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TABLE OF CONTENTS
J. SCOPE AND LIMITATION OF TAXATION. 16
J.1. INHERENT LIMITATIONS .................. 16
J.2. CONSTITUTIONAL LIMITATIONS .....20
K. REQUISITES OF A VALID TAX ................ 27
L. TAX AS DISTINGUISHED FROM OTHER
FORMS OF EXACTIONS .............................. 28
L.1. TARIFF .............................................. 28
L.2. TOLL................................................. 28
L.3. LICENSE FEE .................................... 28
L.4. SPECIAL ASSESSMENT ................... 29
L.5. DEBT ................................................ 30
L.6. PENALTY.......................................... 30
M. KINDS OF TAXES ................................... 30
M.1. AS TO OBJECT ................................. 30
M.2. AS TO BURDEN OR INCIDENCE ......31
M.3. AS TO TAX RATES ............................31
M.4. AS TO SCOPE (OR AUTHORITY
IMPOSING THE TAX) ................................ 31
M.5. AS TO GRADUATION ...................... 32
A. INCOME TAX SYSTEMS .......................... 33
A.1. GLOBAL TAX SYSTEM ...................... 33
A.2. SCHEDULAR TAX SYSTEM .............. 33
A.3. SEMI-SCHEDULAR OR SEMI-GLOBAL
TAX SYSTEM ........................................... 33
B. FEATURES OF THE PHILIPPINE INCOME
TAX LAW ..................................................... 33
C. CRITERIA IN IMPOSING PHILIPPINE
INCOME TAX............................................... 34
C.1. CITIZENSHIP OR NATIONALITY
PRINCIPLE .............................................. 34
C.2. RESIDENCE PRINCIPLE ................... 34
C.3. SOURCE OF INCOME PRINCIPLE .... 34
D. TYPES OF PHILIPPINE INCOME TAX...... 34
E.1. INSTANCES WHEREBY SHORT
ACCOUNTING PERIOD ARISES .............. 34
E.2. WHEN CALENDAR YEAR SHALL BE
USED IN COMPUTING TAXABLE INCOME:
................................................................ 35
F. KINDS OF TAXPAYERS ........................... 35
F.1. DEFINITION OF EACH KIND OF
TAXPAYER .............................................. 35
F.2. INDIVIDUAL TAXPAYERS ................ 36
F.3. CORPORATIONS .............................. 36
F.4. PARTNERSHIP ................................. 37
F.5. ESTATES AND TRUSTS ................... 37

TAXATION LAW 1
I. GENERAL PRINCIPLES OF TAXATION ...........1
A. DEFINITION AND CONCEPT OF
TAXATION .....................................................1
A.1. TAXATION ...........................................1
A.2. TAXES .................................................1
B. UNDERLYING THEORY AND BASIS OF
TAXATION .....................................................1
C. NATURE OF THE POWER OF TAXATION ..1
C.1. SCOPE OF TAXATION......................... 2
C.2. EXTENT OF THE LEGISLATIVE
POWER TO TAX ........................................ 2
D. ESSENTIAL CHARACTERISTICS OF TAX
.................................................................. 3
E. POWER OF TAXATION COMPARED WITH
OTHER POWERS .......................................... 4
F. PURPOSE OF TAXATION .......................... 5
F.1. REVENUE-RAISING ............................ 5
F.2.
NON-REVENUE/SPECIAL
OR
REGULATORY ........................................... 5
G. PRINCIPLES OF SOUND TAX SYSTEM..... 6
G.1. FISCAL ADEQUACY ............................ 6
G.2. ADMINISTRATIVE FEASIBILITY ......... 6
G.3. THEORETICAL JUSTICE OR EQUALITY
.................................................................. 6
H. THEORY AND BASIS OF TAXATION ......... 6
H.1. LIFEBLOOD THEORY ......................... 6
H.2. NECESSITY THEORY ......................... 6
H.3. BENEFITS-PROTECTION THEORY
(SYMBIOTIC RELATIONSHIP) ................... 6
H.4. JURISDICTION OVER SUBJECT AND
OBJECTS ................................................... 7
I. DOCTRINES IN TAXATION ........................ 7
I.1. PROSPECTIVITY OF TAX LAWS ........... 7
I.2. NON-RETROACTIVITY OF RULINGS
(SEC. 246) ................................................. 7
I.3. IMPRESCRIPTIBILITY .......................... 7
I.4. DOUBLE TAXATION ............................ 8
I.5. ESCAPE FROM TAXATION .................. 9
I.6. EXEMPTION FROM TAXATION ......... 10
I.7. COMPENSATION AND SET-OFF ........12
I.8. COMPROMISE ...................................12
I.9. TAX AMNESTY ...................................12
I.10.
CONSTRUCTION
AND
INTERPRETATION OF: ............................. 13
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TABLE OF CONTENTS
F.6. CO-OWNERSHIP.............................. 37
G. INCOME TAXATION................................ 37
G.1. DEFINITION ...................................... 37
G.2. NATURE .......................................... 37
G.3. GENERAL PRINCIPLES .................... 38
H. INCOME.................................................. 38
H.1. DEFINITION ...................................... 38
H.2. NATURE .......................................... 38
I. GROSS INCOME ...................................... 43
I.1. DEFINITION ....................................... 43
I.2. CONCEPT OF INCOME FROM
WHATEVER SOURCE DERIVED .............. 43
I.3. GROSS INCOME VIS--VIS NET
INCOME VIS--VIS TAXABLE INCOME ...44
I.4. CLASSIFICATION OF INCOME AS TO
SOURCE ..................................................44
I.5. SOURCES OF INCOME SUBJECT TO
TAX .........................................................44
SOURCE RULES IN DETERMINING INCOME
FROM WITHIN AND WITHOUT ................... 66
SITUS OF INCOME TAXATION ................68
EXCLUSIONS FROM GROSS INCOME ........68
(A)
EXCLUSIONS
UNDER
THE
CONSTITUTION ...................................... 69
(B) EXCLUSIONS UNDER THE TAX CODE
(SEC. 32, NIRC) ....................................... 69
(C) UNDER SPECIAL LAWS ..................... 72
DEDUCTIONS FROM GROSS INCOME ....... 73
ITEMIZED DEDUCTIONS ........................ 74
EXPENSES .............................................. 74
INTEREST ............................................... 78
TAXES .................................................... 80
LOSSES ................................................... 82
BAD DEBTS.............................................84
DEPRECIATION ......................................85
CHARITABLE
AND
OTHER
CONTRIBUTIONS....................................86
CONTRIBUTIONS TO PENSION TRUSTS 87
DEDUCTIONS UNDER SPECIAL LAWS ... 87
OPTIONAL STANDARD DEDUCTION .....88
EXEMPT CORPORATIONS ...................... 91
TAXATION OF RESIDENT CITIZENS, NONRESIDENT CITIZENS AND RESIDENT ALIENS
.................................................................... 93
TAXATION ON COMPENSATION INCOME . 95

TAXATION
OF
BUSINESS
INCOME/INCOME FROM PRACTICE OF
PROFESSION ..........................................98
TAXATION OF PASSIVE INCOME............98
TAXATION OF CAPITAL GAINS.............. 101
TAXATION OF NON-RESIDENT ALIENS
ENGAGED IN TRADE OR BUSINESS ........ 105
GENERAL RULES.................................. 105
CASH AND/OR PROPERTY DIVIDENDS
.............................................................. 105
CAPITAL GAINS .................................... 106
NON-RESIDENT ALIENS NOT ENGAGED IN
TRADE OR BUSINESS .............................. 106
INDIVIDUAL TAXPAYERS EXEMPT FROM
INCOME TAX............................................. 107
SENIOR CITIZENS ................................. 107
MINIMUM WAGE EARNERS ................. 107
EXEMPTIONS
GRANTED
UNDER
INTERNATIONAL AGREEMENTS (SEC.
32(B)) .................................................... 107
TAXATION OF DOMESTIC CORPORATIONS
.................................................................. 107
TAX PAYABLE ....................................... 107
REGULAR TAX ...................................... 107
MINIMUM CORPORATE INCOME TAX
(MCIT) ................................................... 108
CORPORATIONS EXEMPT FROM THE
MCIT: (BIPTENG) .................................... 112
ALLOWABLE DEDUCTIONS ...................... 112
ITEMIZED DEDUCTIONS........................ 112
TAXATION OF PASSIVE INCOME .............. 112
PASSIVE INCOME SUBJECT TO TAX...... 112
PASSIVE INCOME NOT SUBJECT TO TAX
............................................................... 113
TAXATION OF CAPITAL GAINS ................. 114
INCOME FROM SALE OF SHARES OF
STOCK.................................................... 114
INCOME FROM THE SALE OF REAL
PROPERTY
SITUATED
IN
THE
PHILIPPINES .......................................... 114
TAX ON PROPRIETARY EDUCATIONAL
INSTITUTIONS
AND
NON-PROFIT
HOSPITALS................................................ 114

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TABLE OF CONTENTS
TAX ON GOVERNMENT-OWNED OR
CONTROLLED CORPORATIONS, AGENCIES
OR INSTRUMENTALITIES ......................... 114
FOR GOCCS: .......................................... 114
FOR
INSTRUMENTALITIES
AND
AGENCIES OF GOVERNMENT: .............. 115
TAXATION
OF
RESIDENT
FOREIGN
CORPORATIONS ....................................... 115
GENERAL RULE ..................................... 115
WITH RESPECT TO THEIR INCOME FROM
SOURCES WITHIN THE PHILIPPINES .... 116
MINIMUM CORPORATE INCOME TAX .. 116
TAX ON CERTAIN INCOME ........................ 116
TAXATION OF NON-RESIDENT FOREIGN
CORPORATIONS ....................................... 118
GENERAL RULE ..................................... 118
TAX ON CERTAIN INCOME .................... 118
IMPROPERLY ACCUMULATED EARNINGS
OF CORPORATIONS .............................. 121
TAX EXEMPT CORPORATIONS .................123
TAXATION OF PARTNERSHIPS .................123
CLASSIFICATION OF PARTNERSHIPS FOR
TAX PURPOSES .....................................123
TAXATION OF GENERAL PROFESSIONAL
PARTNERSHIPS ................................... 125
WITHHOLDING TAX.................................. 126
CONCEPT .............................................. 126
KINDS .................................................... 127
WITHHOLDING OF VAT ........................ 128
FILING OF RETURN AND PAYMENT OF
TAXES WITHHELD ................................ 128
FINAL WITHHOLDING TAX AT SOURCE129
CREDITABLE WITHHOLDING TAX ......... 131
TIMING OF WITHHOLDING ....................135

F.1. CONCEPT OF RESIDENCE .............. 139


F.2. RULE OF RECIPROCITY ................. 139
G. GROSS ESTATE VIS--VIS NET ESTATE
.................................................................. 140
H. DETERMINATION OF GROSS ESTATE
AND NET ESTATE (AND COMPOSITION) . 140
J. ITEMS TO BE INCLUDED IN GROSS
ESTATE ..................................................... 142
ITEMS TO BE INCLUDED IN THE GROSS
ESTATE ..................................................... 142
K. DEDUCTIONS FROM ESTATE .............. 145
K.1 ORDINARY DEDUCTIONS ............... 145
1.A.
EXPENSES,
LOSSES,
INDEBTEDNESS AND TAXES, ETC.
(ELIT) ................................................ 145
1.
B.
PROPERTY
PREVIOUSLY
TAXED/PPT (SEC. 86(A)(2)) ............. 150
ALSO
CALLED
AS
VANISHING
DEDUCTIONS ................................... 150
1. C. TRANSFERS FOR PUBLIC
PURPOSE (SEC. 86(A)(3)) ................. 151
1.D. AMOUNTS RECEIVED BY HEIRS
UNDER RA 4917 ................................ 151
L. EXCLUSIONS FROM ESTATE................ 153
M. TAX CREDIT FOR ESTATE TAXES PAID IN
A FOREIGN COUNTRY.............................. 155
N. EXEMPTION OF CERTAIN ACQUISITIONS
AND TRANSMISSIONS .............................. 157
O. FILING OF NOTICE OF DEATH .............. 157
P. ESTATE TAX RETURN ........................... 157
II. DONORS TAX .......................................... 160
A. BASIC PRINCIPLES............................... 160
B. DEFINITION .......................................... 160
C. NATURE ................................................ 161
D. PURPOSE OR OBJECT .......................... 161
E. REQUISITES OF VALID DONATION ....... 161
F.
TRANSFERS
WHICH
MAY
BE
CONSTITUTED AS DONATION .................. 161
G. TRANSFER FOR LESS THAN ADEQUATE
AND FULL CONSIDERATION ................... 162
H. CLASSIFICATION OF DONOR .............. 162
I. DETERMINATION OF GROSS GIFT
(INCLUDING COMPOSITION OF GROSS
GIFT) ......................................................... 163

TAXATION LAW 2
I. ESTATE TAX ............................................... 137
A. BASIC PRINCIPLES................................ 137
B. DEFINITION .......................................... 137
C. NATURE ................................................ 137
D. PURPOSE OR OBJECT .......................... 137
E. TIME AND TRANSFER OF PROPERTIES
.................................................................. 138
F. CLASSIFICATION OF DECEDENT ..........139
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TABLE OF CONTENTS
J. VALUATION OF GIFTS MADE IN
PROPERTY ............................................... 164
K. TAX CREDIT FOR DONORS TAXES PAID
IN A FOREIGN COUNTRY ......................... 165
L. EXEMPTIONS OF GIFTS FROM DONORS
TAX ........................................................... 166
M. PERSON LIABLE .................................. 166
N. TAX BASIS ............................................. 167
SUMMARY OF TRANSFER TAXES............ 169
III. VALUE-ADDED TAX (VAT) ........................ 174
A. CONCEPT .............................................. 174
B. CONSTITUTIONALITY OF VAT............... 174
C. CHARACTERISTICS/ELEMENTS OF A
VAT-TAXABLE TRANSACTION .................. 174
D. IMPACT OF TAX V. INCIDENT OF TAX .. 176
E. TAX CREDIT METHOD ........................... 176
F. DESTINATION PRINCIPLE ..................... 177
G. PERSONS LIABLE ................................. 177
G. VAT ON SALE OF GOODS OR
PROPERTIES ............................................. 178
I. ZERO-RATED SALES OF GOODS OR
PROPERTIES, AND EFFECTIVELY ZERORATED SALES OF GOODS OR PROPERTIES
................................................................... 181
J. TRANSACTIONS DEEMED SALE (SEC. 106
(B) ............................................................. 184
K. CHANGE OR CESSATION OF STATUS AS
VAT-REGISTERED PERSON (SEC 106 C) .. 185
L. VAT ON IMPORTATION OF GOODS ..... 186
M. VAT ON SALE OF SERVICE AND USE OR
LEASE OF PROPERTIES ........................... 186
N. ZERO-RATED SALE OF SERVICES....... 189
O. VAT EXEMPT TRANSACTIONS ............ 190
P. INPUT TAX AND OUTPUT TAX, DEFINED
.................................................................. 195
Q. SOURCES OF INPUT TAX..................... 195
R. PERSONS WHO CAN AVAIL OF INPUT
TAX CREDIT .............................................. 196
S. DETERMINATION OF OUTPUT/INPUT
TAX; VAT PAYABLE; EXCESS INPUT TAX
CREDITS .................................................... 197
S.1. DETERMINATION OF OUTPUT TAX 197
S.2. DETERMINATION OF INPUT TAX
CREDITABLE .......................................... 197

