


payable of the seller. The remaining 7%
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.
130

UP LAW BOC

TAXATION 2

VAT FORMULA (IN GENERAL)

TAXATION LAW

On taxable goods/services
xxx
xxx
Net VAT Payable
xxx
Add Penalties:
Surcharge
xxx
Interest
xxx
Compromise
xxx
xxx
Total Amount Payable
xxx

Actual Sales/Receipts
xxx
Add: Excise Tax
xxx
Remaining Merchandise (Cessation of VATregistered Status)
xxx
Transactions Deemed Sale
xxx
xxx
Less: Sales Returns and Allowances
xxx
Sales Discounts
xxx
xxx

INVOLVING GOVERNMENT
When Actual Input VAT > Standard Input VAT:
excess forms part of sellers expense/cost
When Actual Input VAT < Standard Input VAT:
difference is treated as taxable other income

Total Sales (Taxable Base)


xxx
Multiplied by 12%
12%
Output VAT on sales or gross recipts
xxx
Less: Input VAT on purchases and services
xxx
Transitional Input VAT, if applicable
xxx
Presumptive Input VAT, if applicable
xxx
Input VAT Carry-over from previous
period
xxx
Creditable VAT withheld
xxx
xxx
Net VAT payable (refundable)
xxx

Sales xxx
Output VAT (Sales x 12%)
Purchases
xxx
Input VAT (Purchases x 12%)
xxx

xxx

OUTPUT VAT Payable:


Output VAT
xxx
Less: Actual Input VAT
xxx
Standard Input VAT (Sales x 7%)
xxx
xxx
Cost of sale/Expense (Income and
expense summary)
xxx
Net VAT Payable
xxx
Less: Creditable Withholding Tax (Sales x 5%)
xxx
Output VAT Payable
xxx

MONTHLY RETURN
Gross Sales/Receipts for the Month
xxx
Multiplied by VAT rate
12%
Output VAT
xxx
Less Input Taxes:
Transitional/Presumptive Input Tax
xxx
131

UP LAW BOC

TAXATION 2

Quick Notes on VAT


Transactions subject to VAT
General Requirements
Done in the course of trade or business (w/n
profit-oriented): rule of regularity + incidental
thereto (inc isolated)
exception:
(a) NRC/NRA who perform services in Phil,
even if no regularity
(b) Importation of Goods may be for business
or non-business use
Gross sales or receipts for the past 12 months
or the next 12 months > 1,919,500php
OR there are reasonable grounds to believe

(1) Seller (w/n natural) executes contract to


SBE of RP
(2) RP is in the Phil
(3) Seller is engaged in sale or exchange of RP
or real estate (dealer, developer, lessor)
(4) RP is held primarily for sale/lease ICT/B or
an ordinary asset used in T/B as an
incident to his vatable activity (NOT a
capital asset)
(5) not exempt from VAT (NIRC, special law,
special agreement) NB:
Deferred Payments (initial > 25%
GSP)
Instalment Plan (initial 25% GSP)

S of Services29
(1) for
a
valuable
consideration
(actually/constructively received)
(2) performed ICTB in the Phil.
(3) not exempt from VAT (NIRC, special law,
special agreement)
(4) person rendering service is VAT-liable
(5) no ee-er relationship
(6) I of Goods

Taxable Transactions and Specific Requirements


SBEL of Goods or Properties27
Goods/Personal Properties
(1) Actual/deemed sale (4) for a valuable
consideration
(2) for use or consumption in the Phil
(regardless of the payment arrangements)
(3) not exempt from VAT (NIRC, special law,
special agreement)

Persons Liable to pay VAT


Any person who SBEL goods or properties
if real property: persons engaged in real estate
business:
(1) Any person who SBE of real properties
ICT/B
(2) Real estate lessors/ sub-lessors
(3) NRA/NRC lessors when RP is in Phil
(4) non-stock, non-profit corp engaged in SBE
of real properties ICT/B, regardless of
disposition of income
(5) Govt inc GOCCs in SBEL of RP ICT/B
who renders services
who imports goods

Real Properties28:
27

Sec 106

28

Casual
Sale
(Capital
Assets)
Regular Sales
(Ordinary
Assets)
Commercial
Property
(Sale/Lease
)
Residential
Units
(Lease)

Residential
Lot
Residential
House and
Lot

TAXATION LAW

Subject to CGT (6%)

Subject to 12% VAT

If importer is tax-exempt/VAT-exempt AND


goods are subsequently SBE to non-exempt
persons,
purchasers/recipients = importer
if the Philippine branch of an NRFC
imported, first local buyer = importer

If monthly rental 12,800 = VAT and


OPT-exempt
If monthly rental > 12,800 but
aggregate annual rentals 1,919,500
= subject to OPT
If monthly rental > 12,800 and
aggregate annual rentals > 1,919,500
= subject to VAT
If SP > 1,919,500.00 = subject to VAT
IF SP 1,919,500.00 = VAT-exempt
If SP > 3,199,200.00 = subject to VAT
IF SP 3,199,200.00 = VAT-exempt

29

132

Sec 108

UP LAW BOC

TAXATION 2

Tax Bases of VAT


Gross (Sales) Selling Price: total amount of
money paid in consideration of SBEL
Excludes: VAT, sales discounts 30
and,
allowances and returns (2)
Includes: Excise tax paid, initial payments 31 ,
interests and penalties (if instalment),
commission income (if exported), purchase
price, charges for packing, delivery and
insurance

TAXATION LAW

Upon full collection, if a difference is


uncovered because the zonal value or market
value at the date of sale is higher than the total
receipts or collections based on the agreed
consideration, the additional VAT shall be paid
accordingly (RMC 03-96)
IF DEFERRED
GSP = entire selling price or zonal/FMV,
whichever is higher
NB: CIR has the power to determine the
appropriate tax base in 1) SBE in deemed sales
and 2) when GSP is unreasonably lower than
AMV32

If goods/personal properties,
GSP = amount paid in consideration
IF DEEMED SALE: FMV at the time of the
transaction
NB: in retirement/cessation, inventory (raw
materials,
finished
goods,
machinery,
equipment, furniture, fixture), tax base =
whichever is lower,
(1) acquisition cost
(2) current market price of goods
(3) If real property,
GSP = amount higher:
(1) consideration stated in the sales document
(2) FMV, whichever is higher of

GROSS VALUE IN MONEY OF GOODS


Gross Receipts derived from transaction: total
amount of money/equivalent = contract price +
compensation + service fee + rental fee +
royalties + amount charged for materials
supplied with the services + deposits and
advanced payments actually or constructively
received + costs items of construction projects
(VAT + amounts earmarked for payments to
unrelated 3rd party + amounts received as
reimbursement + monies/receipts held in trust
w/c do not redound to the benefit of taxpayer +
universal charge passed on and collected by
distribution companies and electric coop (if sale
of electricity) + receivables + local taxes)

Zonal value: FMV as determined by CIR


Real Property Tax Value: FMV as determined
by provincial & city assessors
IF ON INSTALLMENT:
GSP = down payments received + interests +
penalties + other charges amount of
mortgage (paid)
NB:
If
zonal/FMV,
tax
base
=

IF DEALER IN SECURITIES: gross selling price


cost of securities sold

Total Value/Landed Cost (determined on the


basis
of quantity/volume of goods)
,

Total Value used by Customs: tariff and


customs duties + custom duties +excise tax +
charges
30 It should be determined at the time of the sale,
Landed Cost: invoice amount inc. cost of
loading, shipping, unloading, + custom duties
indicated in the invoice and granting does not depend on
( )
( )

the happening of a future event


31 Initial payments does not include the amount of
mortgage on RP sold (except excess when mortgage
exceeds the cost of the property), notes and other
evidence on=f indebtedness issued by the purchaser at
the time of the sale

GSP is unreasonably lower than the actual market


value if it is lower than 30% of AMV of the same goods of
the same quantity or quality sold in the immediate
locality or the nearest date of sale.
32

133

UP LAW BOC

TAXATION 2

+ freight + insurance + other charges +excise


tax expenses incurred after release of goods
(e.g. cost of delivery)
Customs duty: amount of customs duty legally
due and paid by the importer
Charges: special import tax,foreign marginal
fees, bank and arrastre charges, wharfage
dues, broker fees, other charges paid to
complete importation

TAXATION LAW
FORMULA

INPUT
TAX
TREATMENT

Untraceable
VAT

Input
x Creditable Input
( )
VAT

Untraceable
VAT

Input Input VAT Credit,


x eligible for tax
( )
refund or TCC

Untraceable
Input Cost of Sales or
VAT
x Operating
( )
Expense

Compare
to
Untraceable
Input Standard Input
( )
VAT (Creditable
VAT x
against Standard
input VAT)

Rates of VAT
(a) Output Tax (Sale/Barter/Exchange/Lease)
12% standard rate: applied directly to TB
0%: applied directly to TB
(b) Input Tax (Purchase from VAT-registered
businesses/Importation of goods)
12% standard rate: applied directly to TB
0%: applied directly to TB
2% transitional VAT: applied to the
(inventory on hand) value of goods (exc.
VAT-exempt good) existing at the date a
person commences business and/or
becomes liable to VAT) or 12% actual input
tax rate, higher
4% presumptive input tax rate: applies to
purchases of VAT-exempt goods used as
inputs by a VAT-registered person in
manufacturing or processing certain food
products
7% FWT (standard input VAT, when
government), 5% withholding

NB: Creditable Input VAT is increased by any


input VAT carried over from the preceding
month or quarter decreased by:
(1) amount of the claim for refund or tax credit
for VAT filed during the same period
(2) input tax attributable to exempt sales and
unauthorized input tax attributable of
depreciable capital goods
(3) amount of input VAT wrt uncollected
portion of instalment receivable in
instalment sales

Creditable Input VAT Requirements


(1) Proper documentation
(2) No double input tax credit is allowed.
(3) Input VAT on a particular purchase
transaction can be claimed once only upon
consummation of the sale of goods and
based on the entire GSP (whether paid on
cash, credit or instalment)
(4) Ignore erroneous VAT rate. The correct rate
of input VAT can still be claimed.
(5) Transactions should have been made with
VAT-registered persons.
(6) IF MIXED TRANSACTIONS and input VAT
cannot be directly attributable:
134

UP LAW BOC

TAXATION 2

TAXATION LAW

VAT-EXEMPT AND 0% VAT


VAT-Exempt
Non-VAT taxable transaction
Taxpayer is relieved from payment of VAT for
w/c he is directly liable
NO output and input VAT
Optional VAT Registration
Partial relief
Only removes VAT at the exempt stage

0% VAT
Taxable transaction
No output VAT, but input VAT is available as tax credit
or refund
Total relief
All VAT is removed at whatever stage

SALE OF SERVICES
VAT-Exempt
0% VAT
NB: There are 31 VAT-exempt sales of Processing, manufacturing, repacking goods to nonservices (Sec 109 and special laws)
resident (5)
Processing, manufacturing, repacking goods to
export-oriented (3)
Services other than processing, manufacturing,
repacking (4)
Services to exempted persons (3): effectively 0-rate
Sale of power/fuel-generated through renewable
wrt lease of property =exempt
resources (3)
if advance payment = loan, option money, Services rendered to intl shipping/air transport (2)
security deposit
Transport of passengers and cargo by air from Phil to
NB: if security deposit is applied to rental = Foreign (3)
VAT
Transactions of VAT-reg person to foreign embassies
wrt persons engaged in milling, processing, (2)
manufacturing or repacking goods = exempt
if palay rice; corn corn grits; sugar cane
raw sugar
wrt franchise grantees of electric utilities,
telephone and telegraph, radio and/or
television broadcasting = exempt
if annual gross receipts <= 10M;
franchise grantees of gas and water
utilities;
of telephone & telegraph services,
amounts received for overseas dispatch from
Phil.
wrt PREMIUMS of non-life insurance
companies = exempt
if life and disability insurance;
crop insurance;
health and accident insurance
(included are only those with exceptions)
Exceptions to the Exemptions (Subject to VAT)
5. sale/import of agricultural & marine food wrt livestock and poultry DOES NOT INCLUDE
products in their original state; livestock and fighting cocks, race horses, zoo animals and pets
poultry (used/yield for human consumption);
breeding stock and genetic materials
DOES NOT INCLUDE vehicles, vessels, aircrafts,
6. import of professional instruments, machineries, and other goods for use in
implements, wearing apparel, domestic manufacturing in commercial quantities
135

UP LAW BOC

TAXATION 2

TAXATION LAW

animals, and personal household effects


DOES NOT INCLUDE those under Petroleum
7. Transactions exempt pursuant to special Exploration Concessionaires under Petroleum Act of
laws
1949
Wrt sale by agricultural coops to non-members, if
8. Cooperatives
seller is the member = VAT
Wrt sale by non-agri, non-electric and non-credit,
importation of machineries and equipment = VAT
9. Residential lots 1,919,500 & lot & DOES NOT INCLUDE parking lot
dwellings 3,199,200
10. lease of residential units, if
12,800/unit/month (regardless of aggregate
amount); if 12,800/unit/month (AND If any portion of such goods are used for purposes
other than those stated = VAT
aggregate amount is 1,919,500)
11. importation of fuels, goods, supplies by
international shipping or air transport
Importation of Services

136

UP LAW BOC

TAXATION 2

TAXATION LAW

SALE OF GOODS
VAT-Exempt
Real Property
Not primarily held ICT/B
Low-cost or socialized housing
Residential lot <= 1,919,500
House and/or other residential dwellings <=
3,199,200
Lease
(12,800/unit/year
or
total
1,919,500/year)
Transmission to a trustee
E: if transmission is deemed sale
Transfer to corporation in exchange of SoS
Advance payments/Security Deposits in
lease
E: if applied to the rent

0% VAT
Actual Export Sales (3)
Deemed Export Sales
Internal or constructive export sales
Raw/Packaging materials to non-resident buyer (5)
Raw/Packaging materials to export-oriented (3)
Phil. Port FOB value of export products (2)33
Net selling price of export products (4)34
sales to bonded manufacturing warehouses (2)35
sales to export processing zones36
sales to enterprises duly accredited by Subic Bay
Metropolitan Authority (2)
sales to registered export traders (3)
sales to diplomatic missions etc. (2)
sale by VAT-supplier to manufacturer/producer whose
products are 100% exported (3)
Sale of gold to BSP
Sale of goods/supplies/equipment/fuel to persons
engaged in intl shipping/air transport (4)
Docking/Undocking services to foreign vessels
Foreign currency denominated goods
To a NRC/NRA of goods (5)
To a NRC/NRA of goods locally manufactured for
household and personal use (2)
E: automobiles and non-essential goods
Effectively-zero rated sales (3)
Made by VAT registered supplier from customs
territory to any registered enterprise inside ecozone
Intra-ecozone enterprise sale of service, if PEZA
registered seller is subject to NIRC taxes

As regards ecozones and PEZA-registered


entities
Made by VAT-exempt supplier from customs
territory to any registered enterprise inside
ecozone
Intra-ecozone enterprise sale of service, if
PEZA registered seller is subject to 5%
special tax regime
Intra-ecozone sales of goods

Under Omnibus Investment Code (EO226)


Ibid
35 RA7227
36 RA 7916
33
34

137

UP LAW BOC

TAXATION 2

Taxable Activity/Property
TR
Actual SBE of Goods or
Properties
Goods/
Personal
Properties
12%
Real Properties
IF sale is on instalment
plan AND ZV/FMV > SP
(excluding VAT)
Deemed Sale Transactions
Not ICB/T, but originally
intended for sale/use
ICB/T
Transfer to SH in share of
profit or Cr in payment of 12%
debt
Consignment after 60d
Retirement/Cessation of
business

TAXATION LAW

Tax Base

Tax Payable

Gross Selling Price


= amt. paid to the seller
= consideration/FMV, higher
=

()
VAT Payable
paid
by
seller/transfer
or
FMV (at the time of transaction)
E: if FMV is unreasonably lower (by more than 30% of AMV) =
AMV or determined by CIR

AC or current market price, lower

VAT Payable
paid
by
performer
Importation of Goods
Total Value used by BOC
VAT paid by
=tariff & custom duties + custom duties + excise tax + importer
In general
PRIOR tp the
charges
12%
release
of
When custom duties are
goods
in
based on quantity or
= landed cost + excise tax
Customs
volume
custody
withhold a Final VAT due at the rate of five
(1) Once registered as a VAT person, the
percent (5%) of the gross payment.
taxpayer shall be liable to output tax and
be entitled to input tax credit beginning on
The five percent (5%) final VAT withholding
the first day of the month following
rate shall represent the net VAT payable of the
registration.
seller. The remaining seven percent (7%)
(2) The cancellation for registration will be
effectively accounts for the standard input VAT
effective from the first day of the following
for sales of goods or services to government or
month the cancellation was approved.
any
of
its
political
subdivisions,
What is the treatment for Withholding of
instrumentalities or agencies including GOCCs
VAT on Government Money Payments?
in lieu of the actual input VAT directly
(3) The government or any of its political
attributable or ratably apportioned to such
subdivisions, instrumentalities or agencies,
sales. Should actual input VAT attributable to
including government-owned or controlled
sales to government exceeds seven percent
corporations (GOCCs) shall, before making
(7%) of gross payments, the excess may form
payment on account of each purchase of
part of the sellers' expense or cost. On the
goods and/or services taxed at twelve
other hand, if actual input VAT attributable to
percent (12%) VAT pursuant to Sections
sale to government is less than seven percent
106 and 108 of the Tax Code, deduct and
(7%) of gross payment, the difference must be
closed to expense or cost.
Sale of Services

12
%

Gross receipts derived

138

UP LAW BOC

TAXATION 2

The government or any of its political


subdivisions, instrumentalities or agencies
including GOCCs, as well as private
corporation, individuals, estates and trusts,
whether large or non-large taxpayers, shall
withhold twelve percent (12%) VAT with
respect to the following payments:
Lease or use of properties or property rights
owned by non-residents; and
Other services rendered in the Philippines by
non-residents.

139

TAXATION LAW

UP LAW BOC
VAT-Exempt

Person

(cannot be cancelled w/in


3years;
franchise
of
radios/tv
broadcasting,
irrevocable)

Before start of business or


within 10d before the
beginning of taxable quarter

Optional Registration

Before start of business


and
every
year
thereafter (on/before
Jan 31)

Person
Liable for
VAT

TAXATION 2

TAXATION LAW
VAT-registered
Person
(w/ TIN)

VAT AND NON-VAT REGISTRATION

Register
to
RDO for every
separate and
distinct
establishment

Did not register:


Still liable for VAT
No input credit

Registration Fee (500php) to


authorized
bank
agent,
RDOfficer, Rev Collection
Officer,
authorized
city/municipal treasurer
EXEMPT from 500php
1.
if
aggregate
gross
sales/receipts 100,000;
2. cooperative;
3. individuals earning pure
compensation income;
4. overseas workers

Compliance activities after registration:


1. Registration of books of accounts (3) of the
business/occupation/calling including practice
of profession, before using the same.
2. Registration of sales invoices and official
receipts (If there are transactions not subject to
VAT, registration of non-VAT invoices or nonVAT official receipts)
3. Annual Registration: Pay registration fee for
every place of business that generates sales
after updating the registration records.
4. Filing of the Monthly VAT Declaration and
Quarterly VAT Return to be submitted to
RTO/LTDO

Certificate of
Registration

APPROVE

DENY

CANCELLATION/UPDATE OF VAT REGISTRATION


(registration of a taxpayer of a franchise grantee of radio and/or tv
broadcasting whose gross annual receipts 10,000,000 =
irrevocable)

Certificate of Non-VAT

Before start of business or


within 10d before the
beginning of taxable quarter

Register
to
RDO for every
separate and
distinct
establishment

Registration Fee (500php) to


authorized
bank
agent,
RDOfficer, Rev Collection
Officer,
authorized
city/municipal treasurer

Cancellation/Update
necessitating cancellation

APPROVE

w/in 25d from


cancellation

Filing of Short Period Return


(for the remaining period
that he was VAT-reg)

DENY

EXEMPT from 500php


if
aggregate
gross
sales/receipts 100,000;
cooperative;
individuals
earning pure compensation
income; overseas workers

Minor change in
original registration
w/in
15d
from
change

Notice of Change (f
change of address)

Instances when a taxpayer may


CANCEL his registration:
1.
2.
3.
4.
5.
6.

When TPs gross sales/receipts for the following 12 months 1,919,500


When TP has ceased to carry on his T/B and does not expect to recommence within 12m
In case of a single proprietorship, a change of ownership
Dissolution of a partnership or corporation
Merger/consolidation wrt dissolved corporations
Person who registered prior to planned business commencement but failed to actually start
business

UPDATE his registration:

140
RE applications for VAT zero-rating: Taxpayers shall file their application directly with
the Audit Information, Tax Exemption and Incentives Division (AITEID) under the
Assessment Service, or with the LTAID I and II, BIR National Office, as the case may be.

1. When TPs business has become exempt


2. When there is a change of the nature of business (from vatable to exempt)
3. When TP a tax-exempt individual who applied for optional registration and cancelled his
registration after 3yrs.
4. When TP is a VAT-registered person whose gross sales/receipts for 3 consecutive years 1,919,500

UP LAW BOC

VAT

TAXATION 2

REFUND

OR

VAT

CREDIT

Input Tax wrt Zero-rated and


Effectively zero-rated Sales
VAT-registered
Taxpayer
If VAT-exempt
changes
his
status to VATregistered
=
transitional
input tax

TAXATION LAW

CERTIFICATE

w/in 2 years after close


of the taxable quarter
when sales are made

Direct Tax
Credit
Presumptive Input Tax
Transitional Input Tax
Actual Input Tax not related
to zero-rated sales

Carry-over
Tax Credit

VAT- registered
cancelling their
registration (regardless of
the source of input tax)
Application for
refund or TCC to
CIR +
supporting docs

w/in 2 years after


close
of
the
taxable
quarter
when sales are
made
w/in 120 days
from
submission

w/in 120 days


from
submission

GRANTED
DENIED

VAT-exempt Transactions

w/in 30 days
from receipt
of denial

Apply against
OUTPUT VAT

Non-VAT
Taxpayer

INACTION
w/in 30 days
from expiration
of 120-days

ISSUANCE

Appeal to CTA

NO INPUT TAX

Related INPUT VAT shall


be treated as a cost of
sale or operating
expense
DENIED

Related INPUT VAT


shall be treated as
cost of purchases

Related OUTPUT
VAT shall be treated
as an operating
expense

GRANTED

Tax Credit
Certificate

141

Tax Refund

UP LAW BOC

TAXATION 2

TAXATION LAW

each taxpayer; to settle determine or fix the


amount of tax to be paid [84 C.J.S 74-750]

VI. Tax Remedies under


the NIRC

An assessment is the notice to the effect that


the amount therein stated is due from a
taxpayer as a tax with a demand for payment
of the same within a stated period of time.
[Commissioner v. CTA, 27 SCRA 1159]

Remedies: method by which a cause of action


can be enforced by law or equity. It is a
procedure which may be availed of by a person
as a means to obtain the relief desired

Requisites for valid assessment:


(a) The taxpayer shall be informed in writing of
the law and the facts on which the
assessment is made [Sec. 228, NIRC]
(b) An assessment contains not only a
computation of tax liabilities, but also a
demand for payment within a prescribed
period [CIR v. PASCOR]
(c) An assessment must be served on and
received by the taxpayer [CIR v. PASCOR]

In tax, these remedies may be availed of if the


taxpayer overpaid, or if the taxpayer paid the
wrong king of tax, or did not pay.