S.3. ALLOCATION OF INPUT TAX ON


MIXED TRANSACTIONS ........................197
S.4. DETERMINATION OF THE OUTPUT
TAX
AND
VAT
PAYABLE
AND
COMPUTATION OF VAT PAYABLE OR
EXCESS TAX CREDITS ........................... 197
T. SUBSTANTIATION OF INPUT TAX
CREDITS ................................................... 198
U. REFUND OR TAX CREDIT OF EXCESS
INPUT TAX (CF REFUND OF ERRONEOUSLY
PAID TAXES) .............................................203
V. INVOICING REQUIREMENTS ............... 204
W. FILING OF RETURN AND PAYMENT .. 206
X. WITHHOLDING OF FINAL VAT ON SALES
TO GOVERNMENT .................................... 207
IV. TAX REMEDIES UNDER THE NIRC.......... 221
A. TAXPAYERS REMEDIES ...................... 221
A. GOVERNMENT REMEDIES .............. 234
V. ORGANIZATION AND FUNCTION OF THE
BUREAU OF INTERNAL REVENUE .............. 236
POWERS OF THE COMMISSIONER .......... 236
ORGANIZATION AND FUNCTION OF THE
BIR ............................................................ 238
VI. TAX REMEDIES UNDER THE NIRC......... 240
VI. ORGANIZATION AND FUNCTION OF THE
BIR ................................................................ 272
VIII. LOCAL GOVERNMENT CODE OF 1991, AS
AMENDED .................................................... 276
C. TAXING POWERS OF MUNICIPALITIES 282
C.1. TAX ON VARIOUS TYPES OF
BUSINESSES.........................................282
C.2 CEILING ON BUSINESS TAX
IMPOSSIBLE ON MUNICIPALITIES WITHIN
METRO MANILA ...................................284
C.3. TAX ON RETIREMENT ON BUSINESS
..............................................................284
C.4 RULES ON PAYMENT OF BUSINESS
TAX .......................................................284
C.5. FEES AND
CHARGES FOR
REGULATION & LICENSING .................284
C.6. SITUS OF TAX COLLECTED ...........285
D. TAXING POWERS OF BARANGAYS .....286
E. COMMON REVENUE RAISING POWERS
..................................................................286
F. COMMUNITY TAX ................................. 287
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TABLE OF CONTENTS
COMMON LIMITATIONS ON THE TAXING
POWERS OF LGUS ...................................288
COLLECTION OF BUSINESS TAX .............289
TAX PERIOD AND MANNER OF PAYMENT
..............................................................289
ACCRUAL OF TAX .................................289
TIME OF PAYMENT ...............................289
PENALTIES ON UNPAID TAXES, FEES OR
CHARGES .............................................289
AUTHORITY
OF
TREASURER
IN
COLLECTION AND INSPECTION OF
BOOKS ..................................................289
TAXPAYERS REMEDIES ..........................289
PERIODS
OF
ASSESSMENT
AND
COLLECTION OF LOCAL TAXES, FEES OR
CHARGES .............................................289
PROTEST OF ASSESSMENT ................ 290
CLAIM FOR REFUND OF TAX CREDIT FOR
ERRONEOUSLY
OR
ILLEGALLY
COLLECTED TAX, FEE OR CHARGE .... 290
CIVIL REMEDIES BY THE LGU FOR
COLLECTION OF REVENUES .................. 290
LOCAL GOVERNMENTS LIEN FOR
DELINQUENT TAXES, FEES OR CHARGES
............................................................. 290
CIVIL REMEDIES, IN GENERAL ............ 290
PROCEDURE FOR ADMINISTRATIVE
ACTION ................................................ 290
PROCEDURE FOR JUDICIAL ACTION ... 291
B. REAL PROPERTY TAXATION ............... 291
A. FUNDAMENTAL PRINCIPLES (CAPUE)
.............................................................. 291
B. NATURE OF REAL PROPERTY TAX .. 291
C. IMPOSITION OF REAL PROPERTY TAX
.............................................................. 292
C.1. COVERAGE ..................................... 292
FOR A PROVINCE, OR A CITY OR
MUNICIPALITY WITHIN METRO MANILA
.............................................................. 292
SPECIAL LEVY ON IDLE LANDS............ 292
SPECIAL LEVY FOR PUBLIC WORKS .... 292
SPECIAL EDUCATION FUND (SEF) ....... 292
C.2. EXEMPT FROM REAL PROPERTY TAX
.............................................................. 292

D. APPRAISAL AND ASSESSMENT OF


REAL PROPERTY TAX .......................... 293
D.1. DECLARATION OF REAL PROPERTY
.............................................................. 293
D.2. LISTING OF REAL PROPERTY IN THE
ASSESSMENT ROLLS ...........................294
D.3. APPRAISAL AND VALUATION OF
REAL PROPERTY ..................................294
D.4. ASSESSMENT OF REAL PROPERTY
..............................................................295
I. ASSESSMENT LEVELS .......................295
II.
GENERAL
REVISIONS
OF
ASSESSMENTS
AND
PROPERTY
CLASSIFICATION ..................................295
III.
DATE
OF
EFFECTIVITY
OF
ASSESSMENT OR REASSESSMENT .....295
IV. ASSESSMENT OF PROPERTY SUBJECT
TO BACK TAXES....................................296
V. NOTIFICATION OF NEW OR REVISED
ASSESSMENT .......................................296
E. COLLECTION OF REAL PROPERTY TAX
..............................................................296
E.1. SPECIAL RULES ON PAYMENT ......296
I. PAYMENT OF REAL PROPERTY TAX IN
INSTALLMENTS ....................................296
II. INTERESTS ON UNPAID REAL
PROPERTY TAX .................................... 297
III. CONDONATION OF REAL PROPERTY
TAX ....................................................... 297
E.2.
REMEDIES
OF
LGUS
FOR
COLLECTION OF REAL PROPERTY TAX
.............................................................. 297
I. ADMINISTRATIVE .............................. 297
II. JUDICIAL ........................................... 297
F. TAXPAYERS REMEDIES ................... 297
F.1. ADMINISTRATIVE ...........................298
F.2. JUDICIAL ........................................298
IX. TARIFF AND CUSTOMS CODE OF 1978, AS
AMENDED .................................................... 303
A. TARIFF AND DUTIES, DEFINED ........... 303
B. GENERAL RULE: ALL IMPORTED
ARTICLES ARE SUBJECT TO DUTY .......... 303
IMPORTATION BY THE GOVERNMENT
TAXABLE............................................... 303
C. PURPOSE FOR IMPOSITION ................ 303
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TABLE OF CONTENTS
D. FLEXIBLE TARIFF CLAUSE ................... 303
E. REQUIREMENTS OF IMPORTATION ....304
E.1. BEGINNING AND ENDING OF
IMPORTATION ......................................304
E.2. OBLIGATIONS OF IMPORTER .......304
I. CARGO MANIFEST.............................304
II. IMPORT ENTRY.................................305
III. DECLARATION OF CORRECT WEIGHT
OR VALUE .............................................306
IV. LIABILITY FOR PAYMENT OF DUTIES
..............................................................306
V. LIQUIDATION OF DUTIES .................306
VI. KEEPING OF RECORDS ................... 307
F. IMPORTATION IN VIOLATION OF TCC 308
F.1. SMUGGLING .................................. 308
F.2. OTHER FRAUDULENT PRACTICES
............................................................. 308
G. CLASSIFICATION OF GOODS ...............309
G.1. TAXABLE IMPORTATION ...............309
G.2. PROHIBITED IMPORTATION .........309
G.3.
CONDITIONALLY-FREE
IMPORTATION ...................................... 310
H. CLASSIFICATION OF DUTIES ................316
H.1. ORDINARY/REGULAR DUTIES.......316
I. AD VALOREM; METHODS OF
VALUATION ...........................................316
II. SPECIFIC ............................................319
H.2. SPECIAL DUTIES ............................319
I. REMEDIES ..............................................319
I.1. GOVERNMENT .................................319
I. ADMINISTRATIVE/EXTRAJUDICIAL ...319
II. JUDICIAL ............................................321
I.2. TAXPAYER .......................................321
I. PROTEST ............................................321
II. ABANDONMENT ................................ 321
III. ABATEMENT AND REFUND ............ 322
X. JUDICIAL REMEDIES ................................ 328
A. JURISDICTION OF THE COURT OF TAX
APPEALS .................................................. 328
A.1. CIVIL TAX CASES ............................ 328
I. EXCLUSIVE ORIGINAL JURISDICTION
.............................................................. 328
II. EXCLUSIVE APPELLATE JURISDICTION
.............................................................. 328
CTA DIVISION ....................................... 328

CTA EN BANC ....................................... 328


A.2. CRIMINAL CASES .......................... 329
I. EXCLUSIVE ORIGINAL JURISDICTION
.............................................................. 329
II. EXCLUSIVE APPELLATE JURISDICTION
IN CRIMINAL CASES ............................. 329
CTA DIVISION ....................................... 329
CTA EN BANC ....................................... 329
B. JUDICIAL PROCEDURES ...................... 329
B.1. JUDICIAL ACTION FOR COLLECTION
OF TAXES.............................................. 329
I. INTERNAL REVENUE TAXES ............. 329
II. LOCAL TAXES ................................... 330
B.2. CIVIL CASES................................... 330
I. WHO MAY APPEAL, MODE OF APPEAL,
EFFECT OF APPEAL .............................. 330
SUSPENSION OF COLLECTION OF TAX
.............................................................. 330
TAKING OF EVIDENCE ........................... 331
MOTION FOR RECONSIDERATION OR
NEW TRIAL ............................................ 331
II. APPEAL TO THE CTA, EN BANC ....... 332
III.
PETITION
FOR
REVIEW
ON
CERTIORARI TO THE SUPREME COURT
.............................................................. 332
B.3. CRIMINAL CASES .......................... 333
I. INSTITUTION AND PROSECUTION OF
CRIMINAL ACTIONS ............................. 333
INSTITUTION OF CRIMINAL ACTION ... 333
PROSECUTION OF CRIMINAL ACTION 333
INSTITUTION ON CIVIL ACTION IN
CRIMINAL ACTION ............................... 333
II. APPEAL AND PERIOD TO APPEAL
CRIMINAL CASES ................................. 333
III.
PETITION
FOR
REVIEW
ON
CERTIORARI TO THE SUPREME COURT
.............................................................. 334
C. TAXPAYERS SUIT IMPUGNING THE
VALIDITY OF TAX MEASURES OR ACTS OF
TAXING AUTHORITIES ............................. 334
C.1. TAXPAYERS SUIT, DEFINED ......... 334
C.2. DISTINGUISHED FROM CITIZENS
SUIT ...................................................... 334

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TABLE OF CONTENTS
C.3. REQUISITES FOR CHALLENGING THE
CONSTITUTIONALITY OF A TAX MEASURE
OR ACT OF TAXING AUTHORITY .......... 334
I. CONCEPT OF LOCUS STANDI AS
APPLIED IN TAXATION ......................... 334
II. DOCTRINE OF TRANSCENDENTAL
IMPORTANCE ....................................... 335
III.
RIPENESS
FOR
JUDICIAL
DETERMINATION ................................. 336

vii

UP COLLEGE OF LAW

TAXATION 1

TAXATION LAW

TAXATION LAW

TAXATION LAW 1

UP COLLEGE OF LAW

TAXATION 1

I. General Principles of
Taxation

TAXATION LAW

B. UNDERLYING THEORY AND BASIS


OF TAXATION
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.

A. DEFINITION AND CONCEPT OF


TAXATION
A.1. TAXATION
(a) is a mode by which governments make
exactions for revenue in order to support
their existence and carry out their legitimate
objectives.
(b) a mode of raising revenue for public
purpose; the exercise of sovereign power to
raise revenue for the expense of the
government;
(c) the process or means by which the
sovereign, through its law-making body,
raises income to defray the necessary
expenses of government; a method of
apportioning the cost of government among
those who in some measure are privileged
to enjoy its benefits and must, therefore,
bear its burdens, (see 51 Am. Jur. 341; 1
Cooley 72-93.)
(d) as a power, it refers to the inherent power of
the state to demand enforced contributions
for public purpose or purposes.

The basis of taxation is found in the reciprocal


duties of protection and support between the
State and its inhabitants. The State receives
taxes that it may be enabled to carry its
mandates into effect and perform the functions
of government and the citizen pays the portion
of taxes demanded in order that he may, by
means thereof, be secured in the enjoyment of
the benefits of an organized society, (see 51
Am. Jur. 42-43.) This is the so-called benefitsreceived principle.

C. NATURE OF THE POWER OF


TAXATION
(1) Inherent in sovereignty- The power to tax is
an attribute of sovereignty. It is a power
emanating from necessity. It is a necessary
burden to preserve the State's sovereignty
and a means to give the citizenry an army to
resist an aggression, a navy to defend its
shores from invasion, a corps of civil
servants to serve, public improvement
designed for the enjoyment of the citizenry
and those which come within the State's
territory, and facilities and protection which
a government is supposed to provide (Phil.
Guaranty Co., Inc. v. Commissioner, G.R. No.
L-22074
April 30, 1965). It is
essential to the existence of every
government. It exists apart from
constitutions and without being expressly
conferred by the people (71 Am.Jur.2d 397398). Constitutional provisions relating to
the power of taxation do not operate as
grants of the power to the government.

A.2. TAXES
(a) 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.
(b) The enforced proportional and pecuniary
contributions from persons and property
levied by the law-making body of the state
having jurisdiction over the subject of the
burden for the support of the government
and public needs.

UP COLLEGE OF LAW

TAXATION 1

They merely constitute limitations upon a


power which would otherwise be practically
without limit. (1 Cooley 150). While the
power to tax is not expressly provided for in
our Constitution, its existence is recognized
by the provisions relating to taxation (infra).

businesses,
transactions,
rights,
or
privileges. A state is free to select the
subject of taxation and it has been
repeatedly held that that inequalities which
result from a singling out of one particular
class for taxation or exemption infringe no
constitutional limitation so long as such
exemption is reasonable and not arbitrary.
(see Lutz vs. Araneta, 98 Phil. 148; Sison, Jr.
vs. Ancheta, 130 SCRA 654 [1984])

(2) Essentially a legislative function- The power


to tax is peculiarly and exclusively
legislative and cannot be exercised by the
executive or judicial branch of the
government (1 Cooley 160-161). Hence, only
Congress, our national legislative body, can
impose taxes. The levy of a tax, however,
may also be made by a local legislative
body subject to such limitations as may be
provided by law.

Thus, the power to tax carries with it the


power to grant exemption therefrom.
(2) The purpose or object of the tax so long as it
is a public purposeThe legislative bodys
determination, however, on the question of
what is a public purpose is not conclusive.
The courts can inquire into whether the
purpose is really public or private.

(3) Subject to constitutional and inherent


limitations - These limitations are those
provided in the fundamental law or implied
therefrom, while the rest spring from the
nature of the taxing power itself although
they may or may not be provided in the
Constitution.

In the final analysis, therefore, the decision


on the question is not a legislative but a
judicial function. But once it is settled that
the purpose is public, the courts can make
no other inquiry into the objective of the
legislature in imposing a tax (see Pascual vs.
Sec. of Public Works, 110 Phil. 331 [1961]), or
the wisdom, advisability, or expediency of
the tax. (Blunt vs. U.S., 255 Fed. 322.)

C.1. 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.

C.2. EXTENT OF
POWER TO TAX

THE

TAXATION LAW

Judicial action is limited only to a review


where it involves:
(a) The determination of the validity of the
tax in relation to constitutional precepts
or provisions. Thus, a tax may be
declared invalid because it violates the
constitutional requirement of uniformity
and equity in taxation; or
(b) The determination in an appropriate case
of the application of a tax law. (see1
Cooley 165.) Thus, a court may decide
that a tax has been illegally collected
where the taxpayer is entitled to tax
exemption or his liability has already

LEGISLATIVE

Subject to constitutional and inherent


restrictions, the legislature has discretion to
determine the incidence of the power to tax.
(1) The subjects or objects to be taxed refer
to the coverage and the kind or nature of
the tax. They may be persons, whether
natural or juridical; property, whether real
or personal, tangible or intangible;
2

UP COLLEGE OF LAW
been extinguished
prescription.

TAXATION 1
by

reason

of

TAXATION LAW
implementation of tax laws. The legislature
possesses the sole power to prescribe the
mode or method by which the tax shall be
collected, and to designate the officers
through whom its will shall be enforced as
well as the remedies which the State or the
taxpayer may avail in connection therewith.

(3) The amount or rate of the tax.- As a general


rule, the legislature may levy a tax of any
amount or rate it sees fit. If the taxes are
oppressive or unjust, the only remedy is the
ballot box and the election of new
representatives. (see1 Cooley 178-181.)

D. ESSENTIAL CHARACTERISTICS OF TAX


(1) It is an enforced contribution for its

According to Chief Justice John Marshall,


"the power to tax involves the power to
destroy." (McCulloch vs. Maryland, 17 U.S.
[4 Wheat.] 316-428, 4L. ed. 579.) To say,
however, that the power to tax is the power
to destroy is to describe not the purposes for
which the taxing power may be used but the
extent to which it may be employed in order
to raise revenues. (see1 Cooley 178.) Thus,
even if a tax should destroy a business, such
fact alone could not invalidate the tax. (84
C.J.S. 46.)

imposition is in no way dependent upon the


will or assent of the person taxed.
(2) It is generally payable in the form of money,
although the law may provide payment in
kind (e.g. backpay certificates under Sec. 2,
R.A. No. 304, as amended);
(3) It is proportionate in character or islaid by
some rule of apportionment which is usually
based on ability to pay;
(4) It is levied on persons, property, rights, acts,

privileges, or transactions.
(5) It is levied by the State which has
jurisdiction or control over the subject to be
taxed.
(6) It is levied by the law-making body of the

Incidentally, our Constitution mandates that


"the rule of taxation shall be uniform and
equitable." In a case, our Supreme Court
said: "The power of taxation is sometimes
called also the power to destroy. Therefore,
it should be exercised with caution to
minimize injury to the proprietary rights of
the taxpayer. It must be exercised fairly,
equally and uniformly, lest the tax collector
kills the 'hen that lays the golden eggs.' And
in order to maintain the general public's
trust and confidence in the government, this
power must be used justly and not
treacherously." (Roxas v. Court of Tax

State. The power to tax is a legislative


power but is also granted to local
governments, subject to such guidelines
and limitations as law may provided (Sec. 5,
Art. X, Constitution); and;
(7) It is levied for public purpose. Revenues
derived from taxes cannot be used for
purely private purposes or for the exclusive
benefit of private persons. (Gaston v.