TAXPAYERS REMEDIES
1. ADMINISTRATIVE (BIR)
a. Before payment
i. Filing a petition or reconsideration or
reinvestigation; and
ii. Entering into a compromise
b. After payment
i. Filing a claim for refund; and
ii. Filing a claim for tax credit

Note: The presumption of the correctedness of


assessment CANNOT be made to rest on
another presumption e.g. presumption of
regularity of performance of official functions.

CONSTRUCTIVE METHODS OF INCOME


DETERMINATION

2. JUDICIAL (CTA/RTC)
a. Civil action
i. Appeal to the CTA
ii. Action to contest forfeiture of
chattel; and
iii. Action for damages
b. Criminal action
i. Filing a criminal complaint against
erring BIR officials and employees

Rely upon circumstantial evidence of


determining the correct income or transaction
of a taxpayer (Indirect Method)
(a) Expenditure Method It proceeds on the
theory that where the amount of money
which a taxpayer spends during a given year
exceeds his reported income, and the
source of such money is otherwise
unexplained, it may be inferred that such
expenditures represent unreported income.
(b) Percentage Method This method is a
computation whereby determinations are
made by the use of percentages or ratios
considered typical of the business under
investigation. By reference to similar
business
or
situations,
percentage
computations are secured to determine
sales, gross profit or even net profit.

Note: Petition for declaratory Relief is not


under the jurisdiction of the CTA.

ASSESSMENT
Concept of assessment
Assess means to impose a tax; to charge with a
tax; to declare a tax to be payable; to
apportion a tax to be paid or contributed, to fix
a rate; to fix or settle a sum to be paid by way
of tax; to set, fix or charge a certain sum to
142

UP LAW BOC

TAXATION 2

(c) Unit and Value Method The determination

TAXATION LAW

present his books of accounts and/or pertinent


records or ii.) substantiate all or any of the
deductions, exemptions or credits claimed in
his return.

of gross receipts may be computed by


applying price and profit figures to the
known ascertainable quality of business
done by taxpayer

It is usually issued when statutory prescriptive


periods for the assessment or collection of
taxes are about to lapse due principally to the
taxpayers fault.
Tax Delinquency v. Tax Deficiency

Inventory method for income determination


(Net Worth Method)
Holland v US: In a typical net worth
prosecution,
the
Government,
having
concluded that the taxpayer's records are
inadequate as a basis for determining income
tax liability, attempts to establish an "opening
net worth" or total net value of the taxpayer's
assets at the beginning of a given year. It then
proves increases in the taxpayer's net worth for
each succeeding year during the period under
examination, and calculates the difference
between the adjusted net values of the
taxpayer's assets at the beginning and end of
each of the years involved. The taxpayer's
nondeductible expenditures, including living
expenses, are added to these increases, and if
the resulting figure for any year is substantially
greater than the taxable income reported by
the taxpayer for that year, the Government
claims the excess represents unreported
taxable income.

Tax Delinquency

Tax Deficiency

It is when:
It is when:
a. Self-assessed
a. The amount of tax
taxpayer filed his
imposed by law is
tax return but did
greater than the
not pay or only
amount shown in
partially paid the
the tax return
tax
b.If no amount is
b.Deficiency
Tax
shown
in
the
assessed by the BIR
return, or if there is
became final and
no return, amount
executory
by which the tax as
determined by the
CIR exceeds the
amount previously
assessed as a
deficiency
CAN be collected CANNOT
be
IMMEDIATELY
immediately
through
collected. CAN be
1.
Administrative collected only AFTER
Actions (warrant of the process of protest
distraint or levy)
2. Judicial Actions
Thus, a civil action for
collection to ordinary
Thus, civil action for courts
pending
collection to ordinary protest
may
be
courts is the proper subject to Motion to
remedy.
Dissmiss
SUBJECT
to SUBJECT
to
administrative
administrative
penalties of:
penalties of:
1. 25% surcharge
1. interest
2. interest
2.
compromise
3.
compromise penalty

Formula:
Increase in Net worth
Add:
Non-deductible Item
Less:
Non-taxable income or receipts subjected
to final tax transfer taxes
Taxable Net Income
Less:
Personal and additional exemptions
NET INCOME SUBJECT TO TAX

JEOPARDY ASSESSMENT
A tax assessment made by an authorized
Revenue Officer (RO) without the benefit of
complete or partial audit, in light of the ROs
belief that the assessment and collection of
the deficiency tax will be jeopardized by delay
caused by the taxpayers failure to: i) comply
with audit and investigation requirements to
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TAXATION LAW

his correct income, sales or receipts for


tax purposes.
(c) Prescribe presumptive gross sales and
receipts if:
(1) It is found that the taxpayer has failed
to issue receipts and invoices, or
(2) When there is reason to believe that
the books of accounts or other records
do not correctly reflect the
declarations made by the taxpayer
(4) TERMINATE Taxable Period [Sec. 6(D),

penalty
Mamalateo: Reviewer on Taxation (2014) p559
a. Deficiency - amount still due and collectible
from a taxpayer upon audit or investigation. A
deficiency tax has to go through the process of
filing the protest against the assessment by
the by the taxpayer and denial of such protest
by the BIR. (Mamalateo, 2008)
b. Delinquency - failure of the taxpayer to pay
the tax due on the date fixed by law or
indicated in the assessment notice or letter of
demand.

NIRC]
Terminating taxable period and ordering
the immediate payment of the tax for the
terminated period and any remaining tax
that is unpaid, when the taxpayer is:
(a) retiring from business subject to tax, or
(b) intending to leave the Philippines or to
remove his property therefrom or to hide
or conceal his property;
(c) 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
(5) PRESCRIBE Real Property Values [Sec. 6(E),

POWERS OF THE COMMISSIONER:


(A) To make assessments and prescribe
additional requirements for tax administration
and enforcement [Sec. 6, NIRC]
(1) Examination of Returns and Determination
of Tax Due [Sec. 6(A), NIRC]
(a) After a return has been filed, the CIR may
authorize the examination of any
taxpayer and the assessment of the
correct amount of tax.
(b) Failure to file a return shall not prevent
the
CIR
from
authorizing
the
examination.
(2) Best evidence obtainable [Sec 6(B), NIRC]
The CIR shall assess the proper tax on the
best evidence obtainable when:
(a) the taxpayer fails to submit the required
returns, statements reports and other
documents
(b) there is a reason to believe that any such
report is false, incomplete or erroneous
(3) Conduct
INVENTORY-TAKING,
SURVEILLANCE and to PRESCRIBE
presumptive gross sales and receipts [Sec.

NIRC]
(a) Dividing the Philippines into different
zones or areas, and determining the FMV
of real properties in each zone or area,
upon consultation with competent
appraisers from private and public
sectors.
(b) For the purpose of computing any
internal revenue tax, the value of the
property shall be WHICHEVER IS
HIGHER OF:
(i) The FMV as determined by the
Commissioner, or
(ii) The FMV as shown in the schedule of
values of the provincial and city
assessors
(6) INQUIRE into Bank Deposit Accounts [Sec.

6(C), NIRC]
(a) Inventory-taking at any time during the
taxable year, for the purpose of
determining the correct tax liabilities.
(b) Surveillance done if there is reason to
believe that the taxpayer is not declaring

6(F), NIRC]
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TAXATION 2

Notwithstanding any contrary provision of


R.A. 1405 (Bank Secrecy Law) and other
general or special laws, the Commissioner is
authorized to inquire into bank deposits of:
(a) A decedent to determine his gross estate,
and
(b) Any taxpayer who has filed an application
for compromise of tax liability by reason
of financial incapacity: the taxpayer must
waive in writing his privilege under R.A.
1405 and other relevant laws, before the
Commissioner may inquire into his bank
accounts.
(7) ACCREDIT and REGISTER Tax Agents [Sec

TAXATION LAW

(2) ACCESS Letter [Sec. 5(B), NIRC]


(a) Obtaining on a regular basis, from any
person OTHER THAN the person
whose tax liability is subject to audit or
investigation, or from any office or
officer of the national and local
governments, government agencies
or instrumentalities, including BSP
and GOCCs,
(b) 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.

6(G), NIRC]
Accrediting and registering tax agents (may
be individuals or general professional
partnerships)
based on the following
criteria:
(a) Professional competence
(b) Integrity
(c) Moral fitness
(8) PRESCRIBE additional PROCEDURAL OR
DOCUMENTARY requirements [Sec. 6(H),

(C) INTERPRET Tax LAWS and to DECIDE Tax


CASES [Sec. 4, NIRC; RMC 44-01]
(a) Shall be under the exclusive and original
jurisdiction of the Commissioner, subject to
review by the Secretary of Finance.
(b) A ruling by the BIR Commissioner shall be
presumed VALID unless modified, reversed
or superseded by the Secretary of Finance.
(c) 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.
(d) 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.

NIRC]
In relation to the manner of compliance of
any requirement in connection with the
submission or preparation of financial
statements accompanying the tax returns.
(B) To obtain information and to summon,
examine, and take testimony of persons [Sec. 5,
NIRC]
(1) EXAMINE RETURNS and DETERMINE
TAX DUE [Sec 5, NIRC]
Authorizing the examination of any
taxpayer and the assessment of the
correct amount of tax, WON a return has
been filed by such taxpayer.
Note: Any return filed with the Commissioner
shall not be withdrawn, BUT the taxpayer
may MODIFY, CHANGE or AMEND such

Note: DOF Order 7-02 added that the Secretary


of Finance may review the rulings MOTU
PROPRIO.

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.
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TAXATION 2

WHEN ASSESSMENT IS MADE

TAXATION LAW

Commissioner of any change in address, the


running of the statute of limitations shall
not be suspended
(d) 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
(e) When the taxpayer is Out of the Philippines

Prescriptive period for assessment (Sec. 203,


NIRC)
If the taxpayer filed a return: internal revenue
taxes shall be assessed (FAN) 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.

RR 12-85 (DIFFERENCE
RECONSIDERATION
&REINVESTIGATION)

Exception:(i) False return, (ii) Fraudulent return


with intent to evade tax, (iii) Failure to file a
return [Sec. 222, NIRC] These exceptions have a
prescriptive period of 10 years from the
discovery of the fraudulent act or discovery of
omission.

BETWEEN

RECONSIDERATION refers to a plea of reevaluation 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

Waiver of Period for Assessment


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 [Sec. 222(b), NIRC]
(1) The waiver of prescription must be executed
properly, otherwise, invalid and results to
prescription of the right to assess/collect.
(Philippine Journalists Inc. vs. CIR,
December 16, 2004)
(2) Requirements for a valid waiver under RMO
20-90: i) definite agreed date, ii) date of
acceptance indicated, and iii) taxpayer must
be furnished with a copy of the waiver.

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.
Note: A request for reconsideration does not
toll the running of the prescription period for
the collection of an assessed tax. [Phil Global

Communication v. CIR]

GENERAL
PROVISIONS
ADDITIONS TO THE TAX

Suspension of running of statute of limitations


[Sec. 223, NIRC] (P-CORN)
(a) Period 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
(b) When the taxpayer requests for a
Reinvestigation which is granted by the
Commissioner
(c) 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

ON

(A) CIVIL PENALTIES [SEC. 248, NIRC]


Surcharge
A civil penalty imposed by law as an addition
to the basic tax required to be paid. A
surcharge added to the main tax is subject to
interest.

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TAXATION 2

Rates of Surcharge:
There shall be imposed a penalty equivalent to
twenty-five percent (25%) of the amount due,
in the following cases:
(1) FAILURE TO FILE ANY RETURN and PAY
THE TAX DUE THEREON on the date
prescribed; or
(2) 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
(3) FAILURE TO PAY THE DEFICIENCY TAX
within the time prescribed for its payment
(4) 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.

TAXATION LAW

(B) INTEREST [SEC 249, NIRC]


In General

20% per annum on any unpaid amount of tax,


from the date prescribed for payment until the
amount is fully paid.

Deficiency Interest the interest due on any


amount of tax due or installment thereof which
is not paid on or before the date prescribed for
its payment [Mamalateo, 2008]
Delinquency Interest- the interest required to be
paid in case of failure to pay:
(a) the amount of tax due on any return
required to be filed, or
(b) amount of tax due for which no return is
required, or
(c) a deficiency tax, or any surcharge or
interest thereon on the due date
appearing in 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

The penalty shall be fifty percent (50%) of the


tax or of the deficiency tax, in the following
cases:
(1) WILLFUL NEGLECT to FILE THE RETURN
within the period prescribed
(2) A FALSE OR FRAUDULENT RETURN is
wilfully made

Prima-facie evidence of false or fraudulent


return: i.) substantial under declaration of

The delinquency interest is in addition to the


interest in the FAN as a result of failure to pay
the deficiency tax assessed within the time
prescribed for its payment.

taxable sales, receipts or income (failure to


report sales, receipts or income in an amount
exceeding 30% of that declared per return) or
ii)substantial overstatement of deductions (a
claim of deduction in an amount exceeding
30% of actual deductions)

[First Lepanto Taisho Insurance Corp. v. CIR,


2013]

Section 5 of RR 12-99 is hereby amended by


modifying Section 5.5 thereof which provides
for modes of procedures in computing for the
tax and/or applicable surcharge. In cases of
late payment of a deficiency tax assessed, the
taxpayer shall be liable for the delinquency
interest (no longer civil penalties under RR 1299) provided under Section 249 (C)(3) of the
1997 National Internal Revenue Code, as
amended. [RR 18-2013]

(C) COMPROMISE PENALTIES


Compromise penalty v. Compromise
Compromise penalty - an amount of money
paid by a taxpayer to compromise a tax
violation that he has committed, which may be
the subject of criminal prosecution. The basis
of the amount paid is the gross sales or
receipts during the year or the tax due.

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TAXATION 2

TAXATION LAW

representative, it is determined that there

Compromise - an amount of money paid by the


taxpayer to settle his civil liability for tax
assessed by the government. The basis of the
amount paid is the basic tax assessed.

exists sufficient basis to assess the taxpayer for


any deficiency tax or taxes, the said Office shall
issue to the taxpayer the PAN for the proposed
assessment.

[Mamalateo, 2008]

The PAN shall show in detail the facts and the


law, rules and regulations, or jurisprudence on
which the proposed assessment is based.

ASSESSMENT PROCESS [SEC. 228,


NIRC; RR 12-99]
FIRST STEP: TAX AUDIT
In a tax audit, revenue officers examine the
books of account and other accounting records
of taxpayers to determine the correct tax
liability. This is through the issuance of a Letter
of Authority.

THIRD STEP: REPLY TO PAN


Taxpayer is given time to respond: 15 days from
date of receipt of PAN
(a) If he/she fails to respond: taxpayer is
considered in default; a formal letter of
demand and assessment notice shall be
issued to the taxpayer
(b) The regulations use the term reply to
distinguish the written objection(s) against
a FAN issued by the BIR, where the generic
term protest or the specific term request
for reconsideration or request for
reinvestigation is utilized.

Letter of Authority: An official document that


empowers a Revenue Officer to examine and
scrutinize a taxpayers books of accounts and
other accounting records, in order to determine
the taxpayers correct internal revenue tax
liabilities.
Cases which need not be covered by a valid LA:
(1) Cases involving civil/criminal tax fraud
which fall under the jurisdiction of the tax
fraud division of the Enforcement Services,
and
(2) Policy cases under audit by the special
teams in national offices

The PAN shall not be required in any of the ff


cases, in which case, issuance of the Formal
Assessment Notice (FAN) shall be sufficient:
(a) The finding for any deficiency tax is the
result of MATHEMATICAL ERROR in the
computation of the tax as appearing on the
face of the return; or
(b) A DISCREPANCY has been determined
between the TAX WITHHELD and the
amount ACTUALLY REMITTED by the
withholding agent; or
(c) A taxpayer who opted to claim a refund or
tax credit of excess creditable withholding
tax for a taxable period was determined to
have carried over and automatically applied
the same amount claimed against the
estimated tax liabilities for the taxable

Section 3 of RR 12-99 is hereby amended by


deleting Section 3.1.1 thereof which provides
for the preparation of a Notice of Informal
Conference, thereby renumbering other
provisions thereof, and prescribing other
provisions for the assessment of tax liabilities
(RR No. 18-2013). Thus, there is no Informal
Conference needed in an assessment process.

SECOND
STEP:
ISSUANCE
OF
PRELIMINARY ASSESSMENT NOTICE
(PAN) [SEC. 228, NIRC; RR18-2013]

quarter or quarters of the succeeding


taxable year; or

If after review and evaluation by the


Commissioner or his duly authorized

(d) The EXCISE TAX due on excisable articles


has not been paid; or
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TAXATION 2

(e) An article locally purchased or imported by


an exempt person, such as, but not limited
to, vehicles, capital equipment, machineries
and spare parts, has been sold, traded or
transferred to a non-exempt person. [Sec.

TAXATION LAW

date of receipt. The taxpayer may either file a


reconsideration or reinvestigation.
Note: Failure to file protest within 30 days
shall make the assessment become final,
executor and demandable.

228, NIRC]
In the above-cited cases, a FLD/FAN shall be
issued outright.

Protesting Assessment [Sec 228, NIRC; RR 1299]


(a) Protest of assessment by taxpayer
(1) Made within thirty (30) days from receipt
of the assessment.
(2) Protest is either a request for
reconsideration or a request for
reinvestigation, or both
(3) A protest is considered validly made if it
satisfies the following conditions:
i. it is made in writing, and
addressed to the Commissioner of
Internal Revenue,
ii. it contains the information
required by the rule,
iii. 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 and
iv. It is filed within the period
prescribed by law
(b) In case of a request for reinvestigation,
submission of documents within 60 days
from filing of protest
(1) Within sixty (60) days from filing of the
protest, all relevant supporting
documents must be submitted,
otherwise the assessment shall
become final. [Sec. 228] This will toll
the prescriptive period for assessment
or collection.
(2) In case of a request for reconsideration,
no additional documents need be
submitted. Further, the prescriptive
period will not be suspended. (See the
difference between the two above)

FOURTH STEP: ISSUANCE OF FORMAL


LETTER OF DEMAND AND FINAL
ASSESSMENT NOTICE
(a) A Final Assessment Notice (FAN) is a
declaration of deficiency taxes issued to a
taxpayer who:
(1) fails to respond to a pre-assessment
notice within the prescribed period of
time, or
(2) whose reply to the PAN was found to be
without merit.
(b) Sec 228: The taxpayer shall be informed in
writing of the law and the facts on which the
assessment is made; otherwise the
assessment shall be void
(c) An assessment contains not only a
computation of tax liabilities, but also a
demand for payment within a prescribed
period.

Effects of Issuance of FAN and LD


1. Creation of Tax Liabilities
2. Taxpayer does not have to pay deficiency tax
assessment yet BUT 20% deficiency interest
per annum starts
3. Business of the taxpayer does not become
illegal by reason of non-payment. (as opposed
too non-payment of local business deficient
taxes, where the business becomes illegal)

FIFTH STEP: DISPUTED ASSESSMENT


The taxpayer or his duly authorized
representative may protest administratively
against the formal letter of demand and
assessment notice within thirty days (30) from
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TAXATION 2

TAXATION LAW

If the CIR or his authorized agent DENIES THE


PROTEST filed by the taxpayer, the latter may
either:
1. appeal to the CTA within 30 days from
receipt of the decision denying the protest
(Sec. 228, NIRC)
The 30-day period starts when the
taxpayer receives the decision of the
Commissioner denying the protest.
The decision of the Commissioner must
categorically state that his action on
the disputed assessment is final,
otherwise period to appeal will not
commence to run.
(Advertising
Associates Vs. CA)
2. File a motion for reconsideration to CIR, if
decided by CIR; OR elevate his protest
through a request for reconsideration to the
CIR, if the denial is made by the authorized
representative. Within 30 days from receipt of
the decision denying the protest.

(c) Effect of failure to protest: the assessment


shall become final, executory and
demandable.
(d) Period provided for protest to be acted upon:
Protest should be acted upon within 180
days from submission of documents.

SIXTH
STEP:
ADMINISTRATIVE
DECISION ON A DISPUTED ASSESSMENT
The power to decide disputed assessments,
refunds of internal revenue taxes, fees or other
charges, penalties imposed in relation thereto,
or other matters is vested in the Commissioner,
subject to the exclusive appellate jurisdiction
of the Court of Tax Appeals. The CIR may deny,
approve or not act upon the protest.

DENIAL
The CIR must state the facts and laws upon
which such protest was denied. Denial may be
made by the CIR or any of his authorized
representatives.

Note that a Motion for Reconsideration on the


CIRs denial of the protest or administrative
appeal shall not toll the 30-day period to
appeal to the CTA [RR 18-2013]

Rendition of Decision by Commissioner


CIRs actions deemed equivalent to denial of
protest:
(a) Filing of collection suit against taxpayer

[CIR v. Union Shipping]

Note: A Division of the CTA shall hear the


appeal. [Sec. 11, RA 1125 as amended by

(b) Issuing a warrant of distraint and levy

[Commissioner v. Algue]

RA 9282 (2004)]

(c) Where there is a request for reconsideration,


final demand letter from BIR [CIR v. Isabela

(b) In case of inaction by Commissioner within


180 days from submission of documents

Cultural Corp]
(d) Notice of delinquency [CIR v. Ayala

If the Commissioner or his duly authorized


representative did NOT ACT UPON THE
PROTEST within 180 days from the time the
documents were submitted, the taxpayer may
either:
(1) Appeal to the CTA within (30) thirty days
from the lapse of the 180-day period OR
(2) Wait until the Commissioner or his duly
authorized representative decides before
he elevates the case to the CTA.

Securities]
(e) Inaction by Commissioner - If the protest is
not acted upon within one hundred eighty
(180) days from submission of documents,
the inaction by the Commissioner is
considered as a denial of protest.
(f) Referral of case for collection.

REMEDIES OF TAXPAYER TO ACTION BY


COMMISSIONER
(a) In case of denial of protest
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TAXATION 2

RCBC v. CIR (2007): In case the Commissioner

TAXATION LAW

When the government may avail of the


remedies of collection:
General Rule: When the assessment shall have
become final, executory and demandable.

failed to act on the disputed assessment within


the 180-day period from date of submission of
documents, a taxpayer can either:
(1) file a petition for review with the Court of
Tax Appeals within 30 days after the
expiration of the 180-day period; OR
(2) await the final decision of the
Commissioner
on
the
disputed
assessments and appeal such final
decision to the Court of Tax Appeals
within 30 days after receipt of a copy of
such decision.
However, these options are mutually
exclusive, and resort to one bars the
application of the other.