Republic Planters Bank, 158 SCRA 626,


March 15, 1988). The public purpose or
purposes of the imposition is implied in the
levy of tax. (see Mendoza v. Municipality, 94
Phil. 1047[1954]), A tax levied for a private
purpose constitutes a taking of property
without due process of law.
It is also an important characteristic of most
taxes that they are commonly required to be
paid at regular periods or intervals (see 1
Cooley 64) every year.

Appeals, 23 SCRA276, App120, 1968; Philex


Mining Corp. vs. Comm. of Internal Revenue,
97 SCAD 777,294 SCRA 687, Aug. 28,
1998.)
(4) The manner, means, and agencies of
collection of the tax. - These refer to the
administration of the tax or the
3

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TAXATION 1

TAXATION LAW

E. POWER OF TAXATION COMPARED WITH OTHER POWERS


1. As to concept

2. As to scope

3. As to authority

4. As to purpose

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

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

5. As to necessity The power to make tax


of delegation
laws cannot be delegated

6. As to person Operates on a community


affected
or a class of individual
7. As to benefits

Continuous
protection
and organized society
8. As to amount Generally no limit
of imposition
9.
As
importance

10.
As
relationship
Constitution

11.
As
limitation

to Inseparable
for
the
existence of a nation it
supports police power
and eminent domain
to Subject to Constitutional
to and Inherent limitations.
Inferior
to
nonimpairment clause.

to Constraints
by
Constitutional
and
Inherent limitations

Can
be
expressly
delegated to the local
government units by the
law making body
Operates
on
the
particular
private
property of an individual
Healthy
economic Market value of the
standard of society
property expropriated
Cost
of
regulation, No imposition
license
and
other
necessary expenses
Protection, safety and Common necessities and
welfare of society
interest of the community
transcend
individual
rights in property
Relatively
free
from Superior to and may
Constitutional
override Constitutional
limitations.
impairment
provision
Superior
to
non- because the welfare of
impairment clause.
the State is superior to
any private contract
Limited by the demand Bounded
by
public
for public interest and purpose
and
just
due process
compensation

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

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TAXATION 1

educational activities (see RA. No. 5447) or


to improve the efficiency of local police
forces in the maintenance of peace and
order through grant of subsidy (see RA.No.
6141).
(7) Be an implement of the police power to
promote the general welfare.

F. PURPOSE OF TAXATION
F.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.
Fees may be properly regarded as taxes even
though they also serve as an instrument of
regulation... If the purpose is primarily revenue,
or if revenue is, at least, one of the real and
substantial purposes, then the exaction is
properly called a tax. [PAL v. Edu, G.R. No. L41383 August 15, 1988

F.2.
NON-REVENUE/SPECIAL
REGULATORY

TAXATION LAW

In Lutz v. Araneta, 78 Phil 148, it has been


held that the Sugar Adjustment Act is an
act enacted primarily under the police
power and designed to obtain a
readjustment of the benefits derived by
people interested in the sugar industry as
well as to rehabilitate and stabilize the
industry which constitutes one of the great
sources of the country's wealth and,
therefore, affects a great portion of the
population of the country.

OR

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. Thus, taxation can:
(1) Strengthen anemic enterprises or provide
incentive to greater production through
grant of tax exemptions or the creation of
conditions conducive to their growth.
(2) Protect local industries against foreign
competition by imposing additional taxes
on imported goods, or encourage foreign
trade by providing tax incentives on
imported goods.
(3) Be a bargaining tool by setting tariff rates
first at a relatively high level before trade
negotiations are entered into with another
country.
(4) Halt inflation in periods of prosperity to curb
spending power; ward off depression in
periods of slump to expand business.
(5) Reduce inequalities in wealth and incomes,
as for instance, the estate, donor's and
income taxes, their payers being the
recipients of unearned wealth or mostly in
the higher income brackets.
(6) Taxes may be levied to promote science and
invention (see RA. No. 5448) or to finance

Taxes may be levied with a regulatory


purpose to provide means for rehabilitation
and stabilization of a threatened industry
which is imbued with public interest as to be
within the police power of the State. [Caltex
v. COA, G.R. No. 92585 May 8, 1992]
As long as a tax is for a public purpose, its
validity is not affected by collateral purposes or
motives of the legislature in imposing the levy,
or by the fact that it has a regulatory effect (51
Am. Jur. 381-382.) or it discourages or even
definitely deters the activities taxed. The
principle applies even though the revenue
obtained from the tax appears very negligible
or the revenue purpose is only secondary. (see

United States vs. Sanchez, 340 U.S. 42; Tio vs.


Videogram Regulatory Board, 151 SCRA 208
[1987])

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TAXATION 1

government would be paralyzed for lack of the


motive power to activate and operate it [CIR v.
Algue, G.R. No. L-28896, February 17, 1988].

G. PRINCIPLES OF SOUND TAX


SYSTEM
G.1. FISCAL ADEQUACY

H.2. NECESSITY THEORY

The sources of tax revenue should coincide


with, and approximate the needs of,
government expenditures. The revenue
should be elastic or capable of expanding or
contracting annually in response to
variations in public expenditures.

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.

G.2. ADMINISTRATIVE FEASIBILITY

The power to tax, an inherent prerogative, has


to be availed of to assure the performance of
vital state functions. It is the source of the bulk
of public funds. [Sison v. Ancheta, G.R. No. L59431, July 25, 1984]

Tax laws should be capable of convenient,


just and effective administration. Each tax
should be capable of uniform enforcement
by government officials, convenient as to
the time, place, and manner of payment,
and not unduly burdensome upon, or
discouraging to business activity.

G.3.
THEORETICAL
EQUALITY

JUSTICE

TAXATION LAW

The obligation to pay taxes rests upon the


necessity of money for the support of the state.
For this reason, no one is allowed to object to
or resist the payment of taxes solely because
no personal benefit to him can be pointed out
[Lorenzo v. Posadas, G.R. No. L-43082, June
18, 1937].

OR

The tax burden should be in proportion to


the taxpayers ability to pay. This is the socalled ability to pay principle. Taxation
should be uniform as well as equitable

H.3. BENEFITS-PROTECTION THEORY


(SYMBIOTIC RELATIONSHIP)

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)

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.
Despite the natural reluctance to surrender
part of one's hard earned income to the taxing
authorities, every person who is able to must
contribute his share in the running of the
government. The government for its part is
expected to respond in the form of tangible
and intangible benefits intended to improve
the lives of the people and enhance their moral
and material values. This symbiotic
relationship is the rationale of taxation and
should dispel the erroneous notion that it is an

H. THEORY AND BASIS OF TAXATION


H.1. LIFEBLOOD THEORY
Taxes are the lifeblood of the government and
their prompt and certain availability is an
imperious need. [CIR v. Pineda]
Taxes are the lifeblood of the government and
so should be collected without unnecessary
hindrance... It is said that taxes are what we
pay for civilized society. Without taxes, the
6

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TAXATION 1

TAXATION LAW

I.2. NON-RETROACTIVITY OF RULINGS


(SEC. 246)

arbitrary method of exaction by those in the


seat of power. [CIR v. Algue]

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.

H.4. JURISDICTION OVER SUBJECT AND


OBJECTS
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.

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

I. DOCTRINES IN TAXATION
I.1. 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).

I.3. IMPRESCRIPTIBILITY
Unless otherwise provided by the tax itself,
taxes are imprescriptible. (CIR v. Ayala
Securities Corporation)

It is a cardinal rule that laws shall have no


retroactive effect, unless the contrary is
provided (citing Art. 4 of the Civil Code).[Hydro
Resources v.CA]

The law on prescription, being a remedial


measure, should be liberally construed in order
to afford such protection. As a corollary, the
exceptions to the law on prescription should
perforce be strictly construed. [Commissioner v.
C.A., G.R.No. 104171 (1999)]

The language of the statute must clearly


demand or press that it shall have a retroactive
effect.[Lorenzo v.Posadas]

i. Prescriptions found in statutes


(1) National Internal Revenue Code- statute of
limitations (see Section 203 and 222) in the
assessment and collection of taxes therein
imposed.

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]

(2) Tariff and Customs Code- does not express


any general statute of limitation; it provides,
however, that when articles have been
entered and passed free of duty or final
adjustments of duties made, with
subsequent delivery, such entry and
passage free of duty or settlements of
7

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TAXATION 1

duties will, after the expiration of one (1)


year, from the date of the final payment of
duties, in the absence of fraud or protest or
compliance audit pursuant to the provisions
of this Code, be final and conclusive upon
all parties, unless the liquidation of the
import entry was merely tentative. (Sec.
1603)

TAXATION LAW

Double taxation, standing alone and not being


forbidden by our fundamental law, is not a
valid defense against the legality of a tax
measure (Pepsi Cola v. Mun. of Tanauan, G.R.
No. L-31156
February 27, 1976). But from it
might emanate such defenses against taxation
as oppressiveness and inequality of the tax.

iii. Constitutionality of double taxation


(3) Local

Government

Code-

prescribes
prescriptive periods for the assessment (5
years) and collection (5 years) of taxes. (see
Sections 194 and 270, Rep. Act No. 7160).

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

I.4. DOUBLE TAXATION

v. City of Iloilo, G.R. No. L-26521, December


28, 1968]

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.

If the tax law follows the constitutional rule on


uniformity, there can be no valid objection to
taxing the same income, business or property
twice.[China Banking Corp. v. CA, G.R. No.
146749 (2003)]

i. Strict sense (Direct Duplicate Taxation)


(1) the same property must be taxed twice

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).

when it should be taxed once;


(2) both taxes must be imposed on the same

property or subject matter;


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

authority;
(5) within the same territory, jurisdiction or
taxing district;
(6) during the same taxing period; and
(7) of the same kind or character of tax.

ii. Broad
Taxation)

sense

(Indirect

iv. Modes of eliminating double taxation


(1) Allowing reciprocal exemption either by law
or by treaty;
(2) Allowance of tax credit for foreign taxes
paid
(3) Allowance of deductions such as for foreign
taxes paid, and vanishing deductions in
estate tax
(4) Reduction of Philippine tax rate.

Duplicate

There is double taxation in the broad sense or


there is indirect duplicate taxation if any of the
elements for direct duplicate taxation is absent.
It extends to all cases in which there is a
burden of two or more pecuniary impositions.
For example, a tax upon the same property
imposed by two different states.

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TAXATION 1

TAXATION LAW

I.5. ESCAPE FROM TAXATION

Incidence of taxation is that point on which the

i. Shifting of tax burden

tax burden finally rests or settles down. It takes


place when shifting has been effected from the
statutory taxpayer to another.

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.

Relationship between Impact, Shifting, and


Incidence of a Tax
The impact is the initial phenomenon, the
shifting is the intermediate process, and the
incidence is the result.
Impact is the
imposition of the tax; shifting is the transfer of
the tax; while incidence is the setting or
coming to rest of the tax. (e.g impact in a sales
tax is on the seller who shifts the burden to the
customer who finally bears the incidence of the
tax)

All indirect taxes may be shifted; direct taxes


cannot be shifted.
Ways of shifting the tax burden
(1) Forward shifting - When the burden of the
tax is transferred from a factor of
production through the factors of
distribution until it finally settles on the
ultimate purchaser or consumer. Example:
VAT, percentage tax

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.

(2) Backward shifting - When the burden of the


tax is transferred from the consumer or
purchaser through the factors of
distribution to the factor of production.
Example: Consumer or purchaser may shift
tax imposed on him to retailer by
purchasing only after the price is reduced,
and from the latter to the wholesaler, and
finally to the manufacturer or producer.

Example: A person refrains from engaging in


some activity or enjoying some privilege in
order to avoid the incidental taxation or to
lower his tax bracket for a taxable year.

ii. Transformation

(3) Onward shifting - When the tax is shifted


two or more times either forward or
backward.

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.

Taxes that can be shifted


(1) Value-added Tax
(2) Percentage Tax
(3) Excise Tax
Meaning of impact and incidence of taxation
Impact of taxation is the point on which a tax is
originally imposed. In so far as the law is
concerned, the taxpayer, the subject of tax, is
the person who must pay the tax to the
government.

iii. Tax evasion (Tax Dodging)


Tax Evasion - is the use by the taxpayer of
illegal or fraudulent means to defeat or lessen

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TAXATION LAW

the payment of a tax. It is also known as tax


dodging. It is punishable by law.

subjected. It is strictly construed against the


taxpayer.

Example: Deliberate failure to report a taxable


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

Taxation is the rule; exemption is the exception.


He who claims exemption must be able to
justify his claim or right thereto, by a grant
expressed in terms too plain to be mistaken
and too categorical to be misinterpreted. If
not expressly mentioned in the law, it must at
least be within its purview by clear legislative
intent.

Elements of Tax Evasion


(1) The end to be achieved. Example: the
payment of less than that known by the
taxpayer to be legally due, or in paying no
tax when such is due.
(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.

ii. Nature of tax exemption


(1) Mere personal privilege-

cannot be
assigned or transferred without the 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 guarantee
or the uniformity rule.

Since fraud is a state of mind, it need not be


proved by direct evidence but may be inferred
from the circumstances of the case. Thus:
(1) The failure of the taxpayer to declare for
taxation purposes his true and actual
income derived from his business for two
consecutive years has been held as an
indication of his fraudulent intent to cheat
the government of its due taxes. (Republic v.
Gonzales, 13 SCRA 633 [1965]).
(2) The substantial underdeclaration of income
in the income tax returns of the taxpayer for
four (4) consecutive years coupled with his
intentional overstatement of deductions
justifies the finding of fraud. (Perez v. CTA
and Collector, 103 Phil. 1167 [1958]).

I.6. EXEMPTION FROM TAXATION


i. Meaning of exemption from taxation
The grant of immunity to particular persons or
corporations or to person or corporations of a
particular class from a tax which persons and
corporations generally within the same state or
taxing district are obliged to pay. It is an
immunity or privilege; it is freedom from a
financial charge or burden to which others are
10

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TAXATION 1

iii. Principles of Tax Exemption

TAXATION LAW
government, acting in its private capacity,
sheds its cloak of authority and waives its
governmental immunity.

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


Gorospe]
(2) When granted, they are strictly construed
against the taxpayer [Luzon Stevedoring Co.
v. CTA]
(3) They are higly disfavoured and may almost
be said to be directly contrary to the
intention of tax laws. [Manila Electric
Company v. Vera]
[Valencia and Roxas]

These contractual tax exemptions, however,


are not to be confused with tax exemptions
granted under franchises. A franchise
partakes the nature of a grant which is
beyond the purview of the non-impairment
clause of the Constitution. (Manila Electric

Company v. Province of Laguna, G.R.No.


131359, May 5, 1999)

iv. Kinds of tax exemption

v. Rationale of Tax Exemption

(1) Express or Affirmative - either entirely or in


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

Such exemption will benefit the body of the


people and not particular individuals or private
interest and that the public benefit is sufficient
to offset the monetary loss entailed in the
grant of the exemption.

(2) Implied or Exemption by Omission - when a


tax is levied on certain classes without
mentioning the other classes. Every tax
statute, in a very real sense, makes
exemptions since all those not mentioned
are deemed exempted. The omission may
be either accidental or intentional.

vi. Grounds for Tax Exemption


(1) It may be based on contract.
(2) It may be based on some ground of public

policy.
(3) It may be created in a treaty on grounds of
reciprocity or to lessen the rigors of

international or multiple taxation.

Exemptions are not presumed, but when


public property is involved, exemption is the
rule, and taxation is the exception.

But equity is NOT a ground for tax exemption.


Exemption from tax is allowable only if there is
a clear provision. While equity cannot be used
as a basis or justification for tax exemption, a
law may validly authorize the condonation of
taxes on equitable considerations.

(3) Contractual - The legislature of a State may,


in the absence of special restrictions in its
constitution, make a valid contract with a
corporation in respect to taxation, and that
such contract can be enforced against the
State at the instance of the corporation
[CasanovasHord, G.R. No. 3473, March 22,
1907]. In the real sense of the term and
where the non-impairment clause of the
Constitution can rightly be invoked, this
includes those agreed to by the taxing
authority in contracts, such as those
contained in government bonds or
debentures, lawfully entered into by them
under enabling laws in which the

vii. 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.