Exception: In case of false or fraudulent return


with intent to evade tax or of failure to file a
return, a proceeding in court for collection may
be filed without assessment within 10 years
from discovery of falsity, fraud or omission.

[Sec. 222(a), NIRC]


Injunction not available
No court may grant injunction to restrain the
collection of any national internal revenue tax,
fee or charge. [Sec. 218, NIRC]
Exception:
When the all of the following conditions
concur:
(1) It is an appeal to the CTA from a decision of
the CIR, or Commissioner of Customs or the
RTC, provincial, city or municipal treasurer
or the Secretary of Finance, the case may be,
AND
(2) In the opinion of the Court of Tax Appeals,
the collection may jeopardize the interest of
the Government and/or the taxpayer. [Sec.

Remedy if the taxpayer is not satisfied with the


CTA Divisions ruling:
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

11, R.A. 1125 as amended by R.A. 9282]

as amended by RA 9282 (2004)]

Requisite before availing of injunction


(1) Taxpayer has to deposit the amount
claimed; OR
(2) File an injunction bond with the Court for
not more double the amount [R.A. 1125]

Remedy if the taxpayer is not satisfied with the


decision of the CTA en banc:
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])

Prescriptive periods

Where return
filed was
NOT false or
fraudulent:

(c) Effect of failure to appeal


If the taxpayer fails to file an appeal, the
assessment shall become final, executory and
demandable.

Where no
return filed, or
the return was
false or
fraudulent:

Collection
should
be should
be
with
prior made within made within 5
assessment
5 years from years from the

COLLECTION
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TAXATION 2

Where return
filed was
NOT false or
fraudulent:
the date of
assessment
of the tax.
(Sec. 203 in
relation
to
Sec.
222,
NIRC)

Where no
return filed, or
the return was
false or
fraudulent:

TAXATION LAW

Administrative
(1) Distraint of Personal Property including
garnishment deposit
(2) Summary remedy of levy on real property
(3) Forfeiture to the government for want of
bidder
(4) Further Distraint or Levy
(5) Tax Lien
(6) Compromise and Abatement
(7) Penalties and Fines

date
of
assessment
(based on Sec.
222(c), NIRC)

Judicial
(1) Civil
(2) Criminal

by distraint or
levy, or by
by distraint or judicial
levy, or by proceedings
judicial
proceedings
Collection
should
be should
be
without prior made within made within
assessment
3 years from ten years after
the date of the discovery
filing
of of the falsity,
return or date fraud
or
return is due, omission
to
whichever is file a return.
LATER
(based
on by
judicial
Sec.
203, proceedings
NIRC)

DISTRAINT
PROPERTY

OF

PERSONAL

Distraint remedy enforced on the goods,


chattels, or effects, and other personal
property of whatever character including
stocks and other securities, debts, credits,
bank accounts, and interest in and rights to
personal property [Sec. 205(a), NIRC]. When
the distraint proceedings validly begins, the
prescription of collection is suspended.

Kinds of Distraint:
(1) Constructive Distraint
(2) Actual Distraint

by
judicial
proceedings

Constructive Distraint - may be placed by the


Commissioner on any taxpayer to safeguard
the interest of the Government [Sec. 206,
NIRC]. Delinquency of the taxpayer is not
necessary.

Waiver of prescriptive period


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

Grounds for Constructive Distraint:


When in the opinion of the Commissioner,
(1) the taxpayer is retiring from any business
subject to tax; or
(2) the taxpayer is intending to leave the
Philippines; or

Remedies of the Government in Collection

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TAXATION LAW

DISTRAINT
OF
INTANGIBLE
PROPERTIES [SEC. 208, NIRC]

(3) the taxpayer is intending to remove his


property from the Philippines or to hide or
conceal his property; or
(4) the taxpayer is planning to perform any act
tending to obstruct the proceedings for
collecting the tax due or which may be due
from him (Sec. 206, NIRC)

(1) Stocks and other securities: by serving a


copy of the warrants of distraint on the
taxpayer, AND upon the president, manager,
treasurer or other responsible officer of the
corporation, company or association which
issued the stocks or securities.
(2) Debts and credits: by leaving with the
person owing the debts or having in his
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.
(3) 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)

How constructive distraint is effected:

(1) Signing of receipt by the taxpayer

By requiring the taxpayer or any person having


possession or control of such property to sign a
receipt covering the property distrained and
obligate himself to preserve the same intact
and unaltered and not to dispose of the same
in any manner whatever, without the express
authority of the Commissioner

(2) If the taxpayer refuses to sign the receipt:


signing of receipt by revenue officer in the
presence of two witnesses
In case the taxpayer or the person having the
possession and control of the property refuses
or fails to sign the receipt, the revenue officer
effecting the constructive distraint shall
proceed to prepare a list of such property and,
in the presence of two (2) witnesses, leave a
copy thereof in the premises where the
property distrained is located (Sec. 206, NIRC)

PROCEDURE FOR ACTUAL DISTRAINT


(A) Commencement of Distraint Proceedings
Who issues the warrant of distraint:
(1) Commissioner or his duly authorized
representative where the amount
involved is more than P1M
(2) Revenue District Officer where the
amount involved is P1M or less [Sec. 207(A),

Note: In constructive distraint, the property is


not actually confiscated or seized by the
revenue officer.
Actual distraint - placed on a person who owes
any delinquent tax or delinquent revenue (see

NIRC]

Sec. 207, NIRC); involves actual seizure of the


property. In his kind of distraint, taxpayer
should have already been delinquent.

(B) Service of Warrant of Distraint


How actual distraint is effected:
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,

Garnishment taking of personal properties,


usually cash or sums of money, owned by a
delinquent taxpayer which is in the possession
of a third party

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TAXATION 2

expenses of distraint and the cost of the


subsequent sale. [Sec. 207(A), NIRC]

TAXATION LAW
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. [Sec.

(C) Report on the Distraint


A report shall be submitted by the distraining
officer to the Revenue District Officer, and to
the Revenue Regional Director.

209, NIRC]
(3) If the proceeds from the sale of the
distrained properties are 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 taxpayers real property. [Sec.

(D) Power of the CIR or proper officer to lift the


order of distraint
The taxpayer may request that the warrant be
lifted. The commissioner may, in his discretion,
allow the lifting of the order of distraint. He
may ask for a bond as a condition for the
cancellation of the warrant. [Sec. 207(A),

207(B), NIRC]

NIRC]

(G) Release of the Properties from Distraint


If at any time prior to the consummation of the
sale all proper charges are paid to the officer
conducting the sale, the goods or effects
distrained shall be restored to the owner. [Sec.

(E)Notice of Sale of Distrained Properties


(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.
(2) 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. [Sec. 209, NIRC]
(F)Sale at Public Auction
(1) At the time of the public sale, the revenue
officer shall sell the goods, chattels, or
effects, or other personal property,
including stocks and other securities so
distrained at a PUBLIC AUCTION, to the
HIGHEST BIDDER for CASHor with the
approval of the Commissioner, through a
DULY LICENSED COMMODITY or STOCK
EXCHANGES.
(2) 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

210, NIRC]
(H) Purchase by the government at sale upon
distraint
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. The property
so purchased may be resold by the
Commissioner or his deputy. [Sec. 212, NIRC]
(I) Report of sale to BIR
Within two (2) days after the sale, the officer
making the same shall make a report of his
proceedings in writing to the Commissioner
and shall himself preserve a copy of such
report as an official record. [Sec. 211, NIRC]

SUMMARY REMEDY OF LEVY ON


REAL PROPERTY
Levy seizure of real property, an interest in or
rights to such property in order to enforce the
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TAXATION 2

payment of taxes. [Sec. 205, NIRC] The real


property under levy shall be sold in a public
sale, if the taxes involved are not voluntarily
paid following such levy.

TAXATION LAW
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).

When levy may be effected: after the expiration

[Sec. 207(B), NIRC]

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.

(C) Advertisement of the Sale


(1) Within twenty (20) days after the levy,
the officer conducting the proceedings
shall proceed to advertise for SALE the
property or a portion 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.
(2) CONTENTS of notice: statement of
amount of taxes, and penalties due,
time and place of sale, name of
taxpayer, short description of property.

[Sec. 207(B), NIRC]


In case the warrant of levy is NOT issued before
or simultaneously with the warrant of distraint
on the personal property AND the personal
property of the taxpayer is not sufficient to
satisfy his tax delinquency: the CIR or his duly
authorized representative shall within 30 days
after execution of the distraint, proceed with
the levy on the taxpayers real property. [Sec.

207(B), NIRC]

PROCEDURE FOR LEVY


(A) Issuance of Warrant of Levy
(1) 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.
(2) This certificate shall operate with the
force
of
LEGAL
EXECUTION
throughout the Philippines.
(3) The certificate shall contain a
description of the property upon which
levy is made. (Sec. 207(B), NIRC)

[Sec. 213, NIRC]


(D) Sale
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. [Sec. 213, NIRC]

(B) Service of the Warrant


(1) Levy shall be effected by writing upon
said certificate a description of the
property upon which levy is made.
(2) At the same time, written notice of the
levy shall be mailed to or served upon
the Register of Deeds of the province or

(E) Forfeiture in Favor of the Government


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
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TAXATION 2

to the GOVERNMENT in satisfaction of the


claim. [Sec. 215, NIRC]

TAXATION LAW

(1) All chattels, machinery, and removable


fixtures of any sort used in the unlicensed
production of articles (Sec. 268, NIRC)
(2) Dies and other equipment used for the
printing or making of any internal revenue
stamp, label or tag which is in imitation of
or purports to be a lawful stamp, label or
tag. (Sec. 268, NIRC)
(3) Liquor or tobacco shipped under a false
name or brand (Sec. 262, NIRC)

(F) Redemption of Property Sold


(1) At any time before the day fixed for the sale,
the taxpayer may discontinue all proceeding
by paying the taxes, penalties and interest.

[Sec. 213, NIRC]


(2) Within one (1) year from the date of sale, 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. [Sec. 214, NIRC]

Remedy of enforcement of forfeitures


(1) Forfeiture of chattels and removable
fixtures: enforced by the seizure, sale or
destruction of the specific forfeited property.
(2) Forfeiture of real property: enforced by a
judgment of condemnation and sale in a
legal action or proceeding civil or criminal
as the case may require (Sec. 224, NIRC)

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

When property to be sold or destroyed


(1) Forfeited chattels and removable fixtures
sold in the same manner and under the
same conditions as the public notice and
the time and manner of sale as are
prescribed for sales of personal property
distrained for the non-payment of taxes
(2) Distilled spirits, liquors, cigars, cigarettes,
other manufactured products of tobacco
and all apparatus used in or about the illicit
production of such articles destroyed by
the order of the Commissioner when the
sale or use would be injurious to public
health pr prejudicial to the enforcement of
the law
(3) All other articles subject to excise tax
manufactured or removed in violation of the
Code, dies for the printing or making of
internal revenue stamps and labels sold
or destroyed in the discretion of the
Commissioner
(4) Forfeited property shall not be destroyed
until at least 20 days after seizure. (Sec.
225, NIRC)

price since the Government did not


purchase the property anyway, it was
forfeited)
Note:The taxpayer-owner shall not be
deprived of possession of the said property
and shall be entitled to rents and other
income until the expiration of the period for
redemption [Sec. 214, NIRC]
(G) Final Deed of Purchaser
After the period of redemption, a final deed of
sale is issued in favor of the purchaser.
Forfeiture to Government for Want of Bidder
Forfeiture implies a divestiture of property
without compensation in consequence of a
default or offense. The effect of forfeiture is to
transfer the title of the specific thing from the
owner to the government. (De Leon, NIRC
Annotated, p. 412)
Instances when forfeiture is appropriate
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TAXATION LAW

(8) All taxes and expenses relative to the


issuance of title shall be borne by the
winning bidder.
(9) The winning bidder shall be responsible at
his own expense for the ejectment of
squatters and/or occupants, if any, of the
auctioned property.
(10) Negotiated or private sale shall be resorted
to as a consequence of failed public
bidding for two consecutive times.
(11) Negotiated or private sale shall in all cases
be approved by the Secretary of Finance.
(12) Public auction sale shall be approved by
the Commissioner or his authorized
representative.
(13) The Government reserves the right to reject
or cancel any or all bids.

Resale of real estate taken for taxes [RR No. 222002]


(1) All
acquired/forfeited
properties
transferred in the name of the Republic of
the Philippines, having passed the oneyear redemption period, shall be converted
into cash from the date of acquisition or
forfeiture.
(2) The sale of acquired/forfeited real
properties shall be by sealed bids in a
public auction to be witnessed by a
representative of the COA.
(3) The Notice of Sale of the acquired real
properties shall be published once a week
for two (2) consecutive weeks in a
newspaper of general circulation in the
Philippines which must be completed at
least 20 days prior to the date of such
public auction.
(4) Unless the Commissioner of Internal
Revenue provides otherwise, the Minimum
Bid Price/Floor Price shall be the latest fair
market value as determined by the
Commissioner or the fair market value
shown in the latest tax declaration issued
by the provincial, city or municipal assessor,
whichever is higher, pursuant to Sec. 6(E)
of the Tax Code.
(5) Anyone could bid except foreign nationals,
corporate or otherwise, and those qualified
under existing laws, rules and regulations,
including employees of the Bureau of
Internal Revenue.
(6) Bidders shall be required to post a bond in
cash or managers check in an amount
representing 10% of the minimum bid price
at least one day before the scheduled
public auction.
(7) Unless the Commissioner allows extension
of time to pay, in meritorious cases, the
winning bidder shall pay the full amount of
his bid cash or managers check within two
days after receipt of notice of award.

Disposition of funds recovered in legal


proceedings or obtained from forfeiture
All judgments and monies recovered and
received for taxes, costs, forfeitures, fines and
penalties shall be paid to the Commissioner or
his authorized deputies as the taxes
themselves are required to be paid, and except
as specially provided, shall be accounted for
and dealt within the same way. (Sec. 226,
NIRC)
Further distraint or levy
The remedy by distraint of personal property
and levy on realty may be repeated if necessary
until the full amount due, including all
expenses, is collected. [Sec. 217, NIRC]

TAX LIEN
Tax Lien is a legal claim or charge on the
property, real or personal, as security for the
payment of same debt or obligation. It
attaches from the time the tax became due
and payable.
(1) When a taxpayer neglects or refuses to pay
his internal revenue tax liability after
demand, the amount so demanded shall be
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TAXATION LAW

a lien in favor of the government from the


time the assessment was made by the CIR
until paid with interest, penalties, and costs
that may accrue in addition thereto upon
ALL PROPERTY AND RIGHTS TO
PROPERTY BELONGING to the taxpayer.
(2) 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. (Sec. 219,
NIRC)

(1) A REASONABLE DOUBT as to the validity of


the claim against the taxpayer exists; or
(2) The financial position of the taxpayer
demonstrates a clear inability to pay the
assessed tax. (FINANCIAL INCAPACITY)

Seizure under forfeiture vs. Seizure to enforce a


tax lien

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)

Limits of the Commissioners power to


compromise:
(1) For cases of financial incapacity:
a
minimum compromise rate equivalent to
ten percent (10%) of the basic assessed tax
(2) For other cases: a minimum compromise
rate equivalent to forty percent (40%) of the
basic assessed tax

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)

All criminal cases may be compromised


except: (i) those already filed in court and (ii)
those involving fraud.

COMPROMISE
Authority of the Commissioner to compromise
and abate taxes
Compromise - to reduce the amount of tax
payable. This should not be taken similarly
with compromise penalty.

The taxpayers offer to compromise shall not


be considered until (RR 9 2013)
i. He waives in writing his privilege under
RA 1405 or other special laws
ii. He gave authority to CIR to inquire into
his bank accounts
iii. There is payment of compromise offer.

The CIR has authority to compromise and


abate tax. However, the CIR is not authorized
to accept anything less than what is
adjudicated in favor of the Government.

Abatement- to cancel the entire amount of tax


payable

It should be noted that there should be


consent of BOTH the taxpayer and the CIR,
otherwise it will be void.

When the Commissioner may abate or cancel a


tax liability:
(1) The tax or any portion thereof appears to be
UNJUSTLY or EXCESSIVELY ASSESSED; or
(2) The ADMINISTRATION and COLLECTION
COSTS do not justify the collection of the
amount due. (e.g. when the costs of

Grounds for a compromise:


The Commissioner may compromise the
payment of any internal revenue tax in the
following cases:
158

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TAXATION 2

collection are greater than the amount of


tax due)

TAXATION LAW

A false returns is due to mistakes, carelessness


or ignorance and a fraudulent return is filed
with intent to evade taxes.

CIVIL AND CRIMINAL ACTIONS

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]

Form and Mode of Proceeding:


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:
(1) shall be BROUGHT IN THE NAME OF THE
GOVERNMENT of the Philippines; and
(2) shall be CONDUCTED BY LEGAL OFFICERS
OF THE BIR
(3) shall be filed in court with the approval of
the Commissioner. [Sec. 220, NIRC]

Payment of tax is not a valid defense.


[Sec .253A]

REFUND
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)
Please note that Sections 229 and 204
appeared several times in previous Bar
examinations.

Criminal action as a collection remedy:


The judgment in the criminal case shall impose
the penalty; and order payment of the taxes
subject of the criminal case as finally decided
by the Commissioner. [Sec. 205, NIRC]
Assessment not necessary before filing a
criminal charge for tax evasion
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 wilful attempt to file taxes, such
as failure to file a required tax return. [CIR v.

Grounds for Refund:


(1) Tax erroneously or illegally assessed or
collected [Sec. 229, NIRC]
(2) Penalty claimed to have collected without
authority [Sec. 229, NIRC]
(3) Any sum alleged to have been excessively or
in any manner wrongfully collected [Sec.

Pascor Realty, June 29, 1999]

229, NIRC]
Suit to recover tax based on false or fraudulent
returns
A proceeding in court for the collection of the
tax assessed may be filed without assessment
at any time within ten (10) years after the
discovery of the falsity, fraud or omission.
Provided, that in a fraud assessment which has
become final and executor, the fact of fraud
shall be judicially taken cognizance of in the
civil or criminal action for the collection thereof.

(4) Value of internal revenue Stamps when they


are returned in good condition by the
purchaser [Sec. 204, NIRC]
(5) Unused stamps that have been rendered
unfit for use (Commissioner may redeem,
change or refund their value upon proof of
destruction) [Sec. 204, NIRC]
Requirements for refund as laid down by cases:
(1) Necessity of written claim for refund
(2) Claim containing a categorical demand for
reimbursement
(3) Filing of administrative claim for refund and
the suit/proceeding before the CTA within 2

[Sec. 222, NIRC]


False Return v. Fraudulent Return

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TAXATION 2

years from date of payment regardless of


any supervening cause

TAXATION LAW

found in Art. 2142 and Art. 2154 of the NCC.


When money is paid to another under the
influence of a mistake of fact, on the
mistaken supposition of the existence of a
specific fact, where it would not have been
known that the fact was otherwise, it may
be recovered. The ground upon which the
right of recovery rests is that money paid
through misapprehension of facts belongs
in equity and in good conscience to the
person who paid it.
(b) The government comes within the scope of
solutio indebiti principle, where that:
enshrined in the basic legal principles is
the time honoured doctrine that no person
shall unjustly enrich himself at the expense
of another. It goes without saying that the
Government is not exempt from the
application of this doctrine.

General Rule:The taxpayer must file a written


claim for refund stating a categorical demand
for reimbursement before the Commissioner
within two years from the date of payment.

[Sec. 229, NIRC]


When it comes to recovery of unutilized input
VAT, Section 112, and not Section 229 of the
1997 Tax Code, is the governing law. Second,
prior to 8 June 2007, the applicable rule is
neither Atlas nor Mirant, but Section 112(A).
The Atlas doctrine, which held that claims for
refund or credit of input VAT must comply with
the two-year prescriptive period under Section
229, should be effective only from its
promulgation on 8 June 2007 until its
abandonment on 12 September 2008 in Mirant.

[CIR v. San Roque]

Statutory Basis for Tax Refund


Scope of Claims for Refund [Sec. 204, NIRC]
The Commissioner may:
(a) Credit or refund taxes erroneously or
illegally received or penalties imposed
without authority;
(b) Refund the value of internal revenue
stamps when they are returned in good
condition by the purchaser; and
(c) In the Commissioners discretion, redeem or
change unused stamps that have been
rendered unfit for use and refund their value
upon proof of destruction.

Exceptions to requirement of a written claim:


(1) 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 therefore. (Sec. 229, NIRC)
(2) A return filed showing an overpayment shall
be considered as a written claim for credit
or refund. (Sec. 204(C), NIRC)

Necessity of Proof for Claim or Refund


(1) No credit or refund of taxes or penalties
shall be allowed unless the taxpayer files in
writing with the Commissioner a claim for
credit or refund within two (2) years after the
payment of the tax or penalty. [Sec. 204,

Note: Under Sec. 229, there is no exception to


the 2-year prescriptive period.

NIRC]
Legal Basis of Tax Refunds
(a) Tax refunds are based on the principle of
quasi-contract or solutio indebiti and the
pertinent laws governing this principle are

(2) A return filed showing an overpayment shall


be considered as a written claim for credit
or refund.[Sec. 204, NIRC]

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Burden of Proof for Claim of Refund


Tax refunds, like tax exemptions, are construed
strictly against the taxpayer and liberally in
favor of the taxing authority. [United Airlines,

TAXATION LAW

of the falsity, fraud or omission in the false or


fraudulent return involved.
Who may claim/apply for tax refund/tax credit
The proper person to claim refund or tax credit
is the person on whom the tax is imposed by
the statute.

Inc. v. CIR, G.R. No. 178788, Sept. 29, 2010]


Nature of erroneously paid tax/illegally
assessed collected
Taxes are erroneously paid when a taxpayer
pays under a mistake of fact, such as, he is 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.

Taxpayer/withholding agents of non-resident


foreign corporation - the withholding agent is
directly and independently liable for the
correct amount of tax that should be withheld
and for deficiency assessments, surcharges
and penalties.
Prescriptive Period for Recovery of Tax
Erroneously or Illegally Collected
Two-year period when counted: From the date
that tax was paid.

Tax refund vis--vis tax credit


REFUND takes place when there is actual
reimbursement while 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.

How date of payment determined:


(1) If the income tax is withheld at source
payment is at the end of the taxable year.
(2) If the income is paid on a quarterly basis
payment is from the time of filing the final
adjustment return.