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I.7. COMPENSATION AND SET-OFF

TAXATION LAW

(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.
(c) Generally, compromises are allowed and
enforceable when the subject matter
thereof is not prohibited from being
compromised and the person entering into
it is duly authorized to do so.
(1) In the National Internal Revenue Code,
the Commissioner of Internal Revenue is
expressly authorized to enter, under
certain conditions, into a compromise of
both the civil and criminal liabilities of
the taxpayer (Sec. 204, NIRC).
(2) The power to compromise in respect of
customs duties is, at best, limited to
cases where potestive authority is
specifically granted such as in the
remission of duties by the Collector of
Customs (Sec. 709, Tariff and Customs
Code) and cases involving imposition of
fines, surcharges and forfeitures which
may
be
compromised
by
the
Commissioner subject to the approval of
the Secretary of Finance (Sec. 2316, Tariff
and Customs Code).
(3) No provisions exist under the Local
Government Code, while the tax (not
criminal) liability is not prohibited from
being compromised (see Arts. 2034 and
2035, Civil Code); there is no specific
authority, however, given to any public
official to execute the compromise so as
to render it effective. (Vitug, p. 48)

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).
Reasons:
(1) This would adversely affect the government
revenue system (Philex Mining v. CA G.R.
No. 125704. August 28, 1998).
(2) Government and the taxpayer are not
creditors and debtors of each other. The
payment of taxes is not a contractual
obligation but arises out of a duty to pay.
[Republic v. Mambulao Lumber (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
Articles 1279 and 1290 of the NCC, and both
debts are extinguished to the concurrent
amount.[Domingo v. Garlitos, G.R. No. L18994, June 29, 1963]
Doctrine of Equitable Recoupment- a claim for
refund barred by prescription may be allowed
to offset unsettled tax liabilities. The doctrine
FINDS NO application in this jurisdiction.

I.8. 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.

I.9. TAX AMNESTY


i. Definition
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
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TAXATION 1

so and become a part of the new society with a


clean slate.[Republic v. IAC (1991)]

TAXATION LAW

No person or property is subject to taxation


unless within the terms or plain import of a
taxing statute. (see72 Am.Jur. 2d 44).

A tax amnesty, much like a tax exemption, is


never favored nor presumed in law. If granted,
the terms of the amnesty, like that of a tax
exemption, must be construed strictly against
the taxpayer and liberally in favor of the taxing
authority. For the right of taxation is inherent
in government. The State cannot strip itself of
the most essential power of taxation by
doubtful words. He who claims an exemption
(or an amnesty) from the common burden
must justify his claim by the clearest grant of
organic or state law. It cannot be allowed to
exist upon a vague implication. If a doubt
arises as to the intent of the legislature, that
doubt must be resolved in favor of the state.
(CIR v. Marubeni Corp.,372 SCRA 576 [2001]).

Taxes, being burdens, they are not to be


presumed beyond what the statute expressly
and clearly declares. (Coll. v. La Tondena, 5
SCRA 665 [1962]). Thus, a tax payable by
individuals does not apply to corporations.
Tax statutes offering rewards are liberally
construed in favor of informers. (Penid v. Virata,
121 SCRA 166 [1983]).

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.

ii. Distinguished from tax exemption


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).
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)

Tax statutes are to receive a reasonable


construction or interpretation with a view to
carrying out their purpose and intent. They
should not be construed as to permit the
taxpayer easily to evade the payment of tax.
(Carbon Steel Co. v. Lewellyn, 251 U.S. 201).
Thus, the good faith of the taxpayer is not a
sufficient justification for exemption from the
payment of surcharges imposed by the law for
failing to pay tax within the period required by
law.

I.10. CONSTRUCTION AND


INTERPRETATION OF:
i. 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]).

ii. Tax exemption and exclusion


Tax exemptions must be shown to exist clearly
and categorically, and supported by clear legal
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TAXATION 1

provisions. [NPC v. Albay, G.R. No. 87479, June


4, 1990]

TAXATION LAW
(Comm. V. Arnoldus Carpentry Shop, Inc.,
159 SCRA 19 [1988]).

iii. Tax rules and regulations

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]).

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)

(a) NPC v. Albay: Tax exemptions must be


shown to exist clearly and categorically, and
supported by clear legal provisions.
(b) Floro Cement v. Gorospe: Claims for an
exemption must be able to point out some
provision of law creating the right, and

It is an elementary rule in administrative law


that administrative regulations and policies
enacted by administrative bodies to interpret
the law which they are entrusted to enforce
have the force of law and entitled to great
respect. They have in their favor a presumption
of legality [Gonzales v. Land Bank, 183 SCRA

cannot be allowed to exist upon a mere


vague implication or inference.
(c) CIR v. CA: Refunds are in the nature of

520(1990)]

exemption, and must be construed strictly


against the grantee/taxpayer.

Requisites for validity and effectivity of


regulations
(1) Reasonable
(2) Within the authority conferred
(3) Not contrary to law and the Constitution
(Art. 7, Civil Code)
(4) Must be published

(d) Comm. V. Kiener Co. Ltd. (65 SCRA 142


[1975]): Taxation is the rule and exemption
the exception, and therefore, he who claims
exemption must be able to justify his claim
or right thereto, by a grant expressed in
terms too plain to be mistaken and too
categorical to be misinterpreted.

There are two kinds of administrative


issuances: the legislative rules and the
interpretative rules. A legislative rule is in the
nature of subordinate legislation, designed to
implement a primary legislation by providing
the details thereof. An interpretative rule, on
the other hand, is designed to provide
guidelines to the law, which the administrative
agency is in charge of enforcing. An
administrative rule should be published if it
substantially adds to or increases the burden
of those governed. When an administrative
rule is merely interpretative in nature, its
applicability needs nothing further than its
bare issuance for it gives no real consequence
more than what the law itself has already
prescribed. When, upon the other hand, the
administrative rule goes beyond merely

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
rule on strict construction does not apply.
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TAXATION 1

providing for the means that can facilitate or


render least cumbersome the implementation
of the law but substantially adds to or
increases the burden of those governed, it
behooves the agency to accord at least to
those directly affected a chance to be heard,
and thereafter to be duly informed, before that
new issuance is given the force and effect of
law. (Commissioner v. Court of Appeals,
G.R.No. 119761 [1996]).

TAXATION LAW

and original jurisdiction of the Commissioner


of Internal Revenue subject to review by the
Secretary of Finance (Sec. 4, par.1, NIRC).
Revenue regulations are the formal
interpretation of the provisions of the NIRC
and other laws by the Secretary of Finance
upon
the
recommendation
of
the
Commissioner of Internal Revenue.
The Commissioner has the sole authority to
issue rulings but he also has the power to
delegate said authority to his subordinates. He
cannot, however, delegate to any of his
subordinate officials the power to issue rulings
of first impression (i.e., question involved is
new and important) or to reverse, revoke or
modify any existing ruling of the BIR (Sec. 7[B],
NIRC).

Rep. of the Philippines v. Pilipinas Shell


Petroleum Corporation, G.R. No. 173918, April
8, 2008.
Tax regulations (issued by the CIR/DOF
Secretary) whose purpose is to enforce or
implement existing law must (a) be published
in a newspaper of general circulation (see Art.
2 of the Civil Code), AND (b) filed with UP Law
Center ONAR (per Chapter 2, Book VII of the
Admin Code of 1987 (EO 292) before they can
become effective.

v. 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]).

Such rules once established and found to be in


consonance with the general purposes and
objects of the law have the force and effect of
law, and so they must be applied and enforced.
(De Guzman v. Lontok, 68 Phil. 495 [1939]).
They are, therefore, just as binding as if the
regulations had been written in the law itself.
NOTE: Administrative rules and regulations
must always be in harmony with the provisions
of the law. In case of conflict with the law or
the Constitution, the administrative rules and
regulations are null and void. As a matter of
policy, however, courts will declare a
regulation or provision thereof invalid only
when the conflict with the law is clear and
unequivocal.

The same is also true with respect to decisions


of the Court of Tax Appeals. However, by the
nature of its jurisdiction, the decisions of this
court are still appealable to the Supreme Court
by a petition for review on certiorari.

vi. 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.

iv. Administrative interpretations and


opinions
The power to interpret the provisions of the Tax
Code and other tax laws is under the exclusive
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TAXATION 1

A penal statute should be construed strictly


against the State and in favor of the accused.
The reason for this principle is the tenderness
of the law for the rights of individuals and the
object is to establish a certain rule by
conformity to which mankind would be safe,
and the discretion of the court limited.(People
v. Purisima, 86 SCRA 524 [1978]).

although each advantage to individuals might


incidentally serve the public. [Pascual v.
Secretary of Public Works (1960)]
The protection and promotion of the sugar
industry is a matter of public concern; the
legislature may determine within reasonable
bounds what is necessary for its protection and
expedient for its promotion. [Lutz v Araneta
(1955)]

vii. Non-retroactive application of tax


laws to taxpayers

The public purpose of a tax may legally exist


even if the motive which impelled the
legislature to impose the tax was to favor one
industry over another. [Tio v. Videogram
(1987)]

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.

Tests in Determining Public Purpose:


(1) Duty Test - Whether the thing to be
furthered by the appropriation of public
revenue is something which is the duty of
the State as a government to provide.
(2) Promotion of General Welfare Test Whether the proceeds of the tax will directly
promote the welfare of the community in
equal measure.
(3) Character of the Direct Object of the
Expenditure it is the essential character of
the direct object of the expenditure which
must determine its validity as justifying a
tax and not the magnitude of the interests
to be affected nor the degree to which the
general advantage of the community, and
thus the public welfare, may be ultimately
benefited by their promotion. Incidental
advantage to the public or to the State,
which results from the promotion of private
enterprises or business, does not justify
their aid with public money. [Pascual v. Sec.

Exception: Tax laws may be applied


retroactively provided it is expressly declared or

clearly the legislative intent. (Lorenzo v.


Posadas, 64 Phil. 353 [1937]).
Exception to the exception: a tax law should
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]).

J. SCOPE
TAXATION

AND

LIMITATION

TAXATION LAW

OF

J.1. INHERENT LIMITATIONS


i. 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.

of Public Works, G.R. No. L-10405,


December 29, 1960]

Test: whether the statute is designed to


promote the public interest, as opposed to the
furtherance of the advantage of individuals,
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ii. Inherently Legislative

TAXATION LAW

Exceptions
(1) Delegation to local governments - This
exception is in line with the general
principle that the power to create municipal
corporations for purposes of local selfgovernment carries with it, by necessary
implication, the power to confer the power
to tax on such local governments. (1 Cooley
190). This is logical for after all, municipal
corporations are merely instrumentalities of
the state for the better administration of the
government in respect to matters of local
concern. (Pepsi-Cola Bottling Co. of the Phil.

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

Inc. v. Mun. of Tanauan, 69 SCRA 460


[1976]).
Under the new Constitution,
however, LGUs are 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]

and Acosta]
General Rule: Delegata potestas non potest
delegari. The power to tax is exclusively vested
in the legislative body and it may not be redelegated.
Judge Cooley enunciates the doctrine in the
following oft-quoted language: "One of the
settled maxims in constitutional law is that the
power conferred upon the legislature to make
laws cannot be delegated by that department
to any other body or authority. Where the
sovereign power of the state has located the
authority, there it must remain; and by the
constitutional agency alone the laws must be
made until the Constitution itself is charged.
[People v. Vera, G.R. No. L-45685, November
16, 1937]

(2) Delegation to the President


(a) to enter into Executive agreements, and
(b) to ratify treaties which grant tax
exemption subject to Senate concurrence.
The Congress may, by law, authorize 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]

Legislature has the power to determine the:


(1) nature (kind),
(2) object (purpose),
(3) extent (rate),
(4) coverage (subjects) and
(5) situs (place) of taxation.

(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.
(a) There are certain aspects of the taxing
process that are not legislative and they
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TAXATION 1

may, therefore, be vested in an


administrative body. The powers which
are not legislative include: (1) the power
to value property for purposes of taxation
pursuant to fixed rules; (2) the power to
assess and collect the taxes; and (3) the
power to perform any of the innumerable
details of computation, appraisement,
and adjustment, and the delegation of
such details.
(b) The exercise of the above powers is really
not an exception to the rule as no
delegation of the strictly legislative
power to tax is involved.
(c) The powers which cannot be delegated
include the determination of the subjects
to be taxed, the purpose of the tax, the
amount or rate of the tax, the manner,
means, and agencies of collection, and
the prescribing of the necessary rules
with respect thereto.

TAXATION LAW

of state is no longer subject to its taxing


powers. The fundamental basis of the right to
tax is the capacity of the government to
provide benefits and protection to the object of
the tax. A person may be taxed where there is
between him and the taxing state, a privity of
the relationship justifying the levy. Thus, the
citizens income may be taxed even if he
resides abroad as the personal (as
distinguished from territorial) jurisdiction of his
government over him remains. In this case, the
basis of the power to tax is not dependent on
the source of the income nor upon the location
of the property nor upon the residence of the
taxpayer but upon his relation as a citizen to
the state. As such citizen, he is entitled,
wherever he may be, inside or outside of his
country, to the protection of his government.

iv. Situs of Taxation


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. Within the territorial jurisdiction, the
taxing authority may determine the situs.

iii. 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).

Factors that Determine Situs:


(1) Nature of the tax;
(2) Subject matter of the tax (person, property,
act or activity);
(3) Possible protection and benefit that may
accrue both to the government and the
taxpayer;
(4) Citizenship of the taxpayer;
(5) Residence of the taxpayer;
(6) Source of income.

Reasons:
(1) Tax laws (and this is true of all laws) do not
operate beyond a countrys territorial limits.
(2) Property which is wholly and exclusively
within the jurisdiction of another state
receives none of the protection for which a
tax is supposed to be a compensation.
Note: Where privity of relationship exists. - It
does not mean, however, that a person outside

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TAXATION 1

TAXATION LAW

1. Income Tax

Taxpayer
Citizenship
Filipino
Filipino
Alien
Alien

Source of Income

Residency
Resident
Non-Resident
Resident
Non-Resident

Within Phils.
Taxable
Taxable
Taxable
Taxable

2. Property Tax

Kind of Property
Real property
Tangible Personal
property
Tangible Personal
property
Intangible personal
property (e.g., credits,
bills receivables, bank
deposits, bonds,
promissory notes,
mortgage loans,
judgments and
corporate stocks)

Without Phils.
Taxable
Non-Taxable
Non-Taxable
Non-Taxable

3. Excise Tax

Situs

Kind of Excise Tax

Where it is located
(lex rei sitae)
Where property is
physically
located
although the owner
resides in another
jurisdiction.
Gen Rule: Domicile of
the owner. Mobilia

Income

Donors Tax

Estate

sequuntur personam
(movables follow the
person)

Situs
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

4. Business Tax

Kind of Business Tax


Exceptions:

Situs

VAT

Where transaction is
made
Sale of Real Property
Where
the
real
property is located
Sale
of
Personal Where the personal
Property
property was sold

(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)

v. 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.
Reasons:
(1) In par in parem non habet imperium. As
between equals there is no sovereign
(Doctrine of Sovereign Equality among
states under international law). One state
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TAXATION 1

TAXATION LAW

impeded. (1 Cooley 263). (3) The practical


effect of an exemption running to the benefit of
the government is merely to reduce the
amount of money that has to be handled by
the government in the course of its operations:
For these reasons, provisions granting
exemptions to government agencies may be
construed liberally in favor of non-tax liability
of such agencies. (Maceda v. Macaraig, Jr., 197
SCRA 771 [1991]).

cannot exercise its sovereign powers over


another.)
(2) In international law, a foreign government
may not be sued without its consent
useless to impose a tax which could not be
collected.
(3) Usage among states that when a foreign
sovereign enters the territorial jurisdiction
of another, there is an implied
understanding that the former does not
intend to degrade its dignity by placing
itself under the jurisdiction of the other.
(4) Rule in international law that a foreign
government may not be sued without its
consent so that it is useless to assess the tax
anyway since it cannot be collected.

vi. Exemption of Government Entities,


Agencies, and Instrumentalities

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, G.R. No. 120082 September
11, 1996) There is no constitutional prohibition
against the government taxing itself. (Coll. v.

If the taxing authority is the National


Government:
General Rule: Agencies and instrumentalities
of the government are exempt from tax.

If the taxing authority is the local government


unit: RA 7160 expressly prohibits LGUs from

Bisaya Land Transportation, 105 Phil. 338


[1959]).

levying tax on the National Government, its


agencies and instrumentalities and other
LGUs. [Local Government Code, Sec. 133 (o)]

Note: Unless otherwise provided by law, the


exemption applies only to government entities
through which the government immediately
and directly exercises its sovereign powers.
With respect to government-owned or
controlled corporations performing proprietary
(not governmental) functions, they are
generally subject to tax in the absence of tax
exemption provisions in their charters or the
law creating them.

J.2. CONSTITUTIONAL LIMITATIONS


i. Provisions Directly Affecting Taxation
1. Prohibition against imprisonment for nonpayment of poll tax
Art III, Sec 20, 1987 Constitution- No person
shall be imprisoned for debt or non-payment
of a poll tax.