Essential requisites for claim of refund

[Comm. v. CA and Citytrust, cited in United


Airlines Inc. v. CIR, 2010]: The grant of a refund
is founded on the assumption that the tax
return is valid, that is, the facts stated therein
are true and correct. The deficiency
assessment, although not yet final, created a
doubt as to and constitutes a challenge
against the truth and accuracy of the facts
stated in said return which, by itself and
without unquestionable evidence, cannot be
the basis for the grant of the refundTo grant
the refund without determination of the proper
assessment and the tax due would inevitably
result in multiplicity of proceedings or suits. If
the
deficiency
assessment
should
subsequently be upheld, the Government will
be forced to institute anew a proceeding for
the recovery of erroneously refunded taxes
which recourse must be filed within the
prescriptive period of ten years after discovery

[CIR vs. TMX Sales, January 16, 199]: When a


tax is paid in installments, the prescriptive
period should be counted from the date of final
payment or the last installment. This rule
proceeds from the theory that there is no

payment until the entire tax liability is


completely paid. Installments should be
treated as advances or portions of the annual
tax due.
Other Consideration Affecting Tax Refunds

Remedy of the taxpayer upon denial or


inaction on the claim for refund:
(1) CIR denies claim - appeal to the CTA within
thirty (30) days from the receipt of the
Commissioners decision and within two
years from the date of payment.
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(2) CIR does not act on the claim and the 2-year

TAXATION LAW

(5) Suspension of business operation

period is about to lapse - 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 2year period. [Revised Rules of the CTA, as

The Commissioner or his authorized


representative is empowered to suspend the
business operations and temporarily close
the business establishment of any person
for any of the following violations:
(a) In the case of a VAT-registered Person.
(1) Failure to issue receipts or invoices;
or
(2) Failure to file a value-added tax
return as required under Section
114; or
(3) Understatement of taxable sales or
receipts by thirty percent (30%) or
more of his correct taxable sales or
receipts for the taxable quarter.

amended]
Period for claiming refund once granted:
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. [Sec. 230, NIRC]

Period for using the Tax Credit Certificate


(TCC):
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. [Sec. 230,

(b) Failure of any Person to Register as


Required under Section 236.
The
temporary
closure
of
the
establishment shall be for the duration
of not less than five (5) days and shall be
lifted only upon compliance with
whatever requirements prescribed by the
Commissioner in the closure order. [Sec.

NIRC]

115, NIRC]
(6) Non-availability of injunction to restrain
collection of tax
No court shall have the authority to
grant an injunction to restrain the collection
of any national internal revenue tax, fee or
charge imposed by the National Internal
Revenue Code. [Sec. 218, NIRC]

GOVERNMENT REMEDIES
ADMINISTRATIVE REMEDIES
(1) Tax lien
(2) Levy and sale of real property
(3) Forfeiture of real property to the
government for want of bidder
(4) Further distraint and levy
(5) Suspension of business operation
(6) Non-availability of injunction to
restrain collection of tax

JUDICIAL REMEDIES
(1) Civil Action
(2) Criminal Action
Form and Mode of Proceeding (supra)

(1) Tax lien (supra)


(2) Levy and sale of real property (supra)
(3) Forfeiture of real property to the government
for want of bidder (supra)
(4) Further distraint and levy (supra)

Civil Action

Two ways by which civil liability is enforced:


(1) by filing a civil case for the collection of sum
of money with the proper regular court; and
162

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TAXATION 2

(2) by filing an answer to the petition for review


filed by the taxpayer with the Court of Tax
Appeals. [Mamalateo, 2008]

TAXATION LAW

Offender

Penalty

Criminal Action
Any person convicted of a crime under the
Code shall:
(1) be liable for the payment of the tax, and
(2) be subject to the penalties imposed under
the Code. [Sec. 253(A), NIRC]

CPA

Payment of tax not defense:


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. [Sec. 253(A), NIRC]

Corporations,
associations,
partnerships etc.

Liability of person who aids or abets:


Any person who wilfully 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. [Sec. 253(B),

Minimum amount of fine:


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. [Sec. 253, NIRC]
Prescriptive period for criminal action:
All violations of any provision of the Code shall
prescribe after five (5) years. (Sec. 281, NIRC)

NIRC]

Offender

public
office,
and
perpetually disqualified
from holding any public
office, to vote, and to
participate
in
any
election
his license shall be
automatically revoked or
cancelled once he is
convicted
imposed on the partner,
president,
general
manager,
branch
manager,
treasurer,
officer-in-charge
and
employees responsible
for the violation (Sec.
253, NIRC)

Penalty

Not a citizen of he shall be deported


the Philippines
immediately
after
serving the sentence
A public officer or the maximum penalty
employee
prescribed
for
the
offense shall be imposed
on him
shall be dismissed from

CRIMINAL OFFENSES
Offense

Who is liable

Willful attempt to evade or Any person who willfully


defeat tax. (Sec. 254)
attempts in any manner to
evade or defeat any tax or the
payment thereof.
163

Penalty
Fine:
P30,000
P100,000
AND
Imprisonment: 2-4 years

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TAXATION 2

Offense

Who is liable

Failure to File Return, Supply


Correct
and
Accurate
Information, Pay Tax, Withhold
and Remit Tax and Refund
Excess Taxes Withheld on
Compensation (Sec. 255)

Any person required to pay any


tax, make a return, keep any
record, or supply correct and
accurate information

Making false entries, records,


or reports, or using falsified or
fake accountable forms (Sec.
257)

Unlawful pursuit of business


(Sec. 258)

Illegal Collection of Foreign


Payments (Sec. 259)

Unlawful
Possession
of
Cigarette Paper in Bobbins or
Rolls, Etc. (Sec. 260)

Any person who attempts to


make it appear for any reason
that he or another has in fact
filed a return or statement, or
actually files a return or
statement and subsequently
withdraws the same return or
statement
Any
financial
officer
or
Independent CPA engaged to
examine and audit books of
accounts of taxpayers under
Sec.232 (A) and any person
under his direction.
Any person who carries on any
business for which in annual
registration fee is imposed
without paying the tax as
required by law.
A person engaged in the
business of distilling, rectifying,
repacking, compounding or
manufacturing
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
implementing
rules
and
regulations.
Any person, manufacturer or
importer of cigar or cigarettes

TAXATION LAW

Penalty
Plus other penalties
Fine: P10,000 or more
AND
Imprisonment:1-10 years
Plus other penalties
Fine - P10,000 - P20,000
AND
Imprisonment: 1-3 years
Plus other penalties

Fine
P50,000
P100,000
AND
Imprisonment: 2-6 years

Fine: P5,000 - P20,000


AND
Imprisonment: 6 months2 years
Fine: P30,000 - P50,000
AND
Imprisonment: 1-2 years

Fine: P20,000 - P50,000;


AND
Imprisonment: 1-2 years

Fine:
P20,000
P100,000; AND
Imprisonment - 6 years 1
day - 12 years
Unlawful Use of Denatured Any person who for the purpose Fine:
P20,000
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TAXATION 2

Offense
Alcohol (Sec. 261)

Who is liable

TAXATION LAW

Penalty

of manufacturing any beverage, P100,000; AND


uses denatured alcohol or Imprisonment - 6 years 1
alcohol specially denatured to day - 12 years
be used for motive power or
withdrawn under bond for
industrial uses or alcohol
knowingly misrepresented to be
denatured to be unfit for oral
intake or who knowingly sells or
offers for sale such preparations
containing as an ingredient
such alcohol.

Any person who unlawfully


recovers or attempt to recover
by distillation or other process
any denatured alcohol or who
knowingly sells or offers for
sale, conceals or otherwise
disposes of alcohol as recovered
or redistilled
Shipment or Removal of Any
person
who
ships, Fine: P20,000 P
Liquor/Tobacco
Products transports or removes
100,000; AND
under False Name or Brand or
Imprisonment: 6 years 1
as an Imitation of any Existing
day - 12 years
or Known Product Name or
Brand (Sec. 262)
Unlawful
Possession
or Any person who owns or is
Removal of Articles Subject to found in possession of these
Excise Tax W/o Payment of the articles
Tax (Sec. 263)
Where:
Fine: P1,000 - P2,000
(1) Value of goods < P1,000
AND
Imprisonment:
60-100
days
(2)
Fine: P10,000-P20,000
alue of goods < P50,000 but AND
>P1000
Imprisonment: 2-4 years
Fine: P30,000 - P60,000
(3)
AND
alue of goods < P150,000, Imprisonment: 4-6 years
165

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TAXATION 2

Offense

Who is liable

TAXATION LAW

Penalty

but >P50,000

Failure or Refusal to Issue


Receipts
or
Sales
or
Commercial
Invoices,
Violations Related to the
Printing of Such Receipts or
Invoices and Other Violations
(Sec. 264)
Offenses Relating to Stamps
(Sec. 265)
Failure to Obey Summons (Sec.
266)

Declaration under Penalties of


Perjury (Sec. 267)

Misdeclaration
Misrepresentation
Manufacturers
Subject
Excise Tax (Sec. 268)

or
of
to

Fine:
P50,000
P100,000
(4)
AND
V
alue of goods > P150,000
Imprisonment: 10-12 years
Any person who, being required Fine: P 1,000 - P50,000
under Section 237 to issue AND
receipts or sales or commercial Imprisonment: 2- 4 years
invoices

Fine: P20,000 - P50,000


AND
Imprisonment: 4-8 years
Any person who being duly Fine: P 5,000 - 10,000;
summoned to appear to testify, AND
or to appear and produce books Imprisonment:1-2 years
of
accounts,
records,
memoranda or other papers, or
to furnish information as
required under the pertinent
provisions of this Code.
Any person who willfully files a Penalty for Perjury under
declaration, return or statement the Revised Penal Code
containing information which is
not true and correct as to every
material matter
Any manufacturer subject to Summary cancellation or
excise tax
withdrawal of the permit
to engage in business as a
manufacturer of articles
subject to excise tax
Any person who conducts an Forfeiture of property
unlicensed business or uses dies used
for printing false stamps

Use of Property in Unlicensed


Business or Use of Dies for
Printing False Stamps, Etc.
(Sec. 268)
Illegal Storage or Removal of Any person subject to excise tax Forfeiture of goods
Goods (Sec. 268)
who fails to store the goods in
proper place, or removes goods
without payment of excise tax
Penalty for Second and
Maximum of the penalty
166

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TAXATION 2

Offense

Who is liable

Subsequent Offenses (Sec.


274)
Violation of Other Provisions of
the Tax Code or Rules or
Regulations in General (Sec.
275)

TAXATION LAW

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
Penalty
for
Selling, Any taxpayer, whose property
Transferring, Encumbering or has
been
placed
under
in any way disposing of constructive distraint
property
Placed
under
Constructive Distraint (Sec.
276)

Fine: P1000 or less


OR
Imprisonment: 6 months
or less
OR Both
Fine: at least P5,000
AND
at least twice the value of
the property
OR
Imprisonment: 2 years 1
day - 4 years
OR Both
Fine: P 5,000 or more
OR
Imprisonment: 6 months 1
day - 2 years,
OR Both

Failure to Surrender Property Any person having in his


Placed under Distraint and possession or under his control
Levy (Sec. 277)
any property or rights to
property, upon which a warrant
of constructive distraint or
actual distraint and levy has
been issued
Procuring Unlawful Divulgence Any person procures an officer Fine: not more than P
of Trade Secrets (Sec. 278)
or employee of the BIR to 2,000
divulge
any
confidential OR
information
regarding
the Imprisonment: 6 months business, income or inheritance 5 years
of any taxpayer, knowledge of OR Both
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
The law imposes a fine of not less than
Penalties Imposed on Public Officers [Sec. 269,
P50,000 nor more than P100,000 or
NIRC]
imprisonment for not less than 10 years nor
167

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TAXATION 2

TAXATION LAW

Informers Reward[Sec. 282, NIRC]


To whom given:

more than fifteen years on every official, agent


or employee of the BIR or of any agency or
employee of the Government charged with the
enforcement of the Tax Code, who shall:
(CONED- FRAP)
(a) Extort or willfully oppress under color of
law;
(b) knowingly Demand other or greater sums
than are authorized by law or receive any
fee, compensation or reward, except as by
law prescribed, for the performance of any
duty;
(c) willfully Neglect to give receipts, as by law
required, for any sums collected in the
performance of duty, or who willfully
neglect to perform any of the duties
enjoined by law;
(d) Conspire or collude with another or others
to defraud the revenues or otherwise violate
the law;
(e) willfully make Opportunity for any person to
defraud the revenues, or who do or omit to
do any act with intent to enable any other
person to defraud the revenues;
(f) negligently or by design Permit the violation
of the law by any other person;
(g) make or sign any False certificate or return
in any case where the law requires the
making by them of such entry, certificate or
return;
(h) having knowledge or information of a
violation of any provision of the Code or of
any fraud committed on the revenues
collectible by the BIR, fail to Report such
knowledge or information to their superior
officer, or to report as otherwise required by
law; or
(i) without the authority of law, demand or
Accept or attempt to collect, directly or
indirectly, as payment or otherwise, any
sum of money or other thing of value for the
compromise, adjustment or settlement of
any charge or complaint for any violation or
alleged violation of law.

Persons instrumental in the discovery of


violations of the NIRC and in discovery and
seizure of smuggled goods.

Amount of reward:
10% of the revenues, surcharges or fees
recovered and/or fine/penalty imposed, or
P1,000,000, whichever is LOWER.
(a) The same amount shall be given if the
offender offered to compromise and such
offer has been accepted and collected by
the Commissioner.
(b) If no revenue, surcharge or fees be actually
collected, such person is not entitled to a
reward
(c) 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.

STATUTORY OFFENSES AND PENALTIES


Civil Penalties
(1) Surcharge
(2) Interest
SURCHARGE
Surcharge - penalty imposed in addition to the
tax required to be paid [Sec. 248(A), NIRC]
Rates of Surcharge (25% or 50%)
(1) 25% of the amount due in the following
cases:
(a) Failure to file any return and pay the tax
due on the date prescribed; or
(b) Filing a return with an internal revenue
officer other than those with whom the
return is required to be filed unless the
Commissioner authorizes otherwise; or
(c) Failure to pay the deficiency tax within
the time prescribed for its payment in the
notice of assessment; or
(d) Failure to pay the full or part of the
168

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TAXATION 2

amount of tax due on or before the date


prescribed for its payment [Sec. 246 (A),

TAXATION LAW

(c) A deficiency tax, or any surcharge or interest


thereon on the due date appearing in the
letter of demand and assessment notice
(Sec. 249(C), NIRC)

NIRC]
(2) 50% of the tax or of the deficiency tax in the
following cases:
(a) Willful neglect to file the return within
the period prescribed; or
(b) A false or fraudulent return is willfully
made [Sec. 248(B), NIRC]

Interest on extended payment


20% per annum on the tax or deficiency tax or
any part thereof unpaid from the date of notice
and demand until it is paid if any person
required to pay the tax is:
(a) Qualified and elects to pay the tax on
installment but fails to pay the tax or any
installment or any part of such amount or
installment or before the date prescribed for
its payment; or
(b) Where the Commissioner has authorized an
extension of time within which to pay a tax
or a deficiency tax or any part thereof
(249(D), NIRC)

Prima facie evidence of a false or fraudulent


return: Substantial underdeclaration of taxable
sales, receipts or income, or a substantial
overstatement of deductions. 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,
shall render the taxpayer liable for substantial
underdeclaration or for overstatement. (Sec.
248(B), NIRC)

COMPROMISE AND ABATEMENT OF


TAXES
(see discussion under Remedies of the
Taxpayer)

INTEREST
In General
20% per annum on the unpaid amount of tax,
interest at the rate of twenty percent (20%) per
annum from the date prescribed for payment
until the amount is fully paid. (Sec. 249(A),
NIRC)

Cases which may be compromised: [Sec. 2, R.R.


30-2002]
(1) Delinquent accounts
(2) Cases under administrative protest after
issuance of the Final Assessment Notice to
the taxpayer which are still pending in the
Regional Offices, Revenue District Offices,
Legal Service, Large Taxpayer Service (LTS),
Collection Service, Enforcement Service and
other offices in the National Office
(3) Civil tax cases being disputed before the
courts
(4) Collection cases filed in courts
(5) Criminal violations, other than those
already filed in court or those involving
criminal tax fraud

Deficiency Interest
20% per annum on any deficiency in the tax
due from the date prescribed for its payment
until the full payment thereof. (Sec. 249(B),
NIRC)
Delinquency interest
20% per annum on the unpaid amount in case
of failure to pay:
(a) The amount of the tax due on any return
required to be filed; or
(b) The amount of the tax due for which no
return is required; or

Cases which cannot be compromised: [Sec. 2,


R.R. 30-2002]
169

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TAXATION 2

(1) Withholding tax cases, unless the


applicant-taxpayer invokes provisions of law
that cast doubt on the taxpayer's obligation
to withhold
(2) Criminal tax fraud cases confirmed as such
by the CIR or his duly authorized
representative
(3) Criminal violations already filed in court
(4) Delinquent accounts with duly approved
schedule of installment payments
(5) Cases where final reports of reinvestigation
ore reconsideration have been issued
resulting to reduction in the original
assessment and the taxpayer is agreeable
to such decision by signing the required
agreement form for the purpose. On the

TAXATION LAW

other hand, other protested cases shall be


handled by the Regional Evaluation Board
(REB) or the National Evaluation Board
(NEB) on a case to case basis
(6) Cases which become final and executory
after final judgment of a court, where
compromise is requested on the ground of
doubtful validity of the assessment; and
(7) Estate tax cases where compromise is
requested on the ground of financial
incapacity of the taxpayer

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TAXATION LAW

Flowchart I: Taxpayers Remedies from Tax Assessment-NIRC


START

Commissioner or
Regional Director
Issues Letter of
Authority (LA)

Revenue Officer (RO)


conducts Audit w/in 120
days. If 120 days lapse
LA is revalidated,

Send Formal Letter


of demand and Final
Assessment Notice
(FAN) is issued

Is response w/n
15 days? Is it
meritorious?

NO to
either

Yes to
both

File protest w/n 30


days from receipt of
assessment. Submit
supporting papers wi/in
60 days from protest

Protest made w/in


30 days?
Supporting papers
submitted w/in 60
days?

Assessment becomes
Final, Warrant of Distraint
& Levy Issued

RO sends notice
of informal
conference

Taxpayer
responds w/in
15 days

Taxpayer
responds w/in 15
days

Regional
Assessment
Division issues a
Preliminary
Assessment Notice
(PAN)

ASSESSMENT
ENDS

YES to
both

Commissioner decides on
protest within 180 days

NO to
either

Decision
favorable to
taxpayer?

YES

ASSESSMENT
ENDS

YES

Commissioner
decides w/n
180 days?

NO

NO

Appeal to the Court of Tax


appeals within 30 days OR file
motion for reconsideration
within 30 days. MR tolls 30
day period to appeal to CTA

Appeal to the Court of Tax


Appeals w/in 30 days after
lapse of 180 days OR wait for
a decision by the BIR
(Lascona Land oil vs. CIR)

If MR is denied, appeal to
the CTA within remainder
of the 30 days

CTA decides on
the appeal

YES

Appeal made
on time?

If CTA decision is unfavorable to


taxpayer, file MR with CTA
Division w/in 15 days. Appeal to
CTA en banc if MR denied.

NO

Appeal to
Supreme Court

171

Assessment
becomes Final,
Warrant of Distraint
& Levy Issued

END

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TAXATION 2

TAXATION LAW

Flowchart II: Procedures for Distraint and Levy-NIRC


RCO - Revenue Collection Officer RDO - Revenue District officer
RRD - Revenue Regional Director LGU- Local Government Unit

START

Person owing any


delinquent tax to
fails to pay w/in
the time required

Delinquent tax
more than 1M?

No
RDO posts notice in at least 2 public
places in the municipality/city where
the distraint is made. One place of
posting must be at the mayors office.
Time of sale shall not be less than 20
days after the notice (Sec. 209)

Goods shall be restored to owner,


if charges are paid (Sec. 210)

Commissioner seizes
sufficient
personal property to satisfy the
tax, charge & expenses of seizure
(Sec. 207 (A))

Yes

RDO seizes
sufficient
personal property to satisfy
the tax, charges & expenses
of seizure (Sec. 207 (A))

Property may be resold and


the net proceeds shall be
remitted to the National
Treasury as internal revenue.
(Sec. 212)

Distraining Officer accounts for


the goods distrained (Sec. 208)

Bid less than


amount of tax/
FMV of goods
distrained?

Officer
conducts
public auction

Yes

Commissioner may purchase


property
for
the
National
Government (Sec. 212)

No, bid just right


W/in 5 days after sale,
distraining officer shall enter
return of proceedings in the
records of RCO, RDO and
RRD (Sec. 213)

W/in 2 days after


the sale, officer
shall report to the
Commissioner.
(Sec. 211)

Internal
revenue
officer,
designated by the Commissioner,
shall prepare a certificate with the
force of a nationwide legal
execution (Sec. 207 B)

Real property may be levied


on before, simultaneously, or
after the distraint of personal
property (207 (B))

W/n 10 days after receipt of the


warrant, levying officer shall
report to the Commissioner who
shall have the authority to lift the
warrant of levy (Sec. 207 B)

W/n 1 year from forfeiture,


the taxpayer, may redeem
said property by paying full
amount of the taxes and
charges (Sec. 215)

Excess of proceeds over the


entire claim, shall be returned
to the owner. No charge shall
be imposed for the services of
the officer (Sec. 209)

Levy shall be affected by writing upon said certificate a


description of the property. Notice of the levy shall be
served upon the Register of Deeds of LGU where the
property is located and upon the owner (Sec. 207 B)

W/n 20 days after levy, officer shall post


notice at the main entrance of the
municipal/city hall & in public place in the
barrio/district where the real estate lies for
at least 30 days by AND publish it once a
week for 3 weeks. Owner may prevent
sale by paying all charges (Sec. 213)

W/n 2 days, he shall make a return


of the forfeiture. Register of Deeds,
upon registration of forfeiture shall
transfer title to the Government w/o
court order. (Sec. 215)

Officer sells the goods to the


highest bidder for cash or
with the
Commissioners
approval, through commodity/
stock exchanges. (Sec. 209)

Sale shall be held at the


main entrance of the
municipal/city hall, or on the
premises of the levied
property. (Sec. 213)

Officer conducting the


sale shall forfeit the
property to the
Government (Sec. 215)

Yes

No bidder or
highest bid
insufficient?

No, bid ok
The Commissioner may,
after 20 days notice, sell
property at public auction
or at private sale with
approval of the SoF.
Proceeds
shall
be
deposited with the National
Treasury (Sec. 216)

W/n 1 year from sale, the


owner may redeem, by paying
to the RDO the amount of the
taxes, penalties, and interest
thereon from the date of
delinquency to the date of sale,
and 15% per annum interest on
purchase price from the date
of purchase to the date of
redemption. (Sec. 214)

172

W/n 5 days after the sale,


levying officer shall enter
return of the proceedings
upon the records of the RCO,
RDO and RRD (Sec. 213)

Excess of proceeds
of the sale over claim
and cost of sale shall
be turned over to the
owner (Sec. 213)

Owner shall not be


deprived
of
the
possession and shall
be entitled to the
fruits until 1 year
expires (Sec. 214)

Levy and distraint


may be repeated until
the full amount due,
and all expenses are
collected. (Sec. 217)

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TAXATION 2

VII. Organization and


Function of the BIR
RULE-MAKING AUTHORITY
SECRETARY OF FINANCE

OF

TAXATION LAW
(3) Understatement of taxable sales or
receipts by thirty percent (30%) or more
of his correct taxable sales or receipts for
the taxable quarter.

THE

B. Failure of any person to register as required


under section 236. The temporary closure of the establishment
shall be for the duration of not less than five
(5) days and shall be lifted only upon
compliance with whatever requirements
prescribed by the Commissioner in the
closure order.

Authority of secretary of finance to promulgate


rules and regulations
[Sec. 244, NIRC]
The
Secretary
of
Finance,
upon
recommendation of the Commissioner, shall
promulgate all needful rules and regulations
for effective enforcement of the provisions of
the Code.
Non-retroactivity of rulings [Sec. 246, NIRC]
General Rule:No retroactive application if the
revocation, modification or reversal of rules
and regulations, rulings or circulars will be
prejudicial to the taxpayers

Exceptions:
(a) Where the taxpayer deliberately misstates
or omits material facts from his return or
any document required of him by the BIR;
(b) Where the facts subsequently gathered by
the BIR are materially different from the
facts on which the ruling is based; or
(c) Where the taxpayer acted in bad faith.
POWER OF THE COMMISSIONER TO SUSPEND
THE BUSINESS OPERATION OF A TAXPAYER [Sec
115, NIRC]
The Commissioner or his authorized
representative is empowered to suspend the
business operations and temporarily close the
business establishment of any person for any
of the following violations:
A. In the case of a vat-registered person. (1) Failure to issue receipts or invoices;
(2) Failure to file a value-added tax return
as required under Section 114; or

173

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174

TAXATION LAW

UP LAW BOC

TAXATION 2

VIII. LOCAL
GOVERNMENT CODE
OF 1991, AS AMENDED

TAXATION LAW
Unless otherwise provided, tax exemptions
or incentives granted to, or presently
enjoyed by all persons, whether natural or
judicial, including government-owned or
controlled corporations, except local water
districts, cooperatives duly registered under
R.A. No. 6938, non-stock and non-profit
hospitals and education institutions, are
withdrawn upon the effectivity of the Code.
(Sec. 193, LGC)

LOCAL GOVERNMENT TAXATION


NATURE AND SOURCE OF TAXING
POWER
(A) Grant of local taxing power under the Local
Government Code
(1) Each LGU shall exercise its power to
a. create its own sources of revenue
b. levy taxes, fees, and charges.
(2) Both are subject to the provisions in the
LGC and consistent with local autonomy
(3) Taxes, fees and charges levied accrue
exclusively to the local government units.

(E) Authority to adjust local tax rates


LGUs shall have the authority to adjust the
tax rates as prescribed not oftener than once
every five (5) years, but in no case shall the
adjustment exceed ten percent (10%) of the
rates fixed by the Code. (Sec. 191, LGC)
(F) Residual taxing power of local governments
LGU may exercise the power to levy taxes or
charges on ANY base or subject

[Sec. 129, LGC]


(B) Authority to prescribe penalties for tax
violations
The sanggunian may impose
(1) a surcharge not exceeding twenty-five
percent (25%) of the amount of taxes,
fees or charges not paid on time and
(2) an interest at the rate not exceeding
two percent (2%) per month of the
unpaid taxes, fees or charges including
surcharges, until such amount is fully
paid but in no case shall the total
interest on the unpaid amount or
portion thereof exceed thirty-six (36)
months. [Sec. 168, LGC]

Required:
Not otherwise specifically enumerated in
the LGC or taxed under NIRC or other
applicable laws
(1) Not unjust, excessive, oppressive,
confiscatory or contrary to declared
national policy
(2) Pursuant to an ordinance enacted with
public hearing conducted for the purpose.

[Sec. 186, LGC]


(g) Authority to issue local tax ordinances
The power to impose a tax, fee, or charge, or
to generate revenue under this Code shall
be exercised by the sanggunian of the local
government unit concerned through an
appropriate ordinance. [Sec. 132, LGC]

(C) Authority to grant local tax exemptions


LGUs may, through ordinances duly
approved, grant tax exemptions, incentives
or reliefs under such terms and conditions
as they may deem necessary. [Sec. 192,

LOCAL TAXING AUTHORITY


(a) Power to create revenues exercised thru
LGUs

LGC]
(D) Withdrawal of exemptions
175

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TAXATION 2

TAXATION LAW

(a) Each LGU shall exercise its power to


create its power to create its own sources
of revenue and to levy taxes, fees and
charges. [Sec. 128, LGC]
(b) Exercised by the Sanggunian concerned
through an appropriate ordinance. [Sec.

132, LGC]
(c) Ordinances may be vetoed by local chief
executives of the LGUs, except the
Punong Barangay, on the ground that it
is ultra vires or prejudicial to public
welfare. His reasons shall be stated in
writing. [Sec. 55 (a) and (b), LGC]
(b) Procedure for approval and effectivity of tax

ordinances
(1) A public hearing must be conducted
prior to the enactment of a tax ordinance.

[Sec. 187, LGC]


(2) Within ten (10) days after the approval of
the ordinance, certified true copies of all
tax ordinances or revenue measures
shall be published in full for three (3)
consecutive days in a newspaper of local
circulation. In provinces, cities and
municipalities where there are no
newspapers of local circulation, it must
be posted in at least two (2) conspicuous
and publicly accessible places. [Sec. 188,

LGC]

SPECIFIC TAXING POWER OF LOCAL GOVERNMENT UNIT (LGUS)


Power
Tax on Transfer of Real Property
Tax on Business of Printing and
Publication
Franchise tax
Tax on sand, gravel and other
quarry resources
Professional tax
Amusement tax
Annual Fixed Tax For Every

Province

Municipality

City

(135)

(151)

(136)

(137)

(138)

(139)
(140)
(141)

176

Barangay

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Delivery Truck or Van of


Manufacturers or Producers,
Wholesalers of, Dealers, or
Retailers in, Certain Products
Tax on Business
Fees
and
charges
on
regulation/licensing of business
and occupation
Fees for Sealing and Licensing of
Weights and Measures
Fishery Rentals, Fees and
Charges
Community Tax
Tax on Gross Sales or Receipts of
Small-Scale Stores/Retailers
Service Fees on the use of
Barangay-owned properties
Barangay Clearance
Other Fees and Charges (on
commercial breeding of fighting
cocks,
cockfights,
cockpits;
places of recreation which charge
admission fees; outside ads)
Service Fees and Charges (153)

Public Utility Charges (154)

Toll Fees or Charges (155)

Real Property Tax

TAXATION LAW

(143)

(147)

(148)

(149)

(152a)
(152b)
(152c)

(152d)

(within Metro Manila)


2007):
Business tax must be based on gross receipts,
it being different from gross revenue. The right
to receive income, and not the actual receipt
determines when to include the amount in
gross income.

Yamane vs. Lepanto Condo Corp. (Oct. 23,


1995):
Condominium corporations are not business
entities, and are thus not subject to local
business tax. Even though the corporation is
empowered to levy assessments or dues from
the unit owners, these amounts are not
intended for the incurrence of profit by the
corporation, but to shoulder the multitude of
necessary expenses for maintenance of the
condominium.

Common revenue raising powers


(1) Service fees and charges
LGUs may impose and collect such
reasonable fees and charges for services
rendered. [Sec. 153, LGC]
(2) Public utility charges
LGUs may fix the rates for the operation of
public utilities owned, operated and

Ericsson Telecoms vs. City of Pasig. (Nov


177

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TAXATION 2

maintained by them within their jurisdiction.

TAXATION LAW

Common limitations on the taxing powers of


LGUs
Unless otherwise provided, the following
cannot be levied by the local governments:
(IDEC-GAPEP-GRR-ECN):
(1) Income tax, except when levied on banks
and other financial institutions;
(2) Documentary stamp tax;
(3) Estate tax, inheritance, gifts, legacies and
other acquisitions mortis causa, except as
otherwise provided;
(4) Customs duties, registration fees of vessel
and wharfage on wharves, tonnage dues,
and all other kinds of customs fees,
charges and dues except wharfage on

tolls for bridges or otherwise, or other


taxes, fees, or otherwise
(6) Taxes, fees or charges on Agricultural and
aquatic products when sold by marginal
farmers or fishermen;
(7) Taxes on business enterprises certified to
by the Board of Investments as Pioneer or
non-pioneer for a period of 6 and 4 years,
respectively from the date of registration;
(8) Excise taxes on articles enumerated under
the NIRC, as amended, and taxes, fees or
charges on petroleum products;
(9) Percentage or VAT on sales, barters or
exchanges or similar transactions on goods
or services except as otherwise provided
herein;
(10) Taxes on the Gross receipts of
transportation contractors and persons
engaged in the transportation of
passengers or freight by hire and common
carriers by air, land or water, except as
provided in the Code;
(11) Taxes on premiums paid by way or
Reinsurance or retrocession;
(12) Taxes, fees or charges for the Registration
of motor vehicles and for the issuance of all
kinds of licenses or permits for the driving
thereof, except tricycles;
(13) Taxes, fees, or other charges on Philippine
products actually Exported, except as
otherwise provided;
(14) Taxes, fees, or charges, on Countryside and
Barangay Business Enterprises and
Cooperatives duly registered under the
Cooperative Code of the Philippines; and
(15) Taxes, fees or charges of any kind on the
National Government, its agencies and
instrumentalities, and local government
units. [Sec. 133, LGC]

wharves constructed and maintained by


the LGU concerned;
(5) Taxes, fees or charges on Goods carried
into or out of, or passing through, the
territorial jurisdictions of local government

TAXPAYERS REMEDIES

[Sec. 154, LGC]


(3) Toll fees or charges
(a) The sanggunian may prescribe the terms
and conditions and fix the rates for the
imposition of toll fees or charges for the
use of any public road, pier, or wharf,
waterway,
bridge,
ferry
or
telecommunication system funded and
constructed by the local government unit
concerned.
(b) The sanggunian may also discontinue
the collection of the tolls when public
safety and welfare requires.
(c) NO toll fees or charges shall be collected
from:
(i) Officers and enlisted men of the AFP
and members of the PNP on mission
(ii) Post office personnel delivering mail
(iii) Physically-handicapped
(iv) Disabled citizens who are sixty-five (65)
years or older. [Sec. 155, LGC]

units in the guise of charges for wharfage,


178

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TAXATION 2

(a) Periods of assessment and collection of local


taxes, fees or charges
(a) Assessment: Within 5 years from the
date they become due
(b) In case of Fraud or Intent to Evade Tax:
Within 10 years from discovery of fraud or
intent to evade payment. (Sec. 194, LGC)
(c) Collection: 5 years from the date of
assessment by administrative or judicial
action.

TAXATION LAW

(a) Local governments lien for delinquent taxes,


fees or charges
(1) Non-payment of a tax, fee or charge
creates a lien superior to all liens or
encumbrances in favor of any other
person, enforceable by administrative or
judicial action
(2) The lien may only be extinguished upon
full payment of the delinquent local
taxes, fees, and charges including
related surcharges and interests. [Sec.

Instances When Running of Prescription


Periods is Suspended

173, LGC]

(1) When the treasurer is legally prevented


from making the assessment or
collection
(2) When
taxpayer
requests
for
reinvestigation and executes a waiver in
writing before lapse of the period for
assessment or collection.
(3) When the taxpayer is out of the country
or otherwise cannot be located (Sec. 194
(d), LGC)

(b) Civil remedies, in general


(1) Administrative action
(2) Judicial action
(c) Procedure for administrative action
(1) Distraint of personal property
Personal properties subject to distraint:
goods, chattels or effects and other
personal property of whatever character,
including stocks and other securities,
debts, credits, bank accounts, and
interest in and rights to personal
property

(b) Protest of assessment


Within sixty (60) days from the receipt of the
notice of assessment, the taxpayer may file
a written protest with the local treasurer
contesting the assessment; otherwise it
shall become final and executory. (Sec. 195,
LGC)

PROCEDURE: [Sec. 175, LGC]


(a) Seizure of personal property
(b) Accounting of distrained goods
(c) Publication of time and place of sale
and the articles distrained
(d) Release of distrained property upon
payment prior to sale
(e) Procedure of sale
(f) Disposition of proceeds

(c) Claim for refund of tax credit for erroneously


or illegally collected tax, fee or charge
(a) Requires a written claim for refund or
credit to be filed with local treasurer
before protest is entertained
(b) Must be brought within 2 years from
payment of tax or from the date the
taxpayer became entitled to refund or
credit (Sec. 196, LGC)

(2) Levy of real property, procedure


Levy upon real property and interest in or
rights to real property

CIVIL REMEDIES BY THE LGU FOR


COLLECTION OF REVENUES

PROCEDURE [Sec. 176, LGC]

179

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TAXATION 2

(a) Preparation of a duly authenticated


certificate by the LGU Treasurer
effecting the levy on the real property
(b) Service of written notice of levy to the
assessor and Register of Deeds
(c) Annotation of the levy on the tax
declaration and the certificate of title
(d) Advertisement and Sale [Sec. 178,

TAXATION LAW

(5) Penalty on local treasurer for failure to

issue and execute warrant of distraint or


levy
Automatically dismissed from the service
after due notice and hearing (Sec. 177,
LGC)

LGC]

(d) Procedure for judicial action


(1) The local government may institute an
ordinary civil action with regular courts of
proper jurisdiction for the collection of
delinquent taxes, fees, charges or other
revenues.
(2) The civil action shall be filed by the local
treasurer. (Sec. 183, LGC)

(3) Further distraint or levy


The remedies by distraint or levy may be
repeated if necessary until the full
amount due, including all expenses, is
collected (Sec. 184, LGC)
(4) Exemption of personal property from

distraint or levy

Valley Trading Co. vs. CFI of Isabela, (1989);


Angeles City v. Angeles City Electric
Corporation, (2010):

(ToB-CUPLA)
(a) Tools and implements necessarily
used by the taxpayer in his trade or
employment
(b) one horse, cow, carabao, or other
Beast of burden, such as the
delinquent taxpayer may select and
necessarily used by him in his ordinary
occupation
(c) his necessary Clothing, and that of all
his family
(d) household furniture and utensils
necessary for housekeeping and used
for that purpose by the delinquent
taxpayer, such as he may select, of a
value not exceeding P10,000
(e) Provisions, including crops, actually
provided for individual or family use
sufficient for 4 months
(f) the professional Libraries of doctors,
engineers, one fishing boat and net,
not exceeding the total value of
P10,000 by the lawful use of which a
fisherman earns his livelihood
(g) any material or Article forming part of
a house or improvement of any real
property

LGC does not contain a provision prohibiting


courts from enjoining the collection of local
taxes. Such lapse may have allowed
preliminary injunction under Rule 58, ROC
where local taxes are involved.

180

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(d) Other improvements not


exempted [Sec. 232, LGC]

REAL PROPERTY TAXATION


FUNDAMENTAL PRINCIPLES

All real property, whether taxable or exempt,


shall be appraised at the CURRENT AND
FAIR MARKET VALUE prevailing in the
locality where the property is situated. (Sec.
201, LGC)
basis

specifically

The rate shall be as follows:


(a) Province: not exceeding one percent (1%) of
the assessed value of real property; and
(b) City or municipality within Metro Manila:
not exceeding two percent (2%) of the
assessed value of real property. (Sec. 233,
LGC)

(CAPUE)
(1) Current fair market value is the basis for
assessment

(2) Actual use shall be the


classification for assessment

TAXATION LAW

Special Levy on Idle Lands


(a) A province, or city or municipality within
Metro Manila may levy an annual tax on idle
lands at the rate not exceeding five percent
(5%) of the assessed value of the property in
addition to the basic tax
(b) Lands covered
(1) 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
(2) Other than Agricultural
More than one thousand (1000) square
meters in area one half (1/2) of which
remain unutilized or unimproved (Sec.
236 and 237, LGC)
(c) Exempt Idle Lands
Lands exempt by reason of force majeure,
civil disturbance, natural calamity or any
cause or circumstance which physically or
legally prevents improving, utilizing or
cultivating the same. (Sec. 238, LGC)

of

(a) 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.


(b) Actual Use- refers to the purpose for
which the property is PRINCIPALLY or
PREDOMINANTLY utilized by the person
in possession thereof [Sec. 199(b), LGC]
(c) MCIAA v. Marcos [G.R. No. 120082, Sept.
11, 1996]- Usage means direct,
immediate and actual application of the
property
(3) Private persons cannot be left to the
appraisal, assessment, levy and collection
of real property tax.
(4) Uniform classification within each local
government unit shall be observed.
(5) Equitable appraisal and assessment is
required. (Sec. 197, LGC)

Special Levy for Public Works


(a) A tax ordinance shall describe with
reasonable accuracy the nature, extent and
location of the public works to be
undertaken, the estimated cost, the metes
and bounds by monuments and lines and
the number of annual installments which
should not be less than five (5) nor more
than ten (10) years.

Imposition of Real Property Tax

Coverage
For a Province, or a City or Municipality within
Metro Manila
(a) Land
(b) Building
(c) Machinery
181

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TAXATION 2

(b) The sanggunian may fix different rates for


different parts or sections thereof,
depending on whether such land is more or
less benefited by the proposed work. (Sec.
241, LGC)

TAXATION LAW

GOCCs
Philippine Ports Authority vs. City of Iloilo (G.R.
No. 109791, July 14, 2003):GOCCs are NOT
covered by the exemption since the exemption
only refers to instrumentalities without
personalities distinct from the government.

Special Education Fund (SEF)


A province, or city or municipality within Metro
Manila 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.

Mactan Airport v. MIAA cases


Provision
SC Ruling
involved
Mactan
Sec 133 (o), Airport
Airport
LGC.
LGUs Authority is a
Authorit not allowed GOCC,
not
y
vs. to levy (o) exempt from
Marcos
taxes/fees/ch RPT.
(1996)
arges of any Legislature in

Exemption from real property tax


(1) Owned by the Republic of the Philippines or
any of its political subdivisions except when
beneficial use is granted for a consideration
or to a taxable person.
(2) Charitable
institutions,
churches,
parsonages, or convents appurtenant
thereto, mosques, non-profit or religious
cemeteries, and all lands, buildings, and
improvements actually, directly and
exclusively used for religious, charitable, or
educational purposes.
(3) Machinery and equipment actually, directly
and exclusively used by local Water utilities
and GOCCs engaged in the supply and
distribution of water and/or generation and
transmission of electric power.
(4) Real property owned by duly registered
Cooperatives as provided for under Republic
Act No. 6938 (Cooperative Code of the
Philippines).
(5) Machinery and equipment used for
Pollution control and Environmental
protection. (Sec. 234, LGC)

kind on the
national
govt,
its
agencies,
instrumentalit
ies and LGUs.

amending the
law
specifically
deleted
GOCCS from
the
enumeration
Sec 234 (a), in Sec 234(a).
LGC.
Properties
exempt from
RPT: (a) real
properties
owned by the
Republic
or
any of its
political
subdivisions
Manila
Sec 133 (o),
MIAA falls
Airport
LGC
under
the
Authorit
term
y vs. CA Sec 234 (a), instrumenta
(2006)
LGC)
lity outside
the scope of
LGSs local
taxing
powers
under
Sec

Provincial Assessor of Marinduque v. CA [G.R.


No. 170532, Apr. 30, 2009]-A claim for
exemption under Sec. 234(e) should be
supported by evidence that the property
sought to be exempt is actually, directly and
exclusively used for pollution control and
environmental protection.
182

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TAXATION 2

Provision
involved

SC Ruling

TAXATION LAW

include a duly authenticated certificate


showing the name of the owner or person
having legal interest therein, description of the
property, amount of the tax due and interest
thereon.
(a) Warrant must be mailed or served to owner
or person having legal interest in the
property
(b) Written notice of levy must be mailed or
served to the assessor and the Register of
Deeds where the property is located
(c) The Register of Deeds must annotate the
levy on the tax declaration and certificate of
title [Sec. 258, LGC]

133(o).

Charitable Institutions
LUNG CENTER of the PHILS vs. QUEZON CITY
(G.R. No. 144104, June 29, 2004): A charitable
institution doesn't lose its character and its
exemption simply because it derives income
from paying patients so long as the money
received is devoted to the charitable object it
was intended to achieve, and no money inures
to the benefit of persons managing the
institution.

Failure to issue or execute the warrant of levy


within one year from the time the tax becomes
delinquent or within thirty days from the date
of the issuance thereof shall be dismissed from
service [Sec. 259, LGC]

Property leased to private entities is NOT


exempt from RPT, as it is not actually, directly
and exclusively used for charitable purposes.
Portions of the land occupied by the hospital
and portions used for its patients, whether
paying or non-paying, are EXEMPT from real
property taxes.

Judicial
The LGU may enforce the collection by civil
action in any court of competent jurisdiction.

REMEDIES
OF
LGUS
FOR
COLLECTION OF REAL PROPERTY
TAX

Must be filed by local treasurer within five (5)


to ten (10) years. [Sec. 266 in relation to Sec.

ADMINISTRATIVE

TAXPAYERS REMEDIES

270, LGC]

Local Governments Lien


The basic real property tax shall constitute a
lien on the property subject to tax, superior to
all liens, charges or encumbrances in favour 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. 257,

ADMINISTRATIVE
(a) Protest

Appeal to the Local Board of Assessment


Appeals (LBAA)
Appeal must be filed within 60 days from the
date of receipt of the written notice of
assessment
(a) By filing a petition under oath in the
form prescribed for the purpose
(b) Copies of tax declarations and other
affidavits or documents must be
submitted [Sec. 226, LGC]

LGC]
Levy
Upon the failure to pay the tax when due, the
local treasurer shall issue a warrant levying the
real property subject to tax. The warrant shall
183

UP LAW BOC

TAXATION 2

The LBAA shall decide the appeal within 120


days from the date of receipt of such appeal
(a) The LBAA shall have the power to summon
witnesses, administer oaths, conduct ocular
inspection, take depositions, and issue
subpoena duces tecum and/or subpoena
(b) The LBAA must furnish the appellant a copy
of the decision of the board. [Sec. 229, LGC]

TAXATION LAW

Meralco v. Nelia Barlis (G.R. No. 114231, May 18,


2001): The trial court has no jurisdiction to
issue a writ of prohibition which seeks to set
aside the warrant of garnishment over
petitioners bank deposit in satisfaction of real
property taxes without paying first under
protest the tax assessed and without
exhausting available administrative remedies.

Fels Energy v. Province of Batangas (G.R. No.


168557, Feb. 16, 2007)- Under Section 226 of

The local treasurer shall decide the protest


within 60 days from receipt.

R.A. No 7160, the last action of the local


assessor on a particular assessment shall be
the notice of assessment; it is this last action
which gives the owner of the property the right
to appeal to the LBAA. The procedure likewise
does not permit the property owner the remedy
of filing a motion for reconsideration before the
local assessor.

Appeal to the LBAA


Appeal must be filed within 60 days from the
date of receipt of denial of protest or upon
lapse of 60 days to decide
(a) By filing a petition under oath in the form
prescribed for the purpose
(b) Copies of tax declarations and other
affidavits or documents must be submitted

Victorias Milling v. CTA (G.R. No. L-24213, Mar.