Reasons for the exemption: (1) To levy a tax


upon public property would render necessary
new taxes on other public property for the
payment of the tax so laid and thus, the
government would be taxing itself to raise
money to pay over for itself. (2) This immunity
also rests upon fundamental principles of
government, being necessary in order that the
functions of government shall not be unduly

2. Uniformity and equality of taxation


Art VI, Sec 28(1), 1987 Constitution- The rule of
taxation shall be uniform and equitable.
Congress shall evolve a progressive system of
taxation.
(1) Uniformity- All taxable articles or properties
of the same class shall be taxed at the same
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TAXATION 1

rate. (City of Baguio v. de Leon, 25 SCRA


938).
(1) Uniformity of operation
throughout tax unit - The rule requires the
uniform application and operation, without
discrimination, of the tax in every place
where the subject of it is found. This means,
for example, that a tax for a national
purpose must be uniform and equal
throughout the country and a tax for a
province, city, municipality, or barangay
must be uniform and equal throughout the
province, city, municipality or barangay. (2)
Equality in burden Uniformity implies
equality in burden, not equality in amount
or equality in its strict and literal meaning.
The reason is simple enough. If legislation
imposes a single tax upon all persons,
properties, or transactions, an inequality
would obviously result considering that not
all persons, properties, and transactions are
identical or similarly situated. Neither does
uniformity demand that taxes shall be
proportional to the relative value or amount
of the subject thereof. Taxes may be
progressive.
(2) Equity 1) Uniformity in taxation is effected
through the apportionment of the tax
burden among the taxpayers which under
the Constitution must be equitable.
Equitable means fair, just, reasonable and
proportionate to the taxpayers ability to
pay. Taxation may be uniform but
inequitable where the amount of the tax
imposed is excessive or unreasonable. (2)
The constitutional requirement of equity in
taxation also implies an approach which
employees a reasonable classification of the
entities or individuals who are to be affected
by a tax. Where the tax differentiation is
not based on material or substantial
differences, the guarantee of equal
protection of the laws and the uniformity
rule will likewise be infringed.

TAXATION LAW

Taxation does not require identity or equality


under all circumstances, or negate the
authority to classify the objects of taxation.
Classification to be valid, must, be reasonable
and this requirement is not deemed satisfied
unless:
(1) it is based upon substantial distinctions
which make real differences;
(2) these are germane to the purpose of the
legislation or ordinance;
(3) the classification applies, not only to
present conditions, but, also, to future
conditions substantially identical to those of
the present; and
(4) the classification applies equally to all those
who belong to the same class.
(Pepsi-Cola v. Butuan City, 24 SCRA 789)
The progressive system of taxation would
place stress on direct rather than indirect
taxes, on non-essentiality rather than
essentiality to the taxpayer of the object of
taxation, or on the taxpayers ability to pay.
Example is that individual income tax system
that imposes rates progressing upwards as the
tax base (taxpayers taxable income) increases.
A progressive tax, however, must not be
confused with a progressive system of taxation.
While equal protection refers more to like
treatment of persons in like circumstances,
uniformity and equity refer to the proper
relative treatment for tax purposes of persons
in unlike circumstances.
3. 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)

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TAXATION 1

4. Prohibition against taxation of religious,


charitable entities, and educational entities
Art VI, Sec 28(3), 1987 Constitution:
(e) Charitable institutions, churches and
personages or convents appurtenant
thereto, mosques, non-profit cemeteries,
and all lands, buildings, and improvements,
(f) actually, directly, and exclusively used for
religious, charitable, or educational
purposes shall be exempt from taxation.
(g) The tax exemption under this constitutional
provision covers property taxes only and not
other taxes (Lladoc v. Commissioner, 14
SCRA 292 [1965]).

(3) reasonably necessary for


the accomplishment of
said purposes such as in
the case of hospitals, a
school for training nurses,
a nurses home, property to
provide housing facilities
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]

In general, special assessments are not


covered by the exemption because by nature
they are not classified as taxes. [Apostolic
Prefect v. City Treasurer of Baguio]

TEST: whether an enterprise is charitable or


not: whether it exists to carry out a purpose
recognized in law as charitable or whether it is
maintained for gain, profit, or private
advantage.

To be entitled to the exemption, the petitioner


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

A charitable institution does not lose its


character as such and its exemption from taxes
simply because it derives income from paying
patients, whether out-patient, or confined in
the hospital, or receives subsidies from the
government, so long as the money received is
devoted or used altogether to the charitable
object which it is intended to achieve; and no
money inures to the private benefit of the
persons managing or operating the institution.

Revenue or income from trade, business or


other activity, the conduct of which is not
related to the exercise or performance of
religious, educational and charitable purposes
or functions shall be subject to internal
revenue taxes when the same is not actually,
directly or exclusively used for the intended
purposes. (BIR Ruling 046-2000)

Test of
Exemption
Nature of Use

Scope of
Exemption

TAXATION LAW

Exclusive" - possessed and enjoyed to the


exclusion
of
others;
debarred
from
participation or enjoyment; "Exclusively" - "in a
manner to exclude; as enjoying a privilege
exclusively.

Use of the property, and not


the ownership
Actual, direct and exclusive
use for religious, charitable or
educational purposes.
Real property taxes on
facilities which are
(1) actual,
(2) incidental to, or

If real property is used for one or more


commercial purposes, it is not exclusively used
for the exempted purposes but is subject to
taxation. The words "dominant use" or
"principal use" cannot be substituted for the
words "used exclusively" without doing
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UP COLLEGE OF LAW

TAXATION 1

violence to the Constitutions and the law.


Solely is synonymous with exclusively. [Lung

TAXATION LAW

This provision covers only non-stock, non-profit


educational institutions

Center of the Philippines v. Quezon City


(2004)]

The exemption covers income, property, and


donors taxes, custom duties, and other taxes
imposed by either or both the national
government or political subdivisions on all
revenues, assets, property or donations, used
actually, directly and exclusively for
educational purposes. (In the case of religious
and charitable entities and non-profit
cemeteries, the exemption is limited to
property tax.)

Note: Lung Center did not necessarily overturn


the case of Abra Valley College v. Aquino
(1988). Lung Center just provided a stricter
interpretation. In Abra Valley, the court held:
The primary use of the school lot and building
is the basic and controlling guide, norm and
standard to determine tax exemption, and not
the mere incidental use thereof. Under the
1935 Constitution, the trial court correctly held
that the school building as well as the lot
where it is built, should be taxed, not because
the second floor of the same is being used by
the Director and his family for residential
purposes (incidental to its educational
purpose), but because the first floor thereof is
being used for commercial purposes. However,
since only a portion is used for purposes of
commerce, it is only fair that half of the
assessed tax be returned to the school involved.

The exemption does not cover revenues


derived from, or assets used in, unrelated
activities or enterprise.
Similar tax exemptions may be extended to
proprietary (for profit) educational institutions
by law subject to such limitations as it may
provide, including restrictions on dividends and
provisions for reinvestment. The restrictions
are designed to insure that the tax-exemption
benefits are used for educational purposes.

5. Prohibition against taxation of non-stock,


non-profit educational institutions

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.

Art XIV, Sec 4, 1987 Constitution

(3) All revenues and assets of non-stock, nonprofit educational institutions used actually,
directly, and exclusively for educational
purposes shall be exempt from taxes and
duties.

Art. VI, sec. 28, par. 3

Art. XIV, sec. 4, par. 3

Charitable institutions, Non-stock, nonchurches and


profit educational
parsonages or
institutions.
convents appurtenant
thereto, mosques, nonprofit cemeteries, and
all lands, buildings,
and improvements,

Proprietary educational institutions, including


those cooperatively owned, may likewise be
entitled to such exemptions subject to the
limitations provided by law, including
restrictions on dividends and provisions for
reinvestment.
(4) Subject to conditions prescribed by law, all
grants,
endowments,
donations,
or
contributions used actually, directly, and
exclusively for educational purposes shall be
exempt from tax.

actually, directly, and


exclusively used for
religious, charitable, or
23

UP COLLEGE OF LAW
educational purposes.
Property taxes

TAXATION 1

TAXATION LAW

(2) The President of the Philippines may, when


public interest so requires, condone or
reduce the real property tax and interest for
any year in any province or city or a
municipality within the Metropolitan Manila
Area. (Sec. 277, LGC)

Income, property,
and donors taxes
and custom duties.

6. Majority vote of Congress for grant of tax


exemption
Art VI, Sec 28, 1987 Constitution. No law
granting any tax exemption shall be passed
without the concurrence of a majority of all the
Members of the Congress.

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.
If the purpose for which a special fund was
created has been fulfilled or abandoned, the
balance, if any, shall be transferred to the
general funds of the Government (see Gaston
v. Republic Planters Bank, 158 SCRA 626).

Basis: The inherent power of the state to


impose taxes carries with it the power to grant
tax exemptions.
Exemptions may be created by:
(1) The Constitution or
(2) Statute subject to constitutional limitations

8. Presidents veto power on appropriation,


revenue, tariff bills
Art VI, Sec 27(2), 1987 Constitution. The
President shall have the power to veto any
particular item or items in an appropriation,
revenue, or tariff bill, but the veto shall not
affect the item or times to which he does not
object.

Vote required for the grant of exemption:


Absolute majority of the members of Congress
(at least + 1 of ALL the members voting
separately)
Vote required for withdrawal of such grant of
exemption: Relative majority is sufficient
(majority of the quorum).
The provision guaranteeing equal protection of
the laws and that mandating the rule of
taxation shall be uniform and equitable
likewise limit, although not expressly, the
legislative power to grant tax exemption.

9. Non-impairment of jurisdiction of the


Supreme Court
Art VIII, Sec 2, 1987 Constitution. The Congress
shall have the power to define, prescribe, and
apportion the jurisdiction of the various courts
but may not deprive the Supreme Court of its
jurisdiction over cases enumerated in Section 5
hereof.

Grants in the nature of tax exemptions:


(1) Tax amnesties
(2) Tax condonations
(3) Tax refunds

Art VIII, Sec 5(2(b)), 1987 Constitution. The


Supreme Court shall have the following
powers:
(2) Review, revise, modify or affirm on appeal
or certiorari, as the laws or the Rules of Court
may provide, final judgments and orders of
lower courts in
(b) all cases involving the legality of any
tax, impost, assessment or toll or any

Note:
(1) Local government units may, through
ordinances duly approved, grant tax
exemptions, incentives or reliefs under such
terms and conditions as they may deem
necessary. (Sec. 192, LGC)
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UP COLLEGE OF LAW

TAXATION 1

TAXATION LAW

12. Exemption from real property taxes

penalty imposed in relation thereto.

Art Vi, Sec 28(3), 1987 Constitution


Charitable
institutions,
churches
and
personages or convents appurtenant thereto,
mosques, non-profit cemeteries, and all lands,
buildings, and improvements, actually,
directly, and exclusively used for religious,
charitable, or educational purposes shall be
exempt from taxation.

San Miguel Corp v. Avelino (G.R. No. L-39699


March 14, 1979): Even the legislative body
cannot deprive the SC of its appellate
jurisdiction over all cases coming from inferior
courts where the constitutionality or validity of
an ordinance or the legality of any tax, impost,
assessment, or toll is in question.

Art VI, Sec 30, 1987 Constitution. No law shall

13. No appropriation or use of public money for


religious purposes

be passed increasing the appellate jurisdiction


of the Supreme Court without its advice and
concurrence.

Art Vi, Sec 29, 1987 Constitution

(1) No money shall be paid out of the Treasury


except in pursuance of an appropriation
made by law.
(2) No public money or property shall be
appropriated, applied, paid, or employed,
directly or indirectly, for the use, benefit, or
support of any sect, church, denomination,
sectarian institution, or system of religion,
or of any priest, preacher, minister, other
religious teacher, or dignitary as such,
except when such priest, preacher, minister,
or dignitary is assigned to the armed forces,
or to any penal institution, or government
orphanage or leprosarium.
(3) 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. If
the purpose for which a special fund was
created has been fulfilled or abandoned,
the balance, if any, shall be transferred to
the general funds of the Government

Scope of Judicial Review in taxation: limited


only to the interpretation and application of
tax laws. Its power does not include inquiry
into the policy of legislation. Neither can it
legitimately question or refuse to sanction the
provisions of any law consistent with the
Constitution. (Bisaya Land Transportation Co v.
Collector, May 29, 1959)
10. Grant of power to the local government
units to create its own sources of revenue
LGUs have 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]

ii. Provisions Indirectly Affecting Taxation

11. Flexible tariff clause


Delegation of Tariff powers to the President
under the flexible tariff clause [Art VI, Sec
28(2), 1987 Constitution]

1. Due process

Art III, Sec 1, 1987 Constitution. No person


shall be deprived of life, liberty, or property
without due process of law, nor shall any
person be denied the equal protection of the
laws.

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.

(1) Substantive Due Process An act is done


under the authority of a valid law or the
Constitution itself.

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UP COLLEGE OF LAW

TAXATION 1

(2) Procedural Due Process An act is done


after compliance with fair and reasonable
methods or procedure prescribed by law.

TAXATION LAW

The doctrine does not require that persons or


properties different in fact be treated in laws as
though they were the same. Indeed, to treat
them the same or alike may offend the
Constitution. What the Constitution prohibits is
class legislation which discriminates against
some and favors others. As long as there are
rational or reasonable grounds for so doing,
Congress may, therefore, group the persons or
properties to be taxed and it is sufficient if all
of the same class are subject to the same rate
and the tax is administered impartially upon
them. (1 Cooley 608).

Due Process in Taxation requirements:


(1) public purpose
(2) imposed within taxing authoritys territorial
jurisdiction
(3) assessment or collection is not arbitrary or
oppressive
The due process clause may be invoked where
a taxing statute is so arbitrary that it finds no
support in the Constitution, as where it can be
shown to amount to the confiscation of
property. (Sison v. Ancheta, 130 SCRA 654
[1984]))

The equal protection clause is subject to


reasonable classification. Classification is valid
as long as:
(1) Classification
rests
on
substantial
distinctions which make real differences,
(2) Classification is germane to achieve the
legislative purpose,
(3) The law applies, all things being equal, to
both present and future conditions, and
(4) The classification applies equally well to all
those belonging to the same class.

Instances of violations of the due process


clause:
(1) If the tax amounts to confiscation of
property;
(2) If the subject of confiscation is outside the
jurisdiction of the taxing authority;
(3) If the tax is imposed for a purpose other
than a public purpose;
(4) If the law which is applied retroactively
imposes just and oppressive taxes.
(5) If the law violates the inherent limitations
on taxation.

3. Religious freedom

Art III, Sec 5, 1987 Constitution. No law shall


be made respecting an establishment of
religion, or prohibiting the free exercise
thereof. (Non-establishment clause)
The free exercise and enjoyment of religious
profession and worship, without discrimination
or preference, shall forever be allowed. (Free

2. Equal protection

Art III, Sec 1, 1987 Constitution. No person


shall be deprived of life, liberty, or property
without due process of law, nor shall any
person be denied the equal protection of the
laws.

exercise clause)
No religious test shall be required for the
exercise of civil and political rights.

All persons subject to legislation shall be


treated alike under similar circumstances and
conditions both in the privileges conferred and
liabilities imposed. (1 Cooley 824-825; See
Sison v. Ancheta,1984]).

The free exercise clause is the basis of tax


exemptions.
The imposition of license fees on the
distribution and sale of bibles and other
religious literature by a non-stock, non-profit
missionary organization not for purposes of
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TAXATION 1

profit amounts to a condition or permit for the


exercise of their right, thus violating the
constitutional guarantee of the free exercise
and enjoyment of religious profession and
worship which carries with it the right to
disseminate religious beliefs and information.
[American Bible Society v. City of Manila, L9637 April 30, 1957]It is actually in the nature
of a condition or permit for the exercise of the
right. This is different from a tax in the income
of one who engages in religious activities or a
tax on property used or employed in
connection with those activities. It is one thing
to impose a tax on the income or property of a
preacher. It is quite another thing to exact a tax
for the privilege of delivering a sermon.
(American Bible Society v. City of Manila)

TAXATION LAW

and how taxes are to be implemented (the


manner of imposing and collecting tax). It
also involves the granting of tax exemptions,
tax amnesties or tax condonation.
(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. Payment of tax also includes
the options, schemes or remedies as may be
legally open or available to the taxpayer.
(4) REFUND A claim for refund must first be
filed with the Commissioner of Internal
Revenue. A suit or proceeding may be filed
within two years from the date of payment
of the tax or penalty regardless of any
supervening cause that may arise after
payment. The Commissioner may, even
without a written claim therefor, refund or
credit any tax, where on the face of the
return, such payment appears clearly to
have been erroneously paid. [Sec. 229,
NIRC]

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])
4. Non-impairment of obligations of contracts
Art III, Sec 10, 1987 Constitution. No law
impairing the obligation of contracts shall be
passed.

K. REQUISITES OF A VALID TAX

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 (1994)]

(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

STAGES OR PROCESS OF TAXATION


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. The tax laws to be
passed shall determine those to be taxed
(person, property or rights), how much is to
be collected (the rate and the base of tax),
27

UP COLLEGE OF LAW

TAXATION 1

L. TAX AS DISTINGUISHED FROM


OTHER FORMS OF EXACTIONS

L.3. LICENSE FEE


Taxes

L.1. TARIFF

Imposed under the


taxing power of the
state for purposes of
revenue.
Forced contributions
for the purpose of
maintaining
government
functions.
Generally, unlimited
as to amount

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

L.2. TOLL
Taxes

Imposed on persons,
property
and
to
exercise a privilege.
Failure to pay does
not necessarily make
the act or business
illegal.

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.
A toll is a sum of money for the use of
something, generally applied to the
consideration which is paid for the use of a
road, bridge or the like, of a public nature. (1
Cooley 77.)
The view has been expressed, however,
that the taking of tolls is only another method
of taxing the public for the cost of the
construction and repair of the improvement for
the use of which the toll is charged. (71 Am. Jur.
2d 351.)

TAXATION LAW

License and
Regulatory Fee
Levied under the
police power of the
state.
Exacted primarily to
regulate
certain
businesses
or
occupations.
Should
not
unreasonably exceed
the
expenses
of
issuing the license
and of supervision.
Imposed only on the
right to exercise a
privilege
Failure to pay makes
the act or business
illegal.

Penalty for nonpayment: surcharges


or
imprisonment
(except poll tax).
License or permit fee is a charge imposed
under the police power for purposes of
regulation.
License is in the nature of a special privilege, of
a permission or authority to do what is within
its terms. It makes lawful an act which would
otherwise be unlawful. A license granted by
the State is always revocable. (Gonzalo Sy

Trading vs. Central Bank of the Phil., 70 SCRA


570 [1976])

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UP COLLEGE OF LAW

TAXATION 1

Importance of the distinctions


(1) It is necessary to determine whether a
particular imposition is a tax or a license fee
because some limitations apply only to one
and not to the other, and for the reason that
exemption from taxes may not include
exemption from license fee.
(2) The power to regulate as an exercise of
police power does not include the power to
impose fees for revenue purposes. The
amount of tax bears no relation at all to the
probable cost of regulating the activity,
occupation, or property being taxed. (see

TAXATION LAW
taking into account not only the costs of
direct regulation but also its incidental
consequences as well.

Note: Taxes may also be imposed for


regulatory purposes. It is called regulatory tax.
Fees may be properly regarded as taxes even
though they also served as an instrument of
regulation. If the purpose is primarily revenue,
or if revenue is, at least, one of the real and
substantial purposes, then the exaction is
properly called a tax.[PAL v. Edu (1988)]

Progressive Development Corp. vs. Quezon


City, 172 SCRA 629 [1989])

L.4. SPECIAL ASSESSMENT

(3) An exaction, however, may be considered


both a tax and a license fee. This is true in
the case of car registration fees which may
be regarded as taxes even as they also serve
as an instrument of regulation. If the
purpose is primarily revenue, or if revenue,
is, at least, one of the real and substantial
purposes, then the exaction is properly
called a tax. (Phil. Airlines, Inc. vs. Edu, 164
SCRA 320 [1988])
(4) But a tax may have only a regulatory
purpose. The general rule, however, is that
the imposition is a tax if its primary purpose
is to generate revenue, and regulation is
merely incidental; but if regulation is the
primary purpose, the fact that incidentally
revenue is also obtained does not make the
imposition a tax. (see Progressive

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
time and place.

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.

A special assessment is not a personal liability


of the person assessed, i.e., his liability is
limited only to the land involved. It is based
wholly on benefits (not necessity).

Development Corp. vs. Quezon City)


Progressive Development Corp v. QC (1989): To
be considered a license fee (PRIMARY
PURPOSE TEST):
(1) imposition must relate to an occupation or
activity that so engages the public interest
in health, morals, safety and development
as to require regulation for the protection
and promotion of such public interest;
(2) imposition must bear a reasonable relation
to the probable expenses of regulation,

A charge imposed only on property owners


benefited is a special assessment rather than a
tax notwithstanding that the statute calls it a
tax. The rule is that an exemption from
taxation does not include exemption from
special assessment. But the power to tax
carries with it the power to levy a special
assessment.
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TAXATION 1

TAXATION LAW

L.6. PENALTY
Note: The term "special levy" is the name used
in the present Local Government Code (RA. No.
7160). A province, city, or municipality, or the

Taxes

National Government, may impose a special


levy on lands especially benefited by public
works or improvements financed by it (see Sec.
240, RA 7160).

Violation of tax laws Any sanction imposed


may give rise to as a punishment for
imposition of penalty. violation of law or
acts deemed injurious
Generally intended to Designed to regulate
raise revenue
conduct
May be imposed only May be imposed by
by the government
the government or
private individuals or
entities
Cannot be a subject Can be a subject of
of
set
off
or set
off
or
compensation
compensation
(see
Art. 1279, Civil Code)

L.5. DEBT
Taxes

Penalty

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

M. KINDS OF TAXES
M.1. 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). Taxes of a specified amount
imposed upon each person performing a
certain act or engaging in a certain business
or profession are not, however, poll taxes.
(71 Am.Jur.2d 357).
(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). The obligation to pay the tax is
absolute and unavoidable and is not based
upon the voluntary action of the person
assessed.
(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

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


word.

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UP COLLEGE OF LAW

TAXATION 1

performance of an act, the enjoyment of a


privilege, or the engaging in an occupation,
profession, or business. The obligation to
pay the tax is based on the voluntary action
of the person taxed in performing the act or
engaging in the activity which is subject to
the excise. The term excise tax is
synonymous with privilege tax and the
two are often used interchangeably (e.g.,
income tax, value added tax, estate tax,
donors tax).

TAXATION LAW

(2) Ad Valorem Tax a tax of a fixed proportion


of the value of the property with respect to
which the tax is assessed. It requires the
intervention of assessors or appraisers to
estimate the value of such property before
the amount due from each taxpayer can be
determined. The phrase ad valorem
means literally, according to value. (e.g.
real estate tax, excise tax on automobiles,
non-essential goods such as jewelry and
perfumes, customs duties (except on
cinematographic films)).
(3) Mixed

M.2. 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
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. Thus, the person who absorbs or
bears the burden of the tax is other than the
one on whom it is imposed and required by
law to pay the tax. Practically all business
taxes are indirect (e.g., VAT, percentage tax;
excise taxes on specified goods; customs
duties).

AS TO PURPOSES

(1) General or Fiscal Tax levied for the general


or ordinary purposes of the Government, i.e.,
to raise revenue for governmental needs
(e.g. income tax, value added tax, and
almost all taxes).
(2) Special/Regulatory/ Sumptuary Tax levied
for special purposes i.e., to achieve some
social or economic ends irrespective of
whether revenue is actually raised or not
(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).
Tariff duties intended mainly as a source of
revenue are relatively low so as not to
discourage imports.

M.4. AS TO SCOPE (OR AUTHORITY


IMPOSING THE TAX)
(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).

M.3. 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. It requires no assessment
(valuation) other than the listing or
classification of the objects to be taxed (e.g.,
taxes on distilled spirits, wines, and
fermented liquors; cigars and cigarettes)
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TAXATION 1

TAXATION LAW

II. National Internal


Revenue Code of 1997 as
amended (NIRC)

M.5. 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.

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, 43 Phil. 981).
It may be succinctly defined as a tax on
income, whether gross or net, realized in one
taxable year.
Income tax is generally classified as an excise

tax. It is not levied upon persons, property,


funds or profits but upon the right of a person

Regressive/Progressive system of taxation


A regressive tax must not be confused with the

to receive income or profits.

regressive system of taxation.

In the Philippines, income tax is imposed on


the net income of citizens, resident aliens,
domestic corporations, and nonresident aliens
and foreign corporations engaged in trade or
business within the Philippines (Sec. 24 (A),
Sec. 25 (A), Sec. 27 (A), Sec. 28 (A), NIRC). It is
also imposed on the gross income of
nonresident aliens and foreign corporationsnot doing business in the Philippines (Sec. 25
(B), (C), (D), Sec. 28 (B), NIRC). It is further
imposed as a final tax on certain passive
income (interests, royalties, prizes, and other
winnings), cash and property dividends, capital
gains from the sale of domestic shares of stock
and real property classified as capital assets
located in the Philippines (Sec. 24 (B), Sec. 25
(A) (2), (3), Sec. 27 (D), Sec. 28 (A), NIRC).

In a society where the majority of the people


have low incomes, regressive taxation system
exists when there are more indirect taxes
imposed than direct taxes. Since the lowincome sector of the population as a whole
buys more consumption goods on which the
indirect taxes are collected, the burden of
indirect taxes rests more on them than on the
more affluent groups. There should be no
objection if indirect taxes are raised on luxury
items consumed mainly by the higher income
groups and reduced on basic commodities
consumed by the lower income segments of
society.
Studies reveal that the progressive elements of
the income and other direct taxes have not
sufficiently offset the regressive effects of the
indirect taxes as a whole.

Income Tax Law aims to mitigate the evils


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

A progressive tax is, therefore, also different


from a progressive system of taxation.
32

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TAXATION 1

(Madrigal v. Rafferty & Concepcion, G.R. No. L12287 August 7, 1918).

B. FEATURES OF THE PHILIPPINE


INCOME TAX LAW

A. INCOME TAX SYSTEMS

Direct Tax
The tax burden is borne by the income
recipient upon whom the tax is imposed.

A.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.

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.
Any of the three principles is enough to justify
the imposition of income tax on the income of
a resident citizen and a domestic corporation
that are taxed on a worldwide income.

A.2. 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.

A.3. SEMI-SCHEDULAR
GLOBAL TAX SYSTEM

OR

TAXATION LAW

Semi-Schedular or Semi-Global Tax System


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

SEMI-

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
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.

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.

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


RA 8424 (1998), follows a semi-schedular and
semi-global tax system.
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TAXATION 1

C. CRITERIA IN IMPOSING
PHILIPPINE INCOME TAX
C.1. CITIZENSHIP
PRINCIPLE

OR

TAXATION LAW

D. 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

NATIONALITY

A citizen of the Philippines is subject to


Philippine income tax
(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.

C.2. 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.

C.3. SOURCE OF INCOME PRINCIPLE


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.

E. 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).

The income tax law adopts the most


comprehensive tax situs of nationality and
residence of the taxpayer and of the generally
accepted and internationally recognized
income tax base. (Tan v. De Rosario, G.R. No.
109289 October 3, 1994) Resident citizens and
domestic corporations are subjected to income
tax liability on their income from all sources
within and without the Philippines. The law
adopts the source rule with respect to income
received by taxpayers, other than resident
citizens and domestic corporations.

E.1. INSTANCES WHEREBY


ACCOUNTING PERIOD ARISES

SHORT

(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.

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TAXATION 1

"Taxable year" means the calendar year, or the


fiscal year ending during such calendar year,
upon the basis of which the net income is
computed under Title II (Tax on Income).

F. KINDS OF TAXPAYERS
F.1. DEFINITION OF EACH KIND OF
TAXPAYER
Taxpayer - any person subject to tax imposed
by Title II of the Tax Code (Sec. 22(N), NIRC).

Taxable year includes, in the case of return


made for a fractional part of a year under the
provisions of Title II, the period for which such
return is made (Sec. 22 (P), NIRC).

Person- means an individual, a trust, estate or


corporation (Sec. 22(A), NIRC).

E.2. WHEN CALENDAR YEAR SHALL BE


USED IN COMPUTING TAXABLE INCOME:

For income tax purposes, taxpayers are


classified generally as follows:
(1) Individuals;
(2) Corporations;
(3) Partnerships; and
(4) Estates and Trusts.

(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).

Primary Classification

Sub-Classification(s)
Residents citizens
Non-resident citizens
Residents
Engaged in Trade or
Business in the
Philippines
Non-residents
Not Engaged in Trade or
Business in the
Philippines

Citizens of the
Philippines

Individuals

TAXATION LAW

Aliens

Special Classes of
Individuals

Minimum Wage Earner

Domestic Corporations

Corporations

Foreign Corporations

Estates and Trusts


Partnerships

General Business Partnership


General Professional Partnership

Co-ownerships

35

Resident Corporations
Non-resident Corporations

UP COLLEGE OF LAW

TAXATION 1

TAXATION LAW

F.2. INDIVIDUAL TAXPAYERS


Exception: Definite Intention but such cannot
be promptly accomplished; If his purpose is of

i. Citizens

such nature that an extended stay may be


necessary for its accomplishment, and thus the
alien makes his home temporarily in the
Philippines, then he becomes a resident.

(1) Resident Citizens (RC)


(2) 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 (183 DAYS).
(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

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

iii. 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.

ii. Aliens

F.3. CORPORATIONS
Includes all types of corporations, partnerships

(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 matter how created or organized), joint


stock companies, joint accounts, associations,
or insurance companies, whether or not
registered with the SEC.

No/Indefinite Intention = RESIDENT: If he lives


in the Philippines and has no definite intention
as to his stay, he is a resident. A mere floating
intention indefinite as to time, to return to
another country is not sufficient to constitute
him a transient.

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.

Definite Intention = TRANSIENT: One who


comes to the Philippines for a definite purpose,
which in its nature may be promptly
accomplished, is a transient.

(1) Domestic corporations A corporation


created and organized under its laws (the
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TAXATION 1

TAXATION LAW

F.4. PARTNERSHIP

law of incorporation test).

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
corporation engaged in trade or business
within the Philippines.

General Professional Partnerships (GPP)


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.

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 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.

F.5. ESTATES AND TRUSTS

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)

Taxable estates and trusts are taxed in the


same manner and on the same basis as an
individual.

F.6. 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.

(b) Non-resident foreign corporations


Foreign corporation not engaged in trade or
business within the Philippines
(3) Joint venture and consortium Essential
factors of a joint venture or consortium:
(a) Each party must make a contribution,
not necessarily of capital but by way 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.

G. INCOME TAXATION
G.1. DEFINITION
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).

G.2. NATURE
Income tax is generally classified as an excise

tax. It is not levied upon persons, property,


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TAXATION 1

funds or profits but upon the right of a person

H. INCOME

to receive income or profits.

H.1. DEFINITION

G.3. GENERAL PRINCIPLES

(a) 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.
(b) Conwi v. CTA [G.R. No. 48532 August 31,
1992]: It is an amount of money coming to a
person within a specified time, whether as
payment for services, interest or profit from
investment. Unless otherwise specified. It
means cash or its equivalent. Income can
also be thought of as a flow of the fruits of
one's labor.
(c) Income may be received in the form of cash,
property, service, or a combination of the
three.

(a) A resident citizen of the Philippines is


taxable on all income derived from sources
within and without the Philippines;
(b) A nonresident citizen is taxable only on
income derived from sources within the
Philippines;
(c) 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:
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

H.2. NATURE
Income includes earnings, lawfully or
unlawfully acquired, without consensual
recognition, express or implied, of an
obligation to repay and without restriction as
their disposition. (James v. US, 366 US 213)

(d) An alien individual, whether a resident or


not of the Philippines, is taxable only on
income derived from sources within the
Philippines;
(e) A domestic corporation is taxable on all
income derived from sources within and
without the Philippines; and
(f) 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
Resident Citizen
Non-resident Citizen and
OCW
Resident and Non-resident
Alien
Domestic Corporation
Foreign Corporation

TAXATION LAW

i. 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

Within Without

(a) Madrigal vs. Rafferty (1918): "The fact is that


property is a tree, income is the fruit; labor
is a tree, income the fruit; capital is a tree,
income the fruit." A tax on income is not a
tax on property. "Income," as here used, can
be defined as "profits or gains."
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UP COLLEGE OF LAW

TAXATION 1

(b) A mere increase in the value of property is

(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).

not income, but merely unrealized increase


in capital. (1 Mertens, Sec. 5.06)The
increase in the value of property is also
known as appraisal surplus or revaluation
increment.

ii. When is there INCOME?


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

The doctrine of constructive receipt is


designed to prevent the taxpayer using the
cash basis from deferring or postponing the
actual receipt of taxable income. Without
the rule, the taxpayer can conveniently
select the year in which he will report the
income. (Dimaampao)

Income v. Capital (Madrigal v. Rafferty)


Income

TAXATION LAW

Capital

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

For a taxpayer using the accrual method, the


determinative question is, when do the facts
present themselves in such a manner that the
taxpayer must recognize income or expense?
The accrual of income and expense is
permitted when the all-events test has been
met. This test requires: (1) fixing of a right to
income or liability to pay; and (2) the
availability of the reasonable accurate
determination of such income or liability [CIR
v. Isabela Cultural Corporation].

iii. Realization of Income


Tests of Realization
Actual vis--vis Constructive receipt
(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. The person may
withdraw the said account credited in his
favor anytime without any substantial

The As If Theory of Constructive Income is


designed to prevent a cash basis taxpayer to
delay reporting of income. It also resumes the
existence of income on transactions
supposedly not subject to tax. [Valencia and
Roxas]

limitations or conditions upon which


payment or enjoyment is to be made or
exercised. Examples of constructive receipt
of income are:
(a) Interest credited on savings bank deposit
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UP COLLEGE OF LAW

TAXATION 1

iv. Recognition of Income

TAXATION LAW

Installment method vis--vis Deferred method


vis--vis Percentage of completion method (in
long- term contracts)

Methods of accounting in reporting income and


expenses

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).