13, 1968)- The failure to appeal within the

[Sec. 226, LGC]

statutory period renders the assessment final


and unappealable.

The LBAA shall decided the appeal within 120


days from the date of receipt of such appeal

[Sec. 229, LGC]

Appeal to the Central Board of Assessment


Appeals (CBAA)

Appeal to the CBAA

Appeal must be filed within 30 days from the


receipt of the decision of LBAA [Sec. 229, LGC]

Appeal must be filed within 30 days from the


receipt of the decision of LBAA [Sec. 229, LGC]

Effect of payment of tax

Appeal to the CTA En Banc

Appeal on assessments of real property shall


NOT SUSPEND the collection of the
corresponding realty taxes on the property
involved as assessed by the provincial or city
assessor without prejudice to the subsequent
readjustment depending upon
the final
outcome of the appeal. [Sec. 231, LGC]

Appeal must be filed through a petition for


review within 30 days from the receipt of the
decision of CBAA [Sec. 11, R.A. 1125 as

amended]
Appeal to the SC
Appeal must be filed within fifteen (15) days
from receipt of decision of the CTA [Rule 45,

(b) Payment of real property under protest

File protest with local treasurer

Rules of Court]

No protest shall be entertained unless the tax


is first paid. The protest must be in writing and
filed within 30 days from payment of the tax to
the local treasurer.

JUDICIAL

(1) Question on the legality of a tax ordinance


184

UP LAW BOC

TAXATION 2

(a) Any question on the constitutionality or


legality of a tax ordinance may be raised
on appeal within thirty (30) days from
effectivity to the Secretary of Justice who
shall render a decision within sixty (60)
days from the date of receipt of the
appeal.
(b) The appeal shall not have the effect of
suspending the effectivity of the tax
ordinance and the accrual and payment
of the tax.
(c) Within thirty (30) days after receipt of the
decision or the lapse of the sixty-day
period without the Secretary of Justice
acting upon the appeal, the aggrieved

TAXATION LAW
party may file appropriate proceedings
with a court of competent jurisdiction.
(Sec. 187, LGC)

(2) Assailing the validity of a tax sale


No court shall entertain any action assailing
the validity of any sale at public auction
until the 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. [Sec. 267, LGC]

185

UP LAW BOC

TAXATION 2

TAXATION LAW

Flowchart V: Procedure for Assessment of Land Value for Real Property Tax
Purposes-Local Govt Code
For purposes of this flowchart owner means owner or administrator of real property or any person having legal interest thereto
Owner declares real
property once every 3
years (sec. 202) w/n
Jan 1 to June 30

START

Submit documents
supporting exemption w/
in 30 days from
declaration (sec. 206)

Required
Documents
submitted w/in
30 days?

Property
proven as tax
exempt?

Yes
No
Property shall be
listed as taxable in
the assessment
roll (sec. 206)

Assessor prepares
assessment rolls
wherein real property
shall be listed, valued
and assessed (sec. 205)

Assessor declares
real property if owner/
administrator fails to
do so (sec. 204)

Owner may claim


for tax exemption
(sec. 206)

Yes

Yes

Is real property
tax exempt?

Property shall be
dropped from
assessment roll
(sec. 206)

No
END

Within 30 days from


assessment, assessor
sends notice to owner
(sec. 223)

No

Owner may protest


assessment within 60
days from receipt of notice
to the Local Board of
Assessment Appeals
(LBAA) (Sec. 226)

END

LBAA must decide


within 120 days
from receipt of
appeal (sec. 229)

If CBAA rejects protest,


owner may appeal to
the CTA en banc within
30 days from receipt of
decision

Appeal to the
Supreme Court w/
in 15 days

186

If LBAA rejects protest, owner


may appeal to the Central
Board of Assessment Appeals
(CBAA) w/in 30 days from
receipt of notice (Sec. 229)

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TAXATION LAW

Flowchart VI: Taxpayers Remedies Involving Collection of Real Property


Tax-Loc Govt Code
For purposes of this flowchart owner means owner or administrator of real property or any person having legal interest thereto
LT- Local Treasurer
LGU - Local Government Unit
LBAA- Local Board of Assessment Appeals
CBAA- Central Board of Assessment Appeals
CTA- Court of Tax Appeals

START

Assessor submits
assessment roll to
local
treasurer
(sec. 248)

Amount of tax
protested shall be
refunded or
applied as tax
credit (Sec. 252)

LT posts notice of deadline for


payment at a conspicuous place at
the LGU hall OR publish the same
in a newspaper of general
circulation in the LGU 1x a week for
2 consecutive weeks (sec. 249)

Yes

LT grants
protest?

Yes

LT collects the tax


starting Jan 1 of
the calendar year.
(Sec. 257)

LT decides w/in
60 days?

Owner pays the tax.


Written protest must be
filed with the local
treasurer w/in 30 days
from payment. (sec. 252)

LT must decide w/
in 60 days from
receipt of protest
(sec. 252)

No
Refund or tax credit must
be claimed with the local
treasurer w/in 2 years from
the date taxpayer is entitled
to such (sec. 253)

LT acts on claim
for refund/tax
credit w/in 60
days?

No

Taxpayer may appeal within within 60


days from receipt of notice (or expiration
of 60 days) to the LBAA (Sec. 226)
LBAA must decide
within 120 days
from receipt of
appeal (sec. 229)

Yes

LT grants
refund/tax
credit?

Yes

Taxpayer happy.
END

If LBAA rejects protest/


refund, owner may
appeal to the CBAA w/
in 30 days from receipt
of notice (Sec. 229)

No

No

Taxpayer may appeal


w/in 60 days from
receipt of notice (or
expiration of 60 days)
to LBAA (Sec. 226)

END

Appeal to the
Supreme Court w/
in 15 days

187

If CBAA rejects protest/


refund, owner may appeal to
the CTA en banc within 30
days from receipt of decision
(Rule 43, ROC)

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TAXATION LAW

Flowchart VII: Procedure for Levy for Purposes of Satisfying Real


Property Taxes-Local Govt Code
START

Tax constitutes a lien on the


property superior to all liens
& may only be extinguished
upon payment of the tax and
charges. (sec. 257)

Before the date of sale,


the owner may stay the
proceedings by paying the
delinquent tax, interest &
the expenses of sale.

Sale is held:
1. at the main entrance
of the LGU building, OR
2. on the property to be
sold, OR at
3. any other place
specified in the notice

Is there a
bidder?

Yes
Bidder pays & 30 days
after the sale, the LT
shall report the sale to
the sanggunian

LT shall deliver to
purchaser certificate
of sale

Proceeds of sale in
excess of delinquent
tax,
interest
&
expenses of sale
remitted to the owner
(sec. 260)

For purposes of this flowchart owner means owner or administrator of real property or any
person having legal interest thereto
Warrant of Levy issued
by the Local Treasurer
(LT), which has the force
of legal execution in the
LGU concerned. (sec.
258)

Time for payment


of real property
taxes expires

30 days from service of warrant, local


treasurer shall advertise sale of the
property by:
1. posting notice at main entrance of
LGU hall/bldg and in a conspicuous
place in the barangay where prope is
located AND
2. by publication once a week for 2
weeks (sec. 260) (Note: In cases of
levy for unpaid local taxes publication
is once a week for 3 weeks)

Warrant is mailed
to or served upon
the delinquent
owner (sec. 258)

written notice of the levy &


the warrant is mailed/served
upon the assessor and the
Registrar of Deeds of the
LGU (sec. 258)

LT shall purchase the property in behalf of


the LGU (sec. 263) (Note: in cases of levy
for unpaid local taxes, LT may purchase if
there is no bidder or if the highest bid is
insufficient-sec. 181)

No

w/in 1 year from sale, owner may


redeem upon payment of the
1. delinquent tax,
2. interest due,
3. expenses of sale (from date of
delinquency to date of sale) and
4. addl interest of 2% per month on
the purchase price from date of sale
to date of redemption. (sec. 261)
Delinquent
owner
retains
possession and right to the fruits
(sec. 261)

LT returns to the
purchaser/bidder the
price paid + interest
of 2% per month
(sec. 261)

If property is not
redeemed, the local
treasurer
shall
execute a deed of
conveyance to the
purchaser (sec. 262)

Registrar of Deeds shall transfer the


title of the forfeited property to the LGU
w/o need of a court order (sec. 263)

W/n 1 year from forfeiture, the


owner, may redeem the property by
paying to the local treasurer the full
amount of the tax and the related
interest and the costs of sale
otherwise the ownership shall be
vested on the local government unit
concerned. (sec. 263)

Sanggunian
concerned
may, by ordinance sell
and dispose of the real
property acquired under
the preceding section at
public auction. (sec. 264)

Levy may be repeated


until the full amount due,
including all expenses, is
collected. (sec. 265)

END

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TAXATION LAW

General Rule: All imported articles are subject


to duty. importation by the government
taxable.

IX.
TARIFF
AND
CUSTOMS CODE OF
1978, AS AMENDED

FLEXIBLE TARIFF CLAUSE


Constitutional Basis: Sec. 28(2), Art. VI, 1987
Constitution:
The President is empowered to:
(1) increase, reduce or remove existing rates
(increase in the rate cannot exceed 100% ad
valorem), including authority to modify the
form of duty
(2) establish import quota or ban import of any
commodity
(3) impose an additional duty not exceeding
10% ad valorem

TARIFF AND DUTIES, DEFINED


TARIFF
(a) Taxes or list of articles liable to duties
(b) A list or schedule of articles on which a duty
is imposed upon the importation into the
country, with the rates at which they are
severally taxed. And derivatively, the system
of imposing duties or taxes on the
importation of foreign merchandise

REQUIREMENTS OF IMPORTATION

CUSTOM DUTIES

(1) Export tariff levied, assessed and


collected an export duty on the gross
FOB value at the time of shipment based
on the prevailing rate on traditional
export products, such as certain wood
products, mineral products, plant and
vegetable products [Sec. 514, TCC]

Beginning and ending of importation


(a) Importation begins when the carrying
vessel or aircraft enters the jurisdiction of
the Philippines with intention to unload
therein [Sec. 1202, TCC]
(b) Importation is deemed terminated upon
payment of duties, taxes and other
charges due upon the articles, or secured
to be paid, at a port of entry AND the
legal permit for withdrawal shall have
been granted, or in case said articles are
free of duties, taxes and other charges,
until they have legally left the jurisdiction
of the customs. [Sec. 1202, TCC]

Note: export tariff had been abolished


except upon logs [Sec. 1, EO 26].

Note: The payment of the duties, taxes,


fees and other charges must be in full.

(a) Taxes on the importation or exportation of


commodities
(b) Tariff or tax assessed upon the merchandise
imported from or exported to a foreign
country

[Papa v. Mago, G.R. No. L-27360,


February 28, 1968]

(2) Import tariff articles, when imported


from any foreign country, shall be subject
to duty upon each importation, even
though previously exported from the
Philippines,
except
as
otherwise
specifically provided under the Code or
special laws [Sec. 100, TCC]

Import entry
Imported articles must be entered in the
customhouse at the port of entry within fifteen
days from date of discharge of the last package
from the vessel either (a) by the importer, being
holder of the bill of lading, (b) by any other
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holder of the bill of lading in due course, (c) by


a customs broker acting under authority from a
holder of the bill, or (d) by a person duly
empowered to act as agent or attorney-in-fact
for such holder. The Collector may grant an
extension of not more than fifteen days. [Sec.

TAXATION LAW
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. [Sec. 100, TCC]

(2) Prohibited
importation
[Sec.
101,
TCC](POPP-LAW-DING)
(a) Dynamite, gunpowder, ammunitions and
other explosives, firearm and weapons of
war, and detached parts thereof, except
when authorized by law.
(b) Written or printed article in any form
containing:
(1) any matter advocating or inciting
treason, rebellion, insurrection or
sedition against the Government of
the Philippines
(2) forcible resistance to any law of the
Philippines
(3) containing any threat to take the life
of or inflict bodily harm upon any
person in the Philippines.
(c) Written or printed articles, photographs,
engravings,
lithographs,
objects,
paintings,
drawings
or
other
representation of an obscene or Immoral
character.
(d) Articles,
instruments, drugs and
substances designed, intended or
adapted
for
preventing
human
conception or producing unlawful
abortion, or any printed matter which
advertises or describes or gives directly
or indirectly information where, how or
by whom human conception is prevented
or unlawful abortion produced.
(e) Roulette wheels, Gambling outfits,
loaded dice, marked cards, machines,
apparatus or mechanical devices used in
gambling, or in the distribution of money,
cigars, cigarettes or other articles when
such distribution is dependent upon
chance, including jackpot and pinball
machines or similar contrivances.

1301, TCC]
All imported articles, except importation
admitted free of duty, shall be subject to a
formal or informal entry.
Kinds of Import Entry:
(1) Formal Entry
(2) Informal Entry
Types of Formal Entry [Sec. 1302, as amended]:
A formal entry may be:
(a) for immediate consumption, or
(b) under irrevocable domestic letter of
credit, bank guarantee or bond for:
(1) placing the article in customs bonded
warehouse;
(2) Constructive
warehousing
and
immediate transportation to other
ports of the Philippines upon proper
examination and appraisal; or
(3) Constructive
warehousing
and
immediate exportation.
Note: Import entries under irrevocable
domestic letter of credit, bank guarantee or
bond shall be subject to the provisions of Title
V, Book 11 of this Code. All importations
entered under formal entry shall be covered by
a letter of credit or any other verifiable
document evidencing payment." [R.A. 9135,

April 27, 2001]

CLASSIFICATION OF GOODS
(1) Taxable importation
All articles, when imported from any foreign
country into the Philippines, shall be subject
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TAXATION 2

(f) Lottery
and
sweepstakes
tickets,
advertisements thereof and lists of
drawings therein.
Except those authorized
Philippine Government

by

TAXATION LAW
(a) Aquatic
products
(e.g.,
fishes,
crustaceans, mollusks, marine animals,
seaweeds, fish oil, roe), caught or
gathered by fishing vessels of Philippine
registry: Provided, That they are
imported in such vessels or in crafts
attached thereto: And provided, further,
That they have not been landed in any
foreign territory or, if so landed, they
have
been
landed
solely
for
transshipment without having been
advanced in condition;

the

(g) Any article manufactured in whole or in


part of gold silver or other Precious
metal, or alloys thereof, the stamps
brands or marks of which do not indicate
the actual fineness or quality of said
metals or alloys.
(h) Any Adulterated or misbranded article of
food or any adulterated or misbranded
drug in violation of the provisions of the
"Food and Drugs Act."
(i) Marijuana, opium poppies, coca leaves,
or any other Narcotics or synthetic drugs
which are or may hereafter be declared
habit forming by the President of the
Philippines,
any
compound,
manufactured salt, derivative, or
preparation thereof,

(b) Equipment for use in the salvage of


vessels or aircrafts, not available locally,
upon identification and the giving of a
bond in an amount equal to one and
one-half times the ascertained duties,
taxes and other charges thereon,
conditioned for the exportation thereof
or payment of the corresponding duties,
taxes and other charges within six (6)
months from the date of acceptance of
the import entry: Provided, That the
Collector of Customs may extend the
time for exportation or payment of duties,
taxes and other charges for a term not
exceeding six (6) months from the
expiration of the original period;

Except when imported by the


Government of the Philippines or any
person duly authorized by the Collector
of Internal Revenue for medicinal
purposes only.

(c) Cost of repairs, excluding the value of the


article used, made in foreign countries
upon vessels or aircraft documented,
registered or licensed in the Philippines,
upon proof satisfactory to the Collector
of Customs (1) that adequate facilities for
such repairs are not afforded in the
Philippines, or (2) that such vessels or
aircrafts, while in the regular course of
her voyage or flight was compelled by
stress of weather or other casualty to put
into a foreign port to make such repairs
in order to secure the safety,
seaworthiness or airworthiness of the

(j) Opium pipes and parts thereof, of


whatever material.
(k) All other articles the importation of
which is Prohibited by law.
Conditionally-free importation [Sec. 105, TCC]
The following articles shall be exempt from the
payment of import duties upon compliance
with the formalities prescribed in, or with, the
regulations which shall be promulgated by the
Commissioner of Customs with the approval of
the Secretary of Finance:

191

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TAXATION 2

vessel or aircraft to enable her to reach


her port of destination;

TAXATION LAW
to the Collector of Customs that same
have been in their use abroad for more
than six (6) months and accompanying
them on their return, or arriving within a
reasonable
time
which,
barring
unforeseen circumstances, in no case
shall exceed ninety (90) days before or
after the owners' return: Provided, That
the personal and household effects shall
neither be in commercial quantities nor
intended for barter, sale or hire and that
the total dutiable value of which shall
not exceed two thousand pesos
(P2,000.00): Provided further, That the
returning residents have not previously
received the benefit under this section
within one year from and after the last
exemption
granted:
Provided
furthermore, That a fifty (50) per cent ad
valorem duty across the board shall be
levied and collected on the personal and
household effects (except luxury items)
in excess of two thousand pesos
(P2,000.00): And provided, finally, That
the personal and household effects
(except luxury items) of a returning
resident who has not stayed abroad for
six (6) months shall be subject to fifty
(50)per cent ad valorem duty across the
board, the total dutiable value of which
does not exceed two thousand pesos
(P2,000.00); any excess shall be subject
to the corresponding duty provided in
this Code;

(d) Articles brought into the Philippines for


repair, processing or reconditioning to be
re-exported upon completion of the
repair, processing or reconditioning:
Provided, That the Collector of Customs
shall require the giving of a bond in an
amount equal to one and one-half times
the ascertained duties, taxes and other
charges thereon, conditioned for the
exportation thereof or payment of the
corresponding duties, taxes and other
charges within six (6) months from the
date of acceptance of the import entry;
(e) Medals, badges, cups and other small
articles bestowed as trophies or prizes, or
those received or accepted as honorary
distinction;
(f) Personal
and
household
effects
belonging to residents of the Philippines
returning from abroad including jewelry,
precious stones and other articles of
luxury which were formally declared and
listed before departure and identified
under oath before the Collector of
Customs when exported from the
Philippines by such returning residents
upon their departure therefrom and
during their stay abroad; personal and
household effects including wearing
apparel, articles of personal adornment
(except luxury items), toilet articles,
portable appliances and instruments and
similar personal effects, excluding
vehicles, watercrafts, aircrafts, and
animals purchased in foreign countries
by residents of the Philippines which
were necessary, appropriate and
normally used for the comfort and
convenience in their journey and during
their stay abroad upon proof satisfactory

(g) Wearing apparel, articles of personal


adornment, toilet articles, portable tools
and instruments, theatrical costumes
and similar effects accompanying
travelers, or tourists. or arriving within a
reasonable time before and after their
arrival in the Philippines, which are
necessary and appropriate for the wear
and use of such persons according to the
nature of the journey, their comfort and
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convenience: Provided, That this


exemption shall not apply to articles
intended for other persons or for barter,
sale or hire: Provided, further, That the
Collector of Customs may, in his
discretion, require either a written
commitment or a bond in an amount
equal to one and one-half times the
ascertained duties, taxes and other
charges conditioned for the exportation
thereof or payment of the corresponding
duties, taxes and other charges within
three (3) months from the date of
acceptance of the import entry: And
Provided finally, That the Collector of
Customs may extend the time for
exportation or payment of duties, taxes
and other charges for a term not
exceeding three (3) months from the
expiration of the original period;

TAXATION LAW
Customs may extend the time for
exportation or payment of duties, taxes
and other charges for term not exceeding
six (6) months from the expiration of the
original period;
(h) Professional
instruments
and
implements, tools of trade, occupation or
employment, wearing apparel, domestic
animals, and personal and household
effects belonging to persons coming to
settle in the Philippines or Filipinos
and/or their families and descendants
who are now residents or citizens of
other countries, such parties hereinafter
referred to as Overseas Filipinos, in
quantities and of the class suitable to the
profession, rank or position of the
persons importing them, for their own
use and not for barter or sale,
accompanying such persons, or arriving
within a reasonable time, in the
discretion of the Collector of Customs,
before or after the arrival of their owners,
which shall not be later than February 28,
1979 upon the production of evidence
satisfactory to the Collector of Customs
that such persons are actually coming to
settle in the Philippines, that change of
residence was bona fide and that the
privilege of free entry was never granted
to them before or that such person
qualifies under the provisions of Letters
of Instructions 105, 163 and 210, and that
the articles are brought from their former
place of abode, shall be exempt from the
payment of customs duties and taxes:
Provided, That vehicles, vessels, aircrafts,
machineries and other similar articles for
use in manufacture, shall not be
classified hereunder;

(g-1) Personal and household effects and


vehicles belonging to foreign consultants
and experts hired by, and/or rendering
service to, the government, and their
staff or personnel and families,
accompanying them or arriving within a
reasonable time before or after their
arrival in the Philippines, in quantities
and of the kind necessary and suitable to
the profession, rank or position of the
person importing them, for their own use
and not for barter, sale or hire provided
that, the Collector of Customs may in his
discretion require either a written
commitment or a bond in an amount
equal to one and one-half times the
ascertained duties, taxes and other
charges upon the articles classified
under this subsection; conditioned for
the exportation thereof or payment of the
corresponding duties, taxes and other
charges within six (6) months after the
expiration of their term or contract; And
Provided, finally, That the Collector of

(i) Articles used exclusively for public


entertainment, and for display in public
expositions, or for exhibition or
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competition for prizes, and devices for


projecting pictures and parts and
appurtenances
thereof,
upon
identification,
examination,
and
appraisal and the giving of a bond in an
amount equal to one and one-half times
the ascertained duties, taxes and other
charges thereon, conditioned for
exportation thereof or payment of the
corresponding duties, taxes and other
charges within six (6) months from the
date of acceptance of the import entry;
Provided, That the Collector of Customs
may extend the time for exportation or
payment of duties, taxes and other
charges for a term not exceeding six (6)
months from the expiration of the
original period; and technical and
scientific films when imported by
technical,
cultural
and
scientific
institutions, and not to be exhibited for
profit: Provided, further, That if any of
the said films is exhibited for profit, the
proceeds therefrom shall be subject to
confiscation, in addition to the penalty
provided under Section Thirty-six
hundred and ten as amended, of this
Code;

TAXATION LAW
undeveloped, exposed outside the
Philippines by resident Filipino citizens
or by producing companies of Philippine
registry where the principal actors and
artists employed for the production are
Filipinos, upon affidavit by the importer
and identification that such exposed
films are the same films previously
exported from the Philippines. As used in
this paragraph, the terms "actors" and
"artists" include the persons operating
the photographic cameras or other
photographic and sound recording
apparatus by which the film is made;
(k) Importations for the official use of
foreign embassies, legations, and other
agencies of foreign governments:
Provided, That those foreign countries
accord like privileges to corresponding
agencies of the Philippines;
Articles imported for the personal or
family use of the members and attaches
of foreign embassies, legations, consular
officers and other representatives of
foreign governments: Provided, That
such privilege shall be accorded under
special agreements between the
Philippines and the countries which they
represent: And Provided, further, That
the privilege may be granted only upon
specific instructions of the Secretary of
Finance in each instance which will be
issued only upon request of the
Department of Foreign Affairs;

(j) Articles brought by foreign film


producers directly and exclusively used
for making or recording motion picture
films on location in the Philippines, upon
their identification, examination and
appraisal and the giving of a bond in an
amount equal to one and one-half times
the ascertained duties, taxes and other
charges thereon, conditioned for
exportation thereof or payment of the
corresponding duties, taxes and other
charges within six (6) months from the
date of acceptance of the import entry,
unless extended by the Collector of
Customs for another six (6) months;
photographic and cinematographic films,

(l) Imported articles donated to, or for the


account of, any duly registered relief
organization, not operated for profit, for
free distribution among the needy, upon
certification by the Department of Social
Services and Development or the
Department of Education, Culture and
Sports, as the case may be;
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TAXATION LAW
salvage recovered within the said period
of two (2) years shall be dutiable;

(m) Containers, holders and other similar


receptacles of any material including
kraft
paper
bags
for
locally
manufactured cement for export,
including corrugated boxes for bananas,
mangoes, pineapples and other fresh
fruits for export, except other containers
made of paper, paperboard and textile
fabrics, which are of such character as to
be readily identifiable and/or reusable
for shipment or transportation of goods
shall be delivered to the importer thereof
upon identification, examination and
appraisal and the giving of a bond in an
amount equal to one and one-half times
the ascertained duties, taxes and other
charges within six (6) months from the
date of acceptance of the import entry;

(p) Coffins or urns containing human


remains, bones or ashes, used personal
and household effects (not merchandise)
of the deceased person, except vehicles,
the value of which does not exceed ten
thousand pesos (P10,000.00), upon
identification as such;
(q) Samples of the kind, in such quantity and
of such dimension or construction as to
render them unsalable or of no
appreciable commercial value; models
not adapted for practical use; and
samples of medicines, properly marked
"sample-sale punishable by law," for the
purpose of introducing a new article in
the Philippine market and imported only
once in a quantity sufficient for such
purpose by a person duly registered and
identified to be engaged in that trade:
Provided, That importations under this
subsection shall be previously authorized
by the Secretary of Finance: Provided,
however, That importation of sample
medicine shall be previously authorized
by the Secretary of Health that such
samples are new medicines not available
in the Philippines: Provided, finally, That
samples not previously authorized
and/or properly marked in accordance
with this section shall be levied the
corresponding tariff duty.