Cash method vis--vis Accrual methodCash


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).
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).

Income may be reported on the installment


basis in the following cases:

Sales of personal property by a dealer


A dealer who regularly sells or otherwise
disposes of personal property on the
installment plan

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

Sales of real property (inventory) and casual


sales of personalty
(1) casual sale or other casual disposition of
personal property (not of a kind which
would be includible in the inventory of the
taxpayer if on hand at the close of the
taxable year) where the selling price >
P1,000 and the initial payments do not
exceed 25% of the selling price, or
(2) sale or other disposition of real property
(inventory), if the initial payments do not
exceed 25% of the selling price. Note: This
sale is subject to creditable withholding tax
and normal tax which is 30% for corporate
taxpayer or 5% to 32% for individual
taxpayer.

Examples:
(1) Interest or rent income earned but not yet
received
(2) Rent expense accrued but not yet paid
(3) Wages due to workers but remaining
unpaid
Generally,
trade
and
manufacturing
businesses use accrual method while servicing
businesses use cash method. If the service
business opted to report on accrual basis, such
method can only be applied when it comes to
reporting of expense. To prevent tax evasion,
individual taxpayers whose business consists
of the sale of inventories cannot use cash
method. [Valencia and Roxas]

Sales of real property considered as capital


asset by individuals
An Individual who sells or disposes of real
property, considered as capital asset, if initial
payments do not exceed 25% of the selling
price, may pay the capital gains tax in
installments (Sec. 49(C), NIRC). Note: This
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UP COLLEGE OF LAW

TAXATION 1

sale is subject to a capital gains tax of 6%


based on the selling price or zonal value,
whichever is higher.
Note: Initial payments are the total payments
received in cash or property (other than
evidences of indebtedness such as promissory
notes, mortgages given) by the seller upon or
before the execution of the instrument of sale
during the taxable year of the disposition of the
real property. Considered as initial payments
are the downpayment and all other payments
received by the seller during the year of sale,
including excess mortgage assumed by the
buyer over the basis or cost of the property sold.
It contemplates at least one other payment in
addition to the initial payment. If the entire
purchase price is to be paid in a lump sum in a
later year, there being no payment during the
first year, the income may not be returned on
the installment basis.

TAXATION LAW

(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
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.

Personal Property

Real Property

Dealer
Dealer in personal
property who
regularly sells in
installment plan:
Installment method

Selling price is the total amount or price of the


sale including the cash or property received
and all notes of the buyer or mortgages
assumed by him.

Contract price is the amount which the

*held as ordinary
assetregardless of

Installment method;
Provided, initial
payments do not
exceed 25% of selling
price
If exceeds 25%-Deferred payment
method

amount of percentage
of initial payments

*held as inventory

Casual Sale

purchaser contracts to pay the seller in cash. It


includes the excess of the mortgages assumed
over the cost or other basis of the property sold.

Installment method;
Provided:
(1) Selling price
exceeds php1,000
(2) Initial payments do
not exceed 25% of
selling price
If either of 2 or both
conditions not met
Deferred payment
method

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].

*personal property
not considered
inventory

Sale by Individuals
Installment method;
Provided, initial
payments do not

Deferred Payment

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TAXATION 1

TAXATION LAW
dividends are not income subject to
income tax on the part of the stockholder
when he merely holds more shares
representing the same equity interest in
the corporation that declared stock
dividends (Fisher v Trinidad).

exceed 25% of selling


price
*held as capital asset

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.

(2) 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. To collect a tax would give the
government an unjustified preference as
to the part of the money that rightfully
and completely belongs to the victim. The
embezzlers title is void.

In recognizing realized revenue for long-term


construction contracts, accountants usually
follow two methods:

(3) 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.
Thus, in stock options, the difference
between the fair market value of the
shares at the time the option is exercised
and the option price constitutes additional
compensation income to the employee at
the time of exercise (not upon the grant or
vesting of the right).

(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.
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.

(4) 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.

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
which would result in the receipt of
income (Eisner v Macomber). Thus, stock

(5) 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
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UP COLLEGE OF LAW

TAXATION 1

amount of liability can be determined with


reasonable accuracy.

All events test requires:


(a) Fixing a right to income or liability to
pay; and
(b) The availability of reasonably accurate
determination of such income or
liability.

All of the above tests are followed in the


Philippines for purposes of determining
whether income is received by the taxpayer or
not during the year (Mamalateo).

It excludes unless it is exempt from income


tax under the Constitution, tax treaty, or
statute or it is subject to final withholding
income tax in accordance with the semiglobal or semi-schedular tax system
adopted by the Philippines.

I.1. DEFINITION
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

It is the difference between gross


sales/revenue and the cost of goods
sold/services. The definition of gross
income is broad and comprehensive to
include proceeds from sales of transport
documents. (Mamalateo)

Trade or business or the exercise of a


profession
Rents
Interests
Prizes and winnings
Compensation for services in whatever

I.2. CONCEPT OF INCOME


WHATEVER SOURCE DERIVED

form paid, including, but not limited to


fees, salaries, wages, commissions, and
similar items

FROM

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.)

(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]

The term gross income whenever used


without qualification, is comprehensive, as
defined above, and is different from the
limited meaning of gross income for
purposes of minimum corporate income tax
or the gross income tax of corporations.
Gross income includes gross profit from
ordinary business and other income not
subject to passive income tax or final
withholding tax.
Gross income means income, gain, or profit
subject to income tax.
It includes the compensation for personal
services, business income, profits, and
income derived from any source whatever
(whether legal or illegal)

I. GROSS INCOME

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

TAXATION LAW

The list here is NOT exclusive


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TAXATION 1

TAXATION LAW

foreign corporation; rental and royalties


from property located outside the
Philippines; and gains, profits and income
from sale of real property as well as from
personal property located outside the
Philippines. As a rule, incomes earned with
the Philippines are taxable.
(3) Derived from sources partly within or partly
without the Philippines. Examples: gains,
profits and income from transportation or
other services rendered partly within and
partly outside, and dividend received by a
resident citizen from a resident foreign
corporation. (Sec. 43(E), NIRC). In general,
when an income is earned partly from
within and partly from without, only income
within is taxable in the Philippines, except if
the taxpayer is a resident citizen or a
domestic corporation. A Filipino citizen or a
domestic corporation whose income is
derived from within and without the
Philippines is generally subject to tax.

I.3. 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)
(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]

I.4. CLASSIFICATION OF INCOME AS TO


SOURCE
Source is ascribed to the place wherein the
income is earned. It is governed by the situs of
taxation. This classification of income is
necessary to determine whether such income is
subject to tax or not. Income may be:
(1) Derived entirely from sources within the
Philippines [Sec. 42A, NIRC]. Examples:
compensation for labor or service derived
from Philippine sources; interest on bonds,
notes, deposits and the like earned in the
Philippines; dividends declared by domestic
corporations; rentals and royalties from
property located within the Philippines; and
gains, profits and income from sale of real
property as well as from personal property
in the Philippines. As a rule, incomes earned
within the Philippines are taxable.
(2) Derived entirely from sources without the
Philippines [Sec. 42C, NIRC]. Examples:
compensation for labor or service rendered
by overseas contract workers; interest on
bonds, notes, deposits and the like earned
abroad; dividends declared by nonresident

I.5. SOURCES OF INCOME SUBJECT TO


TAX
i. 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.
It includes, but is not limited to, salaries and
wages, honoraria and emoluments, allowances
(e.g.,
transportation,
representation,
entertainment), commissions, fees (including
directors fees, if the director is, at the same
time, an employee of the payor-corporation),
tips, taxable bonuses, fringe benefits except
those subject to Fringe Benefit Tax (FBT) under
Section 33 of the Tax Code, and taxable
pensions and retirement pay (e.g. retirement
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TAXATION 1

benefits earned without meeting the


conditions for exemption thereof, such as
retirement of less than 50 years of age.)

TAXATION LAW

therein is not exempted. Services of the


household nature in or about a private home
include services rendered by cooks, maids,
butlers, valets, laundresses, gardeners,
chauffeurs of automobiles for family use. The
remuneration paid for the services which are
performed in or about rooming or lodging
houses, boarding houses, clubs, hotels,
hospitals
or
commercial
officer
or
establishments is considered as compensation.
Remuneration paid for services performed as a
private secretary, even if they are performed in
the employers home is considered as
compensation.

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

The term casual labor includes labor which is


occasional, incidental or regular. Not in the
course of the employers trade or business
includes labor that does not promote or
advance the trade or business of the employer.
The term remuneration paid for services
performed as an employee of a foreign
government or an international organization
includes not only remuneration paid for
services performed by ambassadors, ministers
and other diplomatic officers and employees
but also remuneration paid for services
performed as consular or other officer or
employee of a foreign government or as a nondiplomatic representative of such government.

Philippines for a foreign government or an


intl organization. [Sec. 78(A)]
Note: The term agricultural labor does not
include services performed in connection with
forestry, lumbering or landscaping.
The term remuneration for domestic services
refers to remuneration paid for services of a
household nature performed by an employee
in or about the private home of the person
whom he is employed. The services of
household personnel furnished to an employee
(except rank and file employees) by an
employer shall be subject to the fringe benefits
tax pursuant to Sec. 33 of the Tax Code. A
private home is the fixed place of abode of an
individual or family. If the home is utilized
primarily for the purpose of supplying board or
lodging to the public as a business enterprise,
it ceases to be a private home and
remuneration paid for services performed

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 not subject to
withholding tax on wages [RA 9504]. Provided,
however, that an employee shall not enjoy the
privilege of being a MWE and, therefore,
his/her entire earning are not exempt from
income tax and, consequently, from
withholding tax if he receives/earns additional
compensation such as commissions, honoraria,
fringe benefits, benefits in excess of the
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TAXATION 1

allowable statutory amount of P30,000,


taxable allowance, and other taxable income
other than the statutory minimum wage
(SMW), holiday pay, overtime pay, hazard pay
and night shift differential pay.

TAXATION LAW
entertainment, medical services, or so
called courtesy discounts on purchases),
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.

MWEs receiving other income, such as income


from the conduct of trade, business, or practice
of profession, except income subject to final
tax, in addition to compensation income are
not exempted from income tax on their income
earned during the taxable year.

Convenience of the Employer Rule


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

This rule, notwithstanding, the SMW, Holiday


Pay, overtime pay, night differential pay and
hazard pay shall still exempt from withholding
tax.
Forms of compensation and how they are
assessed
(1) Cash If compensation is paid in cash, the
full amount received is the measure of the
income subject to tax.
(2) Medium other than money If services are
paid for in a medium other than money (e.g.
shares of stock, bonds, and other forms of
property), 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.
(3) 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.
(4) Facilities and privileges of a relatively small
value - Facilities and privileges (such an

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)
The amount of de minimis benefits
confirming to the ceiling prescribed shall not
be considered in determining the P30,000
ceiling of other benefits excluded from gross
income under Section 32 (b)(7)(e) of the Tax
Code, Provided, that the excess of the de
minimis benefits over their respective ceilings
prescribed by these regulations shall be
considered as part of other benefits and the
employee receiving it will be subject to tax
only on the excess over the P30,000 ceiling,
Provided, further, that MWEs receiving, other
benefits exceeding the P30,000 limit shall be
taxable on the excess benefits, as well as on
his salaries, wages, and allowances, just like
an employee receiving compensation income
beyond the SMW. Any amount given by the
employer as benefits to its employees, whether
classified as de minimis benefits or fringe
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TAXATION 1

benefits, shall constitute as deductible


expense upon such employer. Where
compensation is paid in property other than
money, the employer shall make necessary
arrangements to ensure that the amount of the
tax required to be withheld is available for
payment to the BIR.

TAXATION LAW

COMPENSATION subject to withholding tax,


provided the following conditions are satisfied:
(a) It is for ordinary and necessary traveling and
representation or entertainment expenses
paid or incurred by the employee in the
pursuit of the employers trade, business or
profession; and
(b) The employee is required to account or
liquidate for the foregoing expenses.

Classification of Gross Compensation Income


Basic salary or wage
(a) Salary earnings received periodically for a
regular work other than manual labor.
Example: monthly salary of an employee
(b) Wages earnings received usually
according to specified intervals of work, as
by the hour, day, or week. Example: a
carpenters wage.

The excess of actual expenses over


advances made shall constitute taxable
income if such amount is not returned to the
employer. The employee is required to
account/liquidate for the expenses in
accordance with the specific requirements
of substantiation for each category of
expenses pursuant to Section 34 of the Tax
Code.

Backwages are subject to income tax and


withholding tax on wages [BIR Ruling No. DA073-2008]

Note:
Reasonable
amounts
of
reimbursements/advances for traveling and
entertainment expenses which are precomputed on a daily basis and are paid to an
employee while he is on an assignment or duty
are NOT subject to withholding tax on wages
and substantiation requirements.

Honoraria payments given in recognition for


services performed for which the established
practice discourages charging a fixed fee.
Example: honorarium of a guest lecturer
Fixed or variable allowances i.e. Transportation,
Representation, and other allowances such as
Cost of Living Allowances (COLA)

Commission usually a percentage of total


sales or on certain quota of sales volume
attained as part of incentive such as sales
commission.

General Rule: Fixed or variable transportation,


representation or other allowances that are
received by a public officer or employee of a
private entity, in addition to the regular
compensation fixed for his position or office is
COMPENSATION subject to withholding tax.
(Rev. Regs. 2-98)

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.

Exception: Any amount paid specifically, either


as advances or reimbursements for travelling,
representation and other bona fide ordinary
and necessary expenses incurred or reasonably
expected to be incurred by the employee in the
performance of his duties are NOT

Tips and Gratuities those paid directly to the


employee (usually by a customer of the
employer) which are not accounted for by the
employee to the employer. (taxable income but
47

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TAXATION 1

not subject to withholding tax) [RR NO. 2-98,


Sec. 2.78.1]

TAXATION LAW

(a) Connotes involuntariness on the part of the


official or employee
(b) The separation from the service of the
official or employee must not be asked for
or initiated by him.
(c) The separation was not of his own making.
(d) Such fact shall be duly established by the
employer by competent evidence which
should be attached to the monthly return
for the period in which the amount paid due
to the involuntary separation was made.
(e) Amounts received by reason of involuntary
separation remain EXEMPT from income tax
even if the official or the employee, at the
time of separation, had rendered less than
ten (10) years of service and/or is below fifty
(50) years of age.
(f) Any payment made by an employer to an
employer to an employee on account of
dismissal,
constitutes
compensation
regardless of whether the employer is
legally bound by contract, statute, or
otherwise, to make such payment.

Hazard or Emergency Pay additional


payment received due to the workers exposure
to danger or harm while working. It is normally
added to the basic salary together with the
overtime pay and night differential to arrive at
gross salary.
Retirement Pay a lump sum payment
received by an employee who has served a
company for a considerable period of time and
has decided to withdraw from work into privacy.
[RR 6-82, Sec. 2b]
In general, retirement pay is taxable except in
the following instances:
(1) SSS or GSIS retirement pays.
(2) Retirement pay (R.A. 7641) due to old age
provided the following requirements are
met:
(a) The retirement program is approved by
the BIR Commissioner;
(b) It must be a reasonable benefit plan. (Its
implementation must be fair and
equitable for the benefit of all
employees)
(c) The retiree should have been employed
for 10 years in the said company;
(d) The retiree should have been 50 years
old or above at the time of retirement;
and
(e) It should have been availed of for the first
time.

Pension 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. Pension
is taxable unless the law states otherwise, OR
unless the BIR approves the pension plan of a
private company.
Vacation and sick leave rules in determining
whether money received for vacation and sick
leave is taxable or not:
(a) If paid or availed of as salary of an employee
who is on vacation or on sick leave
notwithstanding his absence from work, it
constitutes TAXABLE compensation income.
[RR 6-82, 2d]
(b) Monetized value of unutilized VACATION
leave credits of ten (10) days or less which
were paid to private employees during the
year, and the monetized value of vacation
and sick leave credits paid to government

Separation pay taxable if VOLUNTARILY


availed of. It shall not be taxable if involuntary
i.e.
death,
sickness,
disability,
reorganization/merger of company and
company at the brink of bankruptcy or for any
cause beyond the control of the said official or
employee.
For any cause beyond the control.
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TAXATION 1

officials and employees are NOT subject to


income tax and to the withholding tax.
These are de minimis benefits. [RR no. 52011, Sec 2.78.1(A)(7)] Note: monetization of
sick leave credits of private employees even
if not exceeding 10 days is not exempt from
income tax and withholding tax on wages.
(c) Terminal leave or money value of
accumulated vacation and sick leave
benefits received by heir upon death of
employee is not taxable.