(n) Supplies which are necessary for the


reasonable requirements of the vessel or
aircraft in her voyage or flight outside the
Philippines, including articles transferred
from a bonded warehouse in any
collection district to any vessel or aircraft
engaged in foreign trade, for use or
consumption of the passengers or its
crew on board such vessel or aircrafts as
sea or air stores; or articles purchased
abroad for sale on board a vessel or
aircraft as saloon stores or air store
supplies: Provided, That any surplus or
excess of such vessel or aircraft supplies
arriving from foreign ports or airports
shall be dutiable;

Commercial samples, except those that


are not readily and easily identifiable
(e.g., precious and semi-precious stones,
cut or uncut, and jewelry set with
precious stones), the value of any single
importation of which does not exceed ten
thousand pesos (P10,000.00) upon the
giving of a bond in an amount equal to
twice the ascertained duties, taxes and

(o) Articles and salvage from vessels


recovered after a period of two (2) years
from the date of filing the marine protest
or the time when the vessel was wrecked
or abandoned, or parts of a foreign
vessel or her equipment, wrecked,
abandoned in Philippine waters or
elsewhere: Provided, That articles and
195

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TAXATION 2

other charges thereon, conditioned for


the exportation of said samples within
six (6) months from the date of the
acceptance of the import entry or in
default thereof, the payment of the
corresponding duties, taxes and other
charges. If the value of any single
consignment of such commercial
samples exceeds ten thousand pesos
(P10,000.00),the importer thereof may
select any portion of same not exceeding
in value of ten thousand pesos
(P10,000.00) for entry under the
provision of this subsection, and the
excess of the consignment may be
entered in bond, or for consumption, as
the importer may elect;

TAXATION LAW
Economic and Development Authority as
necessary for economic development;
(s) Economic,
technical,
vocational,
scientific, philosophical, historical, and
cultural books and/or publications:
Provided, That those which may have
already been imported but pending
release by the Bureau of Customs at the
effectivity of this Decree may still enjoy
the privilege herein provided upon
certification by the Department of
Education, Culture and Sports that such
imported books and/or publications are
for economic, technical, vocational,
scientific, philosophical, historical or
cultural purposes or that the same are
educational, scientific or cultural
materials covered by the International
Agreement
on
Importation
of
Educational Scientific and Cultural
Materials signed by the President of the
Philippines on August 2, 1952, or other
agreements binding upon the Philippines.

(r) Animals (except race horses), and plants


for scientific, experimental, propagation,
botanical, breeding, zoological and
national defense purposes: Provided,
That no live trees, shoots, plants, moss,
and bulbs, tubers and seeds for
propagation purposes may be imported
under this section, except by order of the
Government or other duly authorized
institutions: Provided, further, That the
free entry of animals for breeding
purposes shall be restricted to animals of
recognized breed, duly registered in the
book of record established for that breed,
certified as such by the Bureau of Animal
Industry: Provided, furthermore, That
certificate of such record, and pedigree
of such animal duly authenticated by the
proper custodian of such book of record,
shall be produced and submitted to the
Collector of Customs, together with
affidavit of the owner or importer, that
such animal is the animal described in
said certificate of record and pedigree:
And Provided, finally, That the animals
and plants are certified by the National

Educational, scientific and cultural


materials covered by international
agreements or commitments binding
upon the Philippine Government so
certified by the Department of Education,
Culture and Sports.
Bibles, missals, prayer books, Koran,
Ahadith and other religious books of
similar nature and extracts therefrom,
hymnal and hymns for religious uses;
(t) Philippine articles previously exported
from the Philippines and returned
without having been advanced in value
or improved in condition by any process
of manufacture or other means, and
upon which no drawback or bounty has
been allowed, including instruments and
implements, tools of trade, machinery
196

UP LAW BOC

TAXATION 2

and equipment, used abroad by Filipino


citizens in the pursuit of their business,
occupation or profession; and foreign
articles previously imported when
returned after having been exported and
loaned for use temporarily abroad solely
for
exhibition,
testing
and
experimentation, for scientific or
educational purposes; and foreign
containers previously imported which
have been used in packing exported
Philippine articles and returned empty if
imported by or for the account of the
person or institution who exported them
from the Philippines and not for sale,
barter or hire subject to identification:
Provided, That any Philippine article
falling under this subsection upon which
drawback or bounty has been allowed
shall, upon re-importation thereof, be
subject to a duty under this subsection
equal to the amount of such drawback or
bounty.

TAXATION LAW
operations, when certified to as such by
the Secretary of Agriculture and Natural
Resources upon the recommendation of
the Director of Mines, for a period ending
five (5) years from the first date of actual
commercial production of saleable
mineral products: Provided, That such
articles are not locally available in
reasonable quantity, quality and price
and are necessary or incidental in the
proper operation of the mine; and
aircrafts imported by agro-industrial
companies to be used by them in their
agriculture and industrial operations or
activities, spare parts and accessories
thereof;
(w) Spare parts of vessels or aircraft of
foreign registry engaged in foreign trade
when brought into the Philippine
exclusively as replacements or for the
emergency repair thereof, upon proof
satisfactory to the Collector of Customs
that such spare parts shall be utilized to
secure the safety, seaworthiness or
airworthiness of the vessel or aircraft, to
enable it to continue its voyage or flight;

(u) Aircraft, equipment and machinery,


spare parts commissary and catering
supplies, aviation gas, fuel and oil,
whether crude or refined, and such other
articles or supplies imported by and for
the use of scheduled airlines operating
under Congressional franchise: Provided,
That such articles or supplies are not
locally available in reasonable quantity,
quality and price and are necessary or
incidental for the proper operation of the
scheduled airline importing the same;

(x) Articles of easy identification exported


from the Philippines for repair and
subsequently reimported upon proof
satisfactory to the Collector of Customs
that such articles are not capable of
being repaired locally: Provided, That the
cost of the repairs made to any such
article shall pay a rate of duty of thirty
per cent ad valorem;

(v) Machineries, equipment, tools for


production, plants to convert mineral
ores into saleable form, spare parts,
supplies,
materials,
accessories,
explosives,
chemicals,
and
transportation
and
communication
facilities imported by and for the use of
new mines and old mines which resume

(y) Trailer chassis when imported by


shipping companies for their exclusive
use in handling containerized cargo,
upon posting a bond in an amount equal
to one and one-half times the
ascertained duties, taxes and other
charges due thereon to cover a period of
197

UP LAW BOC

TAXATION 2

TAXATION LAW
for expenses and profits. [Sec. 201,

one year from the date of acceptance of


the entry, which period for meritorious
reasons may be extended by the
Commissioner of Customs from year to
year, subject to the following conditions:

TCC]
General Rule: The following methods are
sequentially applied

Exception: (CAO 4-2004) Methods 4 and 5

(1) That they shall be properly identified


and registered with the Land
Transportation Commission;
(2) That they shall be subject to customs
supervision fee to be fixed by the
Collector of Customs and subject to
the approval of the Commissioner of
Customs;
(3) That they shall be deposited in the
Customs zone when not in use; and
(4) That upon the expiration of the period
prescribed above, duties and taxes
shall be paid, unless otherwise reexported

may be reversed at the request of the


importer, subject to the approval of the
Commissioner.
Ground to refuse the request: if the
Commissioner deems that he will
experience real difficulties in determining
the dutiable value using Method 5
(Basis for all Methods of Valuation: Sec. 201,
TCC and CAO 4-2004)

(1) Transaction value


Price actually paid or payable for goods
when sold for export to Philippines
(a) commissions & brokerage fees
(b) cost of containers
(c) cost of packing (labor, materials)
(d) 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)
(e) royalties & license fees
(f) value of any part of the proceeds of
subsequent resale, disposal or use of
imported goods that accrue directly or
indirectly to seller
(g) cost of transport
(h) loading, unloading, handling
(i) insurance

CLASSIFICATION OF DUTIES
(1)ORDINARY/REGULAR DUTIES
Ordinary or regular duties refer to those
that, as a matter of course, are imposed on
dutiable articles [Sec. 104, TCC]
(a) Ad valorem; Methods of valuation
The tax rates are based on the cost
(FMV) or price of the imported articles,
in wholesale quantities in the principal
market of the exporting country or the
country of origin, including expenses
connected with the importation, such as
insurance, freight, packaging, loading
and unloading charges, but excluding
internal excise taxes to be remitted or
rebated; or
(a) In case such value is not
ascertainable, the reports of the
Revenue or commercial attaches; or
(b) If still not ascertainable, the
domestic wholesale market price in
the ordinary course of trade less
import duty and not more than 25%

Dutiable Value (DV) must NOT include:


(a) charges for construction, erection,
assembly maintenance or technical
assistance undertaken after importation
(b) cost of transport after importation
(c) duties and taxes of Phil

198

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TAXATION 2

(d) other permissible deduction under WTO


Valuation Agreement

TAXATION LAW
Similar goods must be same commercial
level and substantially same quantity as the
goods being valued.

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.

Similar goods
(a) like characteristics and like component
materials
(b) capable of performing same functions
(c) commercially interchangeable
(d) produced in same country
(e) produced by same producer

Identical goods
(a) Same
in
all
respects
(physical
characteristics, quality and reputation)
(b) Produced in the same country as the goods
being valued
(c) Produced by producer of 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 similar goods produced by the same
person:

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

similar goods produced by different producer


in the same country
If NO similar goods at same commercial level
and same quantity,
(a) TV of similar goods at a different
commercial level and different quantity may
be utilized
(b) TV shall be adjusted upward or downward
to account for the difference

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,
(a) TV of identical goods at a different
commercial level and different quantity may
be utilized
(b) TV shall be adjusted upward or downward
to account for the difference

Deductive value
DV is determined on the basis of sales in the
Phil of goods being valued of identical or
similar imported goods less certain expenses
resulting from importation and sale of goods.
Deductive Value is determined by making a
deduction from the established price per unit
for the aggregate of the ff elements:
(a) Commissions OR
(b) additions made in connection with profit
and general expenses AND
(c) transport, insurance and associated
costs
(d) customs duties and other national taxes

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.

199

UP LAW BOC

Less:
Less:
Less:

TAXATION 2

TAXATION LAW

*Note: these additional costs are added only if


not included in the determination of the
aggregate of relevant costs, charges and
expenses or value of materials and production.

PRICE
COMMISSIONS/ADDITIONS
COSTS
DUTIES and TAXES
DEDUCTIVE VALUE

Fallback value
DV cannot be determined using any of
the above methods

The Sales must meet the following


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

Use other reasonable means consistent with


principles and general provisions of General
Agreements on Tariffs and Trade (GATT)
(b) Specific (Sec. 202, TCC)
Rates are based on unit of weight
number or measurement
Kinds of weight:
(a) Gross Weight - weight of same,
together with the weight of all
containers, packages, holders and
packings, of any kind, in which said
articles are contained, held or
packed at the time of importation
(b) Legal Weight weight at the time of
their sale to the public in usual retail
quantities
(c) Net Weight only the actual weight
at the time of importation excluding
the weight of the immediate and all
other containers

At or about the same time


45 days prior to and 45 days following the
importation
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

(2)SPECIAL DUTIES ADDITIONAL


IMPORT DUTIES IMPOSED ON SPECIFIC
KINDS OF IMPORTED ARTICLES (SEE
TABLE OF SPECIAL DUTIES)

DV is calculated by:
determining aggregate of relevant costs,
charges and expenses or value of (1) materials
and (2) production or processing costs:
(a) Costs* (containers, packing, assists,
engineering, artwork, plans and sketches
undertaken in Phil and charged to
producer
(b) profits and general expenses
(c) cost of transport, insurance and charges
to the port or place of importation
200

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TAXATION 2

Rules on appeal including jurisdiction

REMEDIES

The party aggrieved by a ruling of the


Commissioner in any matter brought before
him upon protest or by his action or ruling in
any case of seizure may appeal to the Court of
Tax Appeals, in the manner and within the
period prescribed by law and regulations.

GOVERNMENT
Administrative/Extrajudicial

Search, seizure, forfeiture, arrest


(1) Enforcement of Tax Lien
Tax Lien attaches upon the articles
imported which may be enforced while such
are in custody or subject to the control of
the government [Sec. 1204]

Unless an appeal is made to the Court of Tax


Appeals in the manner and within the period
prescribed by laws and regulations, the action
or ruling of the Commissioner shall be final
and conclusive. (Sec. 2402, TCC)

(2) Seizure and Forfeiture [Sec. 2205]

Who may effect:


customs official; Fisheries
Philippine Coast Guard

TAXATION LAW

TAXPAYER

Commissions;

Protest

When made:at the time payment of the


amount claimed to be due is made within 15
days thereafter (Sec. 2308)

Settlement [Sec. 2307]


While case is pending, Collector may accept
settlement of any seizure case
(a) Upon approval of Commissioner
(b) Payment of fine ( 25% - 80% of the landed
cost of the article)
(c) In case of forfeiture, should pay the
domestic market value of the seized article

Form:
(a) Must be in writing
(b) Must point out the particular decision or
ruling of the Collector of Customs to which
exception is taken or objection made
(c) Must state the grounds relied upon for relief
(Sec. 2310, TCC)

When Settlement NOT allowed:


(a) Fraud in importation
(b) Importation prohibited by law
(c) Release would be contrary to law

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

Compromise(Sec. 2316, TCC)

Other requirements:

Commissioner may compromise any case


subject to approval by Secretary of Finance

(a) Payment of the amount due and the


corresponding docket fee shall be made
before protest [Sec. 2308]
(b) Upon demand of Collector, the importer
shall furnish samples of the articles which
are the subject of the protest

Judicial

Requisites for filing of criminal/civil case


[Sec, 2401, TCC]:
(1) Brought in the name of the government of
the Phil
(2) Conducted by Customs officers
(3) With approval from the Commissioner

Effect of Failure to Protest: render the action of


the Collector final and conclusive except for
manifest error

201

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TAXATION 2

Review of Commissioner [Sec. 2313]:

(b) custody or charge of such article


(c) fails to report within 24 hours from time
article deemed abandoned shall be
punished according to sec. 3604 (fine:
P5000 P50,000; imprisonment: 1 yr 10
yrs, perpetual disqualification to hold public
office, vote and participate in election)

person aggrieved by the decision or Collector


in any matter presented upon protest or by his
action in any case of seizure may, within days
after notification on writing by the Collector of
his actions or decisions, file a written notice to
the Collector with a copy furnished to the
Commissioner of his intention to appeal the
action or decision of the Collector to the
Commissioner

Abatement and Refund

When available:
(1) Abatement for Damage incurred during
Voyage (Sec. 1701)
(2) Abatement or Refund for the following:
(a) Missing Packages (Sec. 1702)
(b) Deficiency of Contents in Packages (Sec.
1703)
(c) Articles Lost or Destroyed after Arrival
(Sec. 1704)
(d) Dead or Injured Animals (Sec. 1705)
(3) Refund in case of excess payments due to:
(a) manifest clerical error made in invoice or
entry
(b) error in return of weight, measure and
gauge (certified, under penalties of
falsification or perjury, by examining
official)
(c) error in the distribution of charges on
invoices (which does not involve any
question of law and certified, under
penalties of falsification or perjury, by
examining official) (Sec. 1707)

Automatic Review:
Happens in case a decision is made adverse to
the Government
Abandonment

Article is deemed abandoned when (Sec. 1801,


TCC):
(1) owner, importer or consignee expressly
signifies in writing to Collector his intention
to abandon
(2) after due notice, fails to file an entry within
30 days from date of discharge of 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 [Sec. 1802, TCC]:


(a) deemed to have renounced his interest and
property rights
(b) ipso facto deemed property of the
Government
(c) If the abandoned articles are transferred to
a customs bonded warehouse, the operator
shall be liable for the payment of duties and
taxes in the case of loss of the stored
abandoned imported articles [R.V. Marzan v.

Conditions for refund of Excess Payments


(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

CA, GR No. 128064, March 4, 2004]


Liability of Official for Failure to Report
Abandonment
Any official or employee who:
(a) had knowledge of the
abandoned article

existence

TAXATION LAW

How:
(1) Claim made in writing
(2) Collector shall verify with the records in his
office

of

202

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TAXATION 2

(3) Certify claim to Commissioner with his


recommendation and necessary papers
(4) Commissioner shall then cause the claim to
be paid if found correct
If the result of the refund would result to 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

203

TAXATION LAW

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TAXATION 2

TAXATION LAW

Flowchart IX: Remedies from Seizure and Forfeiture Cases-Tariffs and


Customs Code
START

Collector seizes goods


and reports it to the
Commissioner and to
COA. Owner is notified
of seizure

Collector determines
probable cause
(illegal importation)

Collectors
decision favorable
to taxpayer/
adverse to govt?

Yes

Importer may secure


release of goods by
filing of cash bond
(Sec. 2301)

Amount
involved less
than 5M?

Yes

Collector conducts
hearing

Automatic review* by Customs


Commisioner (Sec. 2313)

Does
commissioner
decide w/in 30
days?

No
Taxpayer appeals
to Customs
Commissioner 15
days from receipt
of notice

Is
Commissioners
decision favorable
to taxpayer/
adverse to govt?

Yes

No
Inaction construed as affirmation
of Collectors decision

Does
Commissioner
decide w/n 30
days?

No

Yes

No, amount is at least


5M
Is
Commissioners
decision
favorable to
Yes
taxpayer/
adverse to
govt?

Yes

Automatic Review* by
the Secretary of
Finance (SOF) (Sec.
2313, CMO 3-2002)

Is SOFs
decision
favorable to
taxpayer/adverse
to govt?

No
No

Does SOF
decide within
30 days?

Yes

No
Yes
Decision becomes
final &
unappealable

END

Inaction construed
as affirmation of
Collectors
decision

Appeal to the
Court of Tax
Appeals within 30
days from notice
of decision

MR within 15 days
from receipt of
decision

Appeal to CTA en
banc 15 days from
receipt of decision
denying MR

Inaction construed as
affirmation of
commissioners decision
(or of collectors decision
in case of inaction by
commissioner)

Appeal to the
Supreme Court

No
Appeal
to CTA

END

*Automatic review is intended to protect the interest of the Government. W/o auto review, the Commissioner and SoF would not know
about the decision laid down by the Collector favoring the taxpayer. Automatic review is necessary because nobody is expected to appeal
the decision of the Collector which is favorable to the taxpayer & adverse to the Government. (Yaokasin v. Commissioner 180 SCTA 591

204

UP LAW BOC

Anti-Dumping
[Sec. 301, TCC
as amended by
RA 8752]
Where
a
product
or
commodity is
imported in the
Philippines at
an export price
less than the
normal value
in the ordinary
course of trade
for the like
product
or
article destines
for
consumption
in
the
exporting
country
or
materially
regarding
establishment
of a domestic
industry
producing the
like
product
(Sec. 3, RA
8752)

TAXATION 2

TAXATION LAW

TABLE OF SPECIAL DUTIES: WHEN IMPOSED


Countervailing
Marking
Discriminatory
Safeguard [RA 8800]
[Sec. 302 as
[Sec. 303]
[Sec. 304]
amended by
RA 8751]
Whenever any
product,
commodity or
article
of
commerce is
granted
directly
or
indirectly
by
the
government in
the country of
origin
or
exportation,
any kind or
form of specific
subsidy upon
the production,
manufacture or
exportation of
such product,
commodity or
article, and the
importation of
such
subsidized
product,
has
caused
or
threatens
to
cause material
injury to a
domestic
industry or has
materially
retarded
the
growth
or
prevents
the
establishment
of a domestic
industry

If at the time
of
importation
any article (or
its container if
the
article
cannot
be
marked),
is
not marked in
in any official
language of
the
Philippines
and
in
a
conspicuous
place
as
legibly,
indelibly and
permanently
as the nature
of the article
(or container).
This is used to
prevent
deception of
consumers.

Whenever the
President finds
that the public
interest will be
served thereby,
additional
customs duty
shall
be
imposed upon
articles wholly
or in part the
growth
or
product of, or
imported in a
vessel of, any
foreign country
whenever he
shall find as a
fact that such
country

(1)
Imposes,
directly
or
indirectly,
upon any Phil
product
unreasonable
charge,
exaction,
regulation or
limitation
which is not
equally
enforced upon
the like articles
of other foreign
countries; or
(2)

205

(Sec 5) General
Safeguard
Measure:
Whenever
there
is a
positive final
determination
of
the
Commission
that a product
is
being
imported into
the country in
increased
quantities,
whether
absolute
or
relative to the
domestic
production, as
to
be
a
substantial
cause
of
serious injury
or
threat
thereof to the
domestic
industry;
however, in the
case of nonagricultural
products, the
Secretary
of
Agriculture
shall
first
establish that
the application
of
such
safeguard

(Sec
21)
Special
Safeguard
Measure for
Agricultural
Products:
Imposed upon
agricultural
products,
consistent
with
Phil
international
treaty
obligations, if
its:
a) Cumulative
import
volume in a
given
year
exceeds
its
trigger
volume
subject to the
conditions
under Sec. 23,
RA 8800, or
but
not
currently; and
b) Actual CIF
import price is
less than its
trigger price
subject
to
conditions
under Sec. 24,
RA 8800

UP LAW BOC

TAXATION 2

TAXATION LAW

Discriminates
measures will
in fact against be
in
the
the commerce public interest
of
the
Philippines, as
to place the
commerce of
the Philippines
at
a
disadvantage
compared with
the commerce
of any foreign
country.

TABLE OF SPECIAL DUTIES: Imposing Authority and Amount

AntiDumping
(Sec. 301,
TCC as
amended by
RA 8752)

Countervailing
(Sec. 302 as
amended by RA
8751)

Marking
(Sec. 303)

(1) Secretary of Trade and Commissioner


Industry - non-agricultural of Customs
products
(2) Secretary of Agriculture agricultural products
(3) Tariff Commission - decides
whether or not to impose
antidumping/countervailing
duty

AntiEquivalent
Dumping
the subsidy
Duty
=
Normal
Value
Export Price

Discriminatory
(Sec. 304)

Safeguard (RA 8800)

President
For
non- Secretary
of
(through
a agricultural
Agriculture
proclamation)
products:
Secretary of
Trade
and
Industry
For
agricultural
products:
Secretary of
Agriculture

to 5% ad valorem Not exceeding


of the articles
100%
ad
valorem upon
the articles

206

tariff
For a):
increase,
either
ad appropriately
valorem
or set to a level
specific,
or not exceeding
both, to be one-third
of

UP LAW BOC

TAXATION 2

TAXATION LAW
paid through
a cash bond
set at a level
sufficient to
redress
or
prevent injury
to
the
domestic
industry (Sec.
8, RA 8800)

the applicable
out-quota
customs duty
on
the
agricultural
product under
consideration
in the year
when it is
imposed
For
b),
compute
as
follows:
(a) 0 - if price
difference
is at most
10% of the
trigger
price
(b) 30% of the
amount by
which the
price
difference
exceeds
10% of the
trigger
price
(c) 50% - if it
exceeds
40%
but
less than
60%
(d) 70% - if it
exceeds 60
but at most
75%
(e) 90% - if it
exceeds
75%

207

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TAXATION 2

X. JUDICIAL REMEDIES

TAXATION LAW
originally decided or resolved by them in
their ORIGINAL jurisdiction.

JURISDICTION OF THE COURT OF


TAX APPEALS

(3) 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;

CIVIL TAX CASES


Exclusive Original Jurisdiction
Tax collection cases involving final and
executory assessments for taxes, fees, charges
and penalties, where the principal amount of
taxes and fees, exclusive of charges and
penalties, claimed is one million pesos or more.

(4) 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;

Exclusive Appellate Jurisdiction

CTA Division
(1) Decisions and Inaction 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;

(5) Decisions of the Secretary of Trade and


Industry, in the case of non-agricultural
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. [Sec. 7, RA No. 1125 as

(a) Inaction of the Commissioner shall be


deemed a denial in which the taxpayer
may appeal.
(b) Inaction does not necessarily constitute a
formal decision and the taxpayer may
opt to await the final decision of the
Commissioner by constitute a formal
decision and the taxpayer may opt to
await the final decision of the
Commissioner beyond the 180 days and
may appeal such final decision.
(c) For claim for refund, the taxpayer must
file a petition for review with the CTA
prior to the expiration of the two year
prescriptive period.

amended]
CTA en Banc
(1) Decisions or resolutions on motions for
reconsideration or new trial of the Court in
Divisions in the exercise of its exclusive
appellate jurisdiction over:
(a) Cases arising from administrative
agencies Bureau of Internal Revenue,
Bureau of Customs, Department of
Finance, Department of Trade and
Industry, Department of Agriculture;

(2) Decisions, orders or resolutions of the RTC


in local tax cases and in tax collection cases
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TAXATION 2

(b) Local tax cases decided by the Regional


Trial Courts in the exercise of their
original jurisdiction; and

TAXATION LAW

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.

(c) Tax collection cases decided by the


Regional Trial Courts in the exercise of
their original jurisdiction involving final
and executory assessments for taxes,
fees, charges and penalties, where the
principal amount of taxes and penalties
claimed is less than one million pesos;

Exclusive appellate jurisdiction in criminal cases

CTA Division
(1) 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.
(2) 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.

(2) Decisions, resolutions or orders of the


Regional Trial Courts in local tax cases and
in tax collection cases decided or resolved
by them in the exercise of their APPELLATE
jurisdiction;
(3) Decisions, resolutions or orders on motions
for reconsideration or new trial of the Court
in Division in the exercise of its exclusive
original jurisdiction over tax collection
cases;

CTA En Banc
(1) Decisions, resolutions or orders on motions
for reconsideration or new trial of the Court
in Division in the exercise of its exclusive
original jurisdiction over cases involving
criminal offenses arising from violations of
the National Internal Revenue Code or the
Tariff and Customs Code and other laws
administered by the Bureau of Internal
Revenue or Bureau of Customs;
(2) Decisions, resolutions or orders on motions
for reconsideration or new trial of the Court
in Division in the exercise of its exclusive
appellate jurisdiction over criminal offenses
mentioned in the preceding subparagraph;
and
(3) Decisions, resolutions or orders of the
Regional trial Courts in the exercise of their
appellate jurisdiction over criminal offenses
mentioned in subparagraph (f).

(4) Decisions of the Central Board of


Assessment Appeals (CBAA) 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;

CRIMINAL CASES [SEC. 7, RA 1125 AS


AMENDED]
Exclusive Original Jurisdiction
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. Principal
amount of taxes and fees, exclusive of charges
and penalties, claimed is more than or equal to
One million pesos (P1,000,000.00).
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TAXATION 2

(2) The taxpayer requests for a reinvestigation


and executes a waiver in writing before
expiration of the period within which to
assess or collect; and
(3) The taxpayer is out of the country or
otherwise cannot be located. (Sec. 194,
LGC)

JUDICIAL PROCEDURES
JUDICIAL ACTION FOR COLLECTION OF
TAXES
Internal revenue taxes
The remedies for the collection of
internal revenue taxes, fees or charges, and
any increment thereto resulting from
delinquency can be through the institution of a
civil or criminal action. [Sec. 205, NIRC]

CIVIL CASES
Who may appeal, mode of appeal, effect of
appeal
Appeal to CTA Division

NOTE: Please refer to Taxpayers Remedies (B.


Collection)

A party aggrieved or adversely affected by the


decision or ruling or inaction of
(1) The Commissioner of Internal Revenue;
(2) The Commissioner of Customs;
(3) The Secretary of Finance;
(4) The Secretary of Trade and Industry;
(5) The Secretary of Agriculture; or
(6) The RTC exercising original jurisdiction

When this remedy is resorted to:


(1) The tax assessment becomes final and
executory because of the failure to appeal.
(2) Even pending decision of the administrative
protest (CIR v. Union Shipping, 1990)

may appeal within 30 days from the receipt of


the copy of the decision or ruling, or the
expiration of the period fixed by law for the
Commissioner to decide, to the Court of Tax
Appeals Division.

Local taxes
The LGU concerned may enforce the
collection of delinquent taxes, fees, charges or
other revenues by civil action in any court of
competent jurisdiction. The civil action shall be
filed by the local treasurer. (Sec. 183, LGC)
MTC/RTC
depending
threshold amount.

on

TAXATION LAW

Mode of Appeal: Rule 42


Aggrieved party may file a motion for
reconsideration or new trial within 15 days from
receipt of the copy of the decision.

jurisdictional

Prescriptive period
Local taxes, fees, or charges may be collected
within five (5) years from the date of
assessment by administrative or judicial action.
No judicial or administrative action for
collection can be instituted after lapse of the
period for assessment except when there is
fraud or intent to evade tax. (Sec. 194 LGC)

Appeal to CTA en Banc

The running of the periods of prescription shall


be suspended for the time during which:
(1) The treasurer is legally prevented from
making the assessment of collection;

A party adversely affected by a decision or


ruling of the Central Board of Assessment
Appeals and the Regional Trial Court in the
exercise of their appellate jurisdiction may

A party adversely affected by a decision or


resolution of a Division of the Court on a
motion for reconsideration or new trial may
appeal within 15 days from receipt of the copy
of the decision.

Mode of Appeal: Rule 43

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TAXATION 2

appeal within 30 days from the receipt of the


copy of the decision.

TAXATION LAW
trial pursuant to Section 2, Rule 53 and
Section 12, Rule 124 of the Rules of
Court. [Sec. 2, Rule 12, A.M. No. 05-11-

Mode of Appeal: Rule 43

07]
(ii) Taking of evidence by:
(a) Justice
The Court may, motu proprio or upon
proper motion, direct that a case, or
any issue therein, be assigned to one of
its members for the taking of evidence,
when the determination of a question
of fact arises at any stage of the
proceedings, or when the taking of an
account is necessary, or when the
determination of an issue of fact
requires the examination of a long
account. The hearing before such
justice shall proceed in all respects as
though the same had been made
before the Court.

(1) Suspension of collection of tax


General Rule: No appeal taken to the Court
shall suspend the payment, levy, distraint,
or sale of any property of the taxpayer for
the satisfaction of his tax liability as
provided under existing laws.
Exception: Where the collection of the
amount of the taxpayers liability, sought by
means of a demand for payment, by levy,
distraint or sale of any property of the
taxpayer, or by whatever means, as
provided under existing laws, may

jeopardize the interest of the Government or


the taxpayer, an interested party may file a
motion for the suspension of the collection
of the tax liability

Upon the completion of such hearing,


the justice concerned shall promptly
submit to the Court a written report
thereon, stating therein his findings
and conclusions. Thereafter, the Court
shall render its decision on the case,
adopting, modifying, or rejecting the
report in whole or in part, or, the Court
may, in its discretion, recommit it to
the justice with instructions, or receive
further evidence. (Sec. 12, RA No. 1125,
as amended; also Sec. 3, Rule 12, A.M.
No. 05-11-07)

(i) Injunction not available to restrain


collection
No court shall have authority to grant an
injunction to restrain the collection of
any national internal revenue tax, fee or
charge imposed by the Code. [Sec. 217,

NIRC]
Note: The Local Government Code does
not have a provision prohibiting
injunction in the collection of tax.

(b) Court Official


In default or ex parte hearings, or in
any case where the parties agree in
writing, the Court may delegate the
reception of evidence to the Clerk of
Court, the Division Clerks of Court,
their assistants who are members of
the Philippine bar, or any Court
attorney. The reception of documentary
evidence by a Court official shall be for

(2) Taking of evidence


(i) The Court may receive evidence in the
following cases:
(a) In all cases falling within the original
jurisdiction of the Court in Division
pursuant to Section 3, Rule 4 of these
Rules; and
(b) In appeals in both civil and criminal
cases where the Court grants a new
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TAXATION 2

the sole purpose of marking,


comparison with the original, and
identification by witnesses of such
documentary evidence. The Court
official shall have no power to rule on
objections to any question or to the
admission of exhibits, which objections
shall be resolved by the Court upon
submission of his report and the
transcripts within ten days from
termination of the hearing. (Sec. 4,
Rule 12, A.M. No. 05-11-07)

TAXATION LAW

shall be supported by affidavits of merits which


may be rebutted by counter-affidavits. A
motion for the cause mentioned in
subparagraph (b) of the preceding section
shall be supported by affidavits of the
witnesses by whom such evidence is expected
to be given, or by duly authenticated
documents which are proposed to be
introduced in evidence.
A motion for reconsideration or new trial that
does not comply with the foregoing provisions
shall be deemed pro forma, which shall not toll
the reglementary period for appeal.

(3) Motion for reconsideration or new trial [Rule


15, A.M. No. 05-11-07]

Effect:
Who: Any aggrieved party may seek a

The filing of a motion for


reconsideration or new trial shall suspend the

reconsideration or new trial of any decision,


resolution or order of the Court.

running of the period within which an appeal


may be perfected.

Maybe opposed by: The adverse party may file

Grounds: A motion for new trial may be based

an opposition to the motion for reconsideration


or new trial within ten days after his receipt of
a copy of the motion for reconsideration or new
trial of a decision, resolution or order of the
Court.

on one or more of the following causes


materially affecting the substantial rights of
the movant:
(a) Fraud, accident, mistake or excusable
negligence which ordinary prudence
could not have guarded against and by
reason of which such aggrieved party
has probably been impaired in his rights;
or
(b) Newly discovered evidence, which he
could not, with reasonable diligence,
have discovered and produced at the
trial and, which, if presented, would
probably alter the result.

When:

He shall file a motion for


reconsideration or new trial within fifteen days
from the date he received notice of the decision,
resolution or order of the Court in question.
The Court shall resolve the motion for
reconsideration or new trial within three
months from the time it is deemed submitted
for resolution.

A motion for new trial shall include all grounds


then available and those not included shall be
deemed waived.

How: The motion shall be in writing stating its


grounds, a written notice of which shall be
served by the movant on the adverse party.

Restrictions: No party shall be allowed to file a


A motion for new trial shall be proved in the
manner provided for proof of motions. A
motion for the cause mentioned in
subparagraph (a) of the preceding section

second motion for reconsideration of a decision,


final resolution or order; or for new trial.
Appeal to the CTA, en banc
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TAXATION 2

No civil proceeding involving matter arising


under the National Internal Revenue Code, the
Tariff and Customs Code or the Local
Government Code shall be maintained, except
as herein provided, until and unless an appeal
has been previously filed with the CTA and
disposed of in accordance with the provisions
of this Act.

TAXATION LAW

(b) Those involving violations of the tariff and


Customs Code and other laws enforced by
the Bureau of Customs- Must be approved
by the Commissioner of Customs
Shall interrupt the running of the period of
prescription
(2) Prosecution of criminal action
(a) Conducted and prosecuted under the
direction and control of the public
prosecutor
(b) Those involving violations of the NIRC
and other laws enforced by the BIR or
violations of the tariff and Customs Code
and other laws enforced by the Bureau of
Customs - The prosecution may be
conducted by their respective duly
deputized legal officers.

A party adversely affected by a resolution of a


Division of the CTA on a motion for
reconsideration or new trial, may file a petition
for review with the CTA en banc. (Sec. 18, RA
No. 1125 as amended)
Petition for review on certiorari to the Supreme
Court [Rule 16, A.M. No. 05-11-07]
A party adversely affected by a decision or
ruling of the Court en banc may appeal by
filing with the Supreme Court a verified
petition for review on certiorari within fifteen
days from receipt of a copy of the decision or
resolution, as provided in Rule 45 of the Rules
of Court. If such party has filed a motion for
reconsideration or for new trial, the period
herein fixed shall run from the partys receipt
of a copy of the resolution denying the motion
for reconsideration or for new trial.

(3) Institution on civil action in criminal action


In cases within the jurisdiction of the
Court, the criminal action and the
corresponding civil action for the
recovery of civil liability for taxes and
penalties shall be deemed jointly
instituted in the same proceeding. The
filing of the criminal action shall
necessarily carry with it the filing of the
civil action. No right to reserve the filing
of such civil action separately from the
criminal action shall be allowed or
recognized.

The motion for reconsideration or for new trial


filed before the Court shall be deemed
abandoned if, during its pendency, the movant
shall appeal to the Supreme Court.

Appeal and period to appeal criminal cases

Deciding
Body

CRIMINAL CASES
Institution and prosecution of criminal actions

Regional
Trial Court in
the exercise
of its original
jurisdiction
(to
CTA
Division)
CTA Division
(to CTA En

(1) Institution of criminal action


Instituted by the filing an information in the
name of the People of the Philippines
(a) Those involving violations of the NIRC and
other laws enforced by the BIR - Must be
approved by the Commissioner of Internal
Revenue

213

Period to
Appeal

Mode of
Appeal

15 days from Appeal


receipt
of pursuant to
decision
Sec. 3(a) and
6, Rule 122 of
the Rules of
Court
15 days from Petition
receipt
of review

for
as

UP LAW BOC
Banc)

TAXATION 2

TAXATION LAW

certiorari pursuant to Rule 45 of the 1997


Rules of Civil Procedure. (Sec. 19, R.A. No. 1125
as amended)

decision

provided in
Rule 43 of the
May
be Rules
of
extended for Court
good cause
for not more The Court en
than 15 days
banc shall act
on
the
appeal.
Regional Trial 15 days from Petition for
Courts in the receipt
of review
as
exercise
of decision
provided in
their
Rule 43 of the
appellate
Rules
of
jurisdiction
Court
(To
CTA
division)

TAXPAYERS SUIT IMPUGNING THE


VALIDITY OF TAX MEASURES OR ACTS
OF TAXING AUTHORITIES
Taxpayers suit, defined
A "taxpayer's suit" refers to a case where the
act complained of directly involves the illegal
disbursement of public funds derived from
taxation. [Kilosbayan v. Guingona, Jr. (1994)]
Distinguished from citizens suit
The plaintiff in a taxpayer's suit is in a different
category from the plaintiff in a citizen's suit. In
the former, the plaintiff is affected by the
expenditure of public funds, while in the latter,
he is but the mere instrument of the public
concern. (De Castro v. Judicial and Bar Council
(2010))

Solicitor General as counsel for the People and


government officials sued in their official
capacity
The Solicitor General shall represent
the People of the Philippines and government
officials sued in their official capacity in all
cases brought to the Court in the exercise of its
appellate jurisdiction. He may deputize the
legal officers of the Bureau of Internal Revenue
in cases brought under the National Internal
Revenue Code or other laws enforced by the
Bureau of Internal Revenue, or the legal
officers of the Bureau of Customs in cases
brought under the Tariff and Customs Code of
the Philippines or other laws enforced by the
Bureau of Customs, to appear in behalf of the
officials of said agencies sued in their official
capacity: Provided, however, such duly
deputized legal officers shall remain at all
times under the direct control and supervision
of the Solicitor General.

Requisites for challenging the constitutionality


of a tax measure or act of taxing authority
(1) Concept of locus standi as applied in

taxation
(a) CONCEPT OF LOCUS STANDI: The
doctrine of locus standi is the right of
appearance in a court of justice. The
doctrine requires a litigant to have a
material interest in the outcome of a
case. In private suits, locus standi
requires a litigant to be a "real party in
interest," which is defined as "the party
who stands to be benefited or injured by
the judgment in the suit or the party
entitled to the avails of the suit."

Petition for review on certiorari to the Supreme


Court
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

In public suits, this Court recognizes the


difficulty of applying the doctrine
especially when plaintiff asserts a public
right on behalf of the general public
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TAXATION 2

because of conflicting public policy


issues. On one end, there is the right of
the ordinary citizen to petition the courts
to be freed from unlawful government
intrusion and illegal official action. At the
other end, there is the public policy
precluding excessive judicial interference
in official acts, which may unnecessarily
hinder the delivery of basic public
services.

TAXATION LAW
money is being deflected to any
improper purpose, or that there is
wastage of public funds through the
enforcement of an invalid or
unconstitutional law. A person suing
as a taxpayer, however, must show
that the act complained of directly
involves the illegal disbursement of
public funds derived from taxation. He
must also prove that he has sufficient
interest in preventing the illegal
expenditure of money raised by
taxation and that he will sustain a
direct injury because of the
enforcement of the questioned statute
or contract. In other words, for a

The Court has adopted the "direct injury


test" to determine locus standi in public
suits. In People v. Vera, it was held that a
person who impugns the validity of a
statute must have "a personal and
substantial interest in the case such that
he has sustained, or will sustain direct
injury as a result." The "direct injury test"
in public suits is similar to the "real party
in interest" rule for private suits under
Section 2, Rule 3 of the 1997 Rules of
Civil Procedure. (Planters Products, Inc.
v. Fertiphil Corporation, G.R. No. 166006,
March 14, 2008)

taxpayers suit to prosper, two


requisites must be met: (1) public
funds derived from taxation are
disbursed by a political subdivision or
instrumentality and in doing so, a law
is violated or some irregularity is
committed and (2) the petitioner is
directly affected by the alleged act.
[Mamba v. Lara, G.R. No. 165109, Dec.
14, 2009]

(b) AS APPLIED TO TAXATION:


(i) It is well-stated that the validity of a
statute may be contested only by one
who will sustain a direct injury in
consequence of its enforcement. Yet,
there are many decisions nullifying, at
the instance of taxpayers, laws
providing for the disbursement of
public funds, upon the theory that
"the expenditure of public funds by an
officer of the State for the purpose of
administering an unconstitutional act
constitutes a misapplication of such
funds," which may be enjoined at the
request of a taxpayer. (Pascual v.
Secretary of Public Works (1960))
(ii) A taxpayer is allowed to sue where
there is a claim that public funds are
illegally disbursed, or that the public

(2) Doctrine of transcendental importance


Recognizing that a strict application of the
"direct injury" test may hamper public
interest, this Court relaxed the requirement
in cases of "transcendental importance" or
with "far reaching implications." Being a
mere procedural technicality, it has also
been held that locus standi may be waived
in the public interest. (Ibid)

Planters Products, Inc. v. Fertiphil Corp.:


Even assuming arguendo that there is no
direct injury, We find that the liberal policy
consistently adopted by this Court on locus
standi must apply. The issues raised by
Fertiphil are of paramount public
importance. It involves not only the
constitutionality of a tax law but, more
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TAXATION 2

importantly, the use of taxes for public


purpose. Former President Marcos issued
LOI No. 1465 with the intention of
rehabilitating an ailing private company.
This is clear from the text of the LOI. PPI is
expressly named in the LOI as the direct
beneficiary of the levy. Worse, the levy was
made dependent and conditional upon PPI
becoming financially viable. The LOI
provided that "the capital contribution shall
be collected until adequate capital is raised
to make PPI viable."

TAXATION LAW
adequate relief available in any other form
or proceeding.

CJH Development Corp. v. BIR (GR No.


172457, Dec. 24, 2008) However, CJH is not
left without recourse. The Tariff and
Customs Code (TCC) provides for the
administrative and judicial remedies
available to a taxpayer who is minded to
contest an assessment, subject of course to
certain reglementary periods. The TCC
provides that a protest can be raised
provided that payment first be made of the
amount due.The decision of the Collector
can be reviewed by the Commissioner of
Customs who can approve, modify or
reverse the decision or action of the
Collector. If the party is not satisfied with
the ruling of the Commissioner, he may file
the necessary appeal to the Court of Tax
Appeals. Afterwards, the decision of the
Court of Tax Appeals can be appealed to
this Court.

The constitutionality of the levy is already in


doubt on a plain reading of the statute. It is
Our constitutional duty to squarely resolve
the issue as the final arbiter of all justiciable
controversies. The doctrine of standing,
being a mere procedural technicality,
should be waived, if at all, to adequately
thresh out an important constitutional
issue.
(3) Ripeness for judicial determination
Ripeness for judicial determination means
that litigation is inevitable or there is no

216