TAXATION LAW

Other forms of compensation other forms


received due to services rendered are
compensation paid in kind, e.g., insurance
premium paid by the employer for insurance
coverage where the heirs of the employee are
the beneficiaries is the employees income.
Note: Any amount which is required by law to
be deducted by the employer from the
compensation of an employee including the
withheld tax is considered as part of the
employees compensation and is deemed to be
paid to the employee as compensation at the
time the deduction is made. (This also applies
to deductions not required by law.)

Thirteenth month pay and other benefits - Not


taxable if the total amount received is P30,000
or less. Any amount exceeding P30,000 is
taxable. [Sec. 32 (7)e, NIRC]
Fringe Benefits and De Minimis
Fringe Benefits any good, service, or other
benefit furnished or granted by an employer, in
cash or in kind, in addition to basic salaries of
an individual employee [Sec. 33, NIRC]
De Minimis privileges of relatively small value
as given by the employer to his employees.
Fringe Benefits and De Minimis are not
considered compensation subject to income
tax and withholding tax.

Withholding Tax on Compensation Income


The income recipient (i.e., EE) is the person
liable to pay the tax on income, yet to improve
the collection of compensation income of EEs,
the State requires the ER to withhold the tax
upon payment of the compensation income.

ii. Fringe Benefits


Special treatment of 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

Overtime Pay premium payment received for


working beyond regular hours of work which is
included in the computation of gross salary of
employee. It constitutes compensation.

liable to remit the fringe benefit tax to the BIR


once fringe benefit is given to a managerial or
supervisory employee.

Profit Sharing the proportionate share in the


profits of the business received by the
employee in addition to his wages.
Awards for special services awards for past
services or suggestions to employers resulting
in the prevention of theft or robbery, etc. are
also compensations.

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.

Beneficial Payments such as where employer


pays the income tax owed by an employee are
additional compensation income.

Managerial employee: one who is vested with


the powers or prerogatives to lay down and
execute management policies and/or to hire,
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TAXATION 1

transfer, suspend, lay-off, recall, discharge,


assign or discipline employees.

TAXATION LAW

(10)
Life or health insurance and other nonlife insurance premiums or similar amounts
on excess of what the law allows.[Sec.
33(B)]

Supervisory employees: those who, in the


interest of the employer, effectively
recommend such managerial actions if the
exercise of such authority is not merely
routinary or clerical in nature but requires the
use of independent judgment.

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 represents: (a) the whole amount of
income realized by the employee which
includes the net amount of money or net
monetary value of property that has been
received; and (b) the amount of fringe
benefit tax due from the employee which
has been withheld and paid by the employer
for and in behalf of his employee..

All employees not falling within any of the


above definitions are considered rank-and-file
employees.
Fringe benefit tax is imposed on fringe benefits
received by supervisory and managerial
employees. The fringe benefits of rank and file
employees are treated as part of compensation
income subject to income tax and withholding
tax on compensation.

How GMV is determined


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

Definition
Fringe benefit means any good, service, or
other benefit furnished or granted by an
employer, in cash or in kind, in addition to
basic salaries, to an individual employee
(except rank and file employees) such as, but
not limited to the following:
(1) Housing
(2) Expense Account
(3) Vehicle of any kind
(4) Household personnel, such as maid, driver
and others
(5) Interest on loan at less than market rate to
the extent of the difference between the
market rate and actual rate granted.
(6) Membership fees, dues and other expenses
borne by the employer for the employee in
social and athletic clubs and similar
organizations
(7) Expenses for foreign travel
(8) Holiday and vacation expenses
(9) Educational assistance to the employee or
his dependents; and

Special Cases:
(a) For fringe benefits received by non-resident
alien not engaged in trade of business in the
Philippines (NRANETB), the tax rate is 25%
of the GMV. The GMV is determined by
dividing the actual monetary value of the
fringe benefit by 75% [100% - 25%].
(b) For fringe benefits received by alien
individuals and Filipino citizens employed
by regional or area headquarters, regional
operating headquarters, offshore banking
units (OBUs), or foreign service contractor
or by a foreign subcontractor engaged in
petroleum operations in the Philippines, or
by any of their Filipino individual employees
who are employed and occupying the same
positions as those occupied by the alien
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UP COLLEGE OF LAW

TAXATION 1

employees, the tax rate is 15% of the GMV.


The GMV is determined by dividing the
actual monetary value of the fringe benefit
by 85% [100% - 15%].
(c) What is the tax implication if the employer
gives fringe benefits to rank-and-file
employees? Fringe benefits given to a rankand-file employee are treated as part of his

TAXATION LAW

The exemption of any FB from the FBT shall


not be interpreted to mean exemption from
any other income tax imposed under the Tax
Code except if the same is likewise expressly
exempt from any other income tax imposed
under the Tax Code or under any other existing
law. Thus, if the FB is exempted from the FBT,
the same may, however, still form of the
employees gross compensation income which
is subject to income tax; hence, likewise
subject to withholding tax on compensation
income payment.

compensation income subject to normal tax


rate and withholding tax on compensation
income, except de minimis benefits and
benefits provided for the convenience of the
employer.

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]:

Payor of Fringe Benefit Tax (FBT): The employer


withholds and pays the FBT but the law allows

him to deduct such tax from his gross income.

(a) Monetized unused vacation leave credits of


private employees not exceeding ten (10)
days during the year;
(b) Monetized value of vacation and sick leave
credits paid to government officials and
employees;
(c) Medical cash allowance to dependents of
employees, not exceeding P750 per
employee per semester or P125 per month;
(d) Rice subsidy of P1,500 or one (1) sack of 50
kg. rice per month amounting to not more
than P1,500;
(e) Uniform and Clothing allowance not
exceeding P5,000 per annum (RR 8-2012)
(f) 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;
(g) Laundry allowance not exceeding P300 per
month;
(h) 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

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;
(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

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UP COLLEGE OF LAW

TAXATION 1

employee under an established written plan


which does not discriminate in favor of
highly paid employees;
(i) Gifts given during Christmas and major
anniversary celebrations not exceeding
P5,000 per employee per annum; and
(j) Daily meal allowance for overtime work and
night/graveyard shift not exceeding twentyfive percent (25%) of the basic minimum
wage on a per region basis;

TAXATION LAW

ZV = Zonal Value = value of the land or


improvement, as declared in the Real Property
Declaration Form
FMV = Fair Market Value = FMV as determined
by the Commissioner of Internal Revenue
Non-taxable housing fringe benefit:
(1) Housing privilege of the Armed Forces of
the Philippines (AFP) officials i.e, those of
the Philippine Army, Philippine Navy, or
Philippine Air Force
(2) A housing unit, which is situated inside of
adjacent to the premises of a business or
factory maximum of 50 meters from
perimeter of the business premises
(3) Temporary housing for an employee who
stays in housing unit for three months or
less

All other benefits given by employers which are


not included in the above enumeration shall
NOT be considered as "de minimis" benefits
and hence, shall be subject to withholding tax
on compensation (rank and file employees)
and FBT (managerial/supervisory employees).

Housing

Housing Privilege
(1) LEASE of residential
property for the
residential use of
employees

(2) Assignment of
residential property
owned by employer for
use of employees
(3) Purchase of residential
property in installment
basis for the use of the
employee
(4) Purchase of residential
property and
ownership is
transferred in the
name of the employee

Fringe Benefit Tax


Base (Monetary
Value)

Motor Vehicle

MV= 50% of lease


payments

(1) Purchased in the


name of the employee
(2) Cash given to
employee to purchase
in his own name
(3) Purchase on
installment, in the
name of employee
(4) Employee shoulders
part of the purchase
price, ownership in the
name of employee
(5) Employer owns and
maintains a fleet of
motor vehicles for use
of the business and of
employees
(6) Employer leases and
maintains a fleet for
the use of the
business and of
employees

Motor Vehicle

where MV =
monetary value of
the FB
MV= [5% (FMV or
ZV, whichever is
higher) x 50%]
MV= 5% x
acquisition cost
exclusive of
interest x 50%
MV= FMV or ZV,
whichever is
higher

52

Fringe Benefit Tax


Base
MV= acquisition
cost
MV= cash received
by employee
MV= acquisition
cost exclusive of
interest
MV= amount
shouldered by
employer
MV= (AC/5) x 50%

MV= 50% of rental


payment

UP COLLEGE OF LAW

TAXATION 1

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.

TAXATION LAW

Taxable
Net
Income

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.

Ordinary
Net Income

Ordinary Asset

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

Capital Asset

Gain from sale, exchange or other disposition


Ordinary Gain (part of
Gross Income)

Capital Gain

Loss from sale, exchange, or other disposition


Ordinary Loss (part of
Allowable Deductions
from Gross Income)

Capital Loss

Excess of Gains over Losses

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)

Part of Gross Income

Net Capital Gain

Excess of Losses over Gains


Part of Allowable
Deductions from
Gross Income

determines the tax implication and income tax


treatment, as follows:

Net Capital Loss

Types of Properties
Capital v. Ordinary Asset

Ordinary Assets

Capital Assets

(1)Stock in trade of the taxpayer or other property of


a kind which would properly be included in the
inventory of the taxpayer if on hand at the close
of the taxable year.
(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.

Property held by the taxpayer, whether or not


connected with 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 non-business properties, such as
family car, home appliances, jewelry.

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UP COLLEGE OF LAW

TAXATION 1

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)

TAXATION LAW

(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
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)

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 (2) shares
of stock of a domestic corporation with a
capital gains tax (final tax). 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.

When a capital gain or capital loss is sustained


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

The following percentages of the gain or loss


recognized upon the sale or exchange of a
capital asset shall be taken into account in
computing net capital gain, net capital loss,
and net income:
(a) If the taxpayer is an individual
100% if the capital asset has been held for
not more than 12 months; and
50% of the capital asset has been held for
more than 12 months
(b) If the taxpayer is a corporation
100%, regardless of the holding period of
the capital asset (Sec. 39(B), NIRC)

Note: For sale, barter, exchange or other forms


of disposition of shares of stock subject to the
5%/10% capital gains tax on the net capital
gain during the taxable year, the capital losses
realized from this type of transaction during
the taxable year are deductible only to the
extent of capital gains from the same type of
transaction during the same period. If the
transferor of the shares is an individual, the
rule on holding period and capital loss carryover will not apply, notwithstanding the
provisions of Section 39 of the Tax Code as
amended. (RR 6-2008, c.4)

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.
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UP COLLEGE OF LAW

TAXATION 1

(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. Thus, whether or not the seller
makes a profit from the sale of real property,
he has to pay 6% capital gains tax. In fact, her
has to pay the tax, even if he incurs an actual
loss from the sale thereof. (Note, however, that
where an individual sells his real property
classified as a capital asset to the government,
he has the option whether to be taxed at the
graduated income tax rates or at 6% capital
gains tax.)

TAXATION LAW

(3) Long term capital gain vis--vis Short term


capital gain
Long-term capital gain: Capital asset is held for
more than twelve months 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.
(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.
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,

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).

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)

Computation of the amount of gain or loss


Amount realized from sale or other
disposition of property
Less: Basis or Adjusted Basis
NET GAIN (LOSS)

(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)

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).

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UP COLLEGE OF LAW

TAXATION 1

TAXATION LAW

(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

(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.

(2) Cost or basis of the property exchanged in


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

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 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.

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
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).

The remainder, if any, of the gain


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

The gain shall be recognized in an


amount not in excess of the sum of such
money and the fair market value of such

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UP COLLEGE OF LAW

TAXATION 1

other property so received, which is not


distributed (Sec. 40 (C) (3) (b), NIRC).

TAXATION LAW

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.

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.

SUBSTITUTED
BASIS
OF
PROPERTY
TRANSFERRED:
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].

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.

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.

The remainder, if any, of the gain recognized


shall be treated as a capital gain.
SUBSTITUTED BASIS OF STOCK OR
SECURITIES RECEIVED BY TRANSFEROR
UPON THE EXCHANGE:
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
(b) The amount of any gain that was
recognized on the exchange.
Basis (Cost) of the stock received

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,
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

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
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UP COLLEGE OF LAW

TAXATION 1

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.

TAXATION LAW

(e) Control: ownership of stocks in a


corporation possessing at least fifty-one
percent (51%) of the total voting power of
all classes of stocks entitled to vote (Sec.
40(C)(6)(c), NIRC).
(6) Income tax treatment of capital loss

Meaning of merger, consolidation, control,


securities
(a) Merger and consolidation for tax purposes
shall mean (1) The ordinary merger or
consolidation; or (2) The acquisition by one
corporation of all or substantially all the
properties of another corporation solely for
stock (Sec. 40(C )(6)(b), NIRC).
(b) Requirements to establish merger or
consolidation
(1) Must be undertaken for a bona fide
business purpose and not solely for the
purpose of escaping the burden of
taxation
(2) In determining whether a bona fide
business purpose exists, each and every
step of the transaction shall be
considered and the whole transaction or
series of transaction shall be treated as a
single unit
(3) The property transferred must constitute
a substantial portion of the property of
the transferor (Sec. 40(C)(6)(b), NIRC).
Note: In determining whether the
property transferred constitutes a
substantial portion of the property of the
transferor, the term 'property' shall be
taken to include the cash assets of the
transferor (Sec. 40(C)(b), NIRC).
(c) Substantially All: the acquisition by one
corporation of at least 80% of the assets,
including cash, of another corporation,
which has the element of permanence and
not merely momentary holding.
(d) Securities: bonds and debentures but not
"notes" of whatever class or duration (Sec.
40(C)(6)(a), NIRC)

(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).
(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).

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UP COLLEGE OF LAW

TAXATION 1

(7) Dealings in real property situated in the


Philippines

TAXATION LAW

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

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.

Section 127 (d):


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.
(8) Dealings in shares of stock of Philippine
corporations

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):

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.
Persons not liable:
(a) Dealers in securities
(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.

Amount of Capital
Gain

Tax Rate

Not over P 100,000


On any amount in
excess of P 100,000

- 5%
- 10%

(9) Sale of principal residence


Principal residence: the family home of the
individual taxpayer (RR 14-2000)
Disposition of principal residence (capital
asset) is exempt from Capital Gains Tax,
provided:
(a) Sale or disposition of the old principal
residence;
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UP COLLEGE OF LAW

TAXATION 1

(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)

TAXATION LAW

In general, dividends are included in the gross


income of the stockholder, unless they are
exempt from tax or subject to final ax at
preferential rate under the Tax Code.
1. Cash dividend
Dividends are included in the gross income
of the stockholder, unless they are exempt
from tax or subject to tax at preferential
rate under the NIRC. Cash dividend is the
most common form of dividend, valued at
the amount of money received by the
stockholder. Cash dividend and property
dividend are subject to income tax.
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.

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.
(a) Interest Income
An earning derived from depositing or lending
of money, goods or credits [Valencia and
Roxas] e.g., interest income from government
securities such as Treasury Bills.
Unless exempted by law, interest income
received by the taxpayer, whether or not
usurious, is subject to income tax.
(b) Dividend Income
A form of earnings derived from the
distribution made by a corporation out of its
earnings or profits and payable to its
stockholders, whether in money or in property.
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TAXATION 1

3. Property dividend
Dividends are included in the gross income
of the stockholder, unless they are exempt
from tax or subject to tax at preferential
rate under the NIRC. Cash dividend and

TAXATION LAW
dividend income, but rather is treated in
effect, as a sale of shares of stock resulting
in capital gain or loss. 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.
Where property is distributed in
liquidation, the amount received is the
FMV of such property. The income is
subject to ordinary income tax rates and
NOT to the FWT on dividends.

property dividend are subject to income


tax.
4. Liquidating dividend
Represents distribution of all the property
or assets of a corporation in complete
liquidation or dissolution. It is strictly not

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TAXATION 1

(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.

TAXATION LAW
(3) If the advance payment is, in fact, a
pre-paid rental, received by the
lessor under a claim of right and
without restriction as to its use,
then such payment is income to
the lessor.
(4) Pre-paid rent must be reported in
full in the year of receipt,
regardless of the accounting
method used by the lessor.

Where a person pays royalty to another for


the use of its intellectual property, such
royalty is generally a passive income of the
owner thereof subject to withholding tax.

(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:

(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]

Vessel
Aircraft,
machineries
and
other Equipment
Other assets

Rent income may be in the following


forms:
(a) Cash, at the stipulated price
(b) Obligations of the lessor to third
persons paid or assumed by the
lessee in consideration of the contract
of lease, e.g., real estate tax on the
property leased assumed by the
lessee
(c) Advance payment
(1) If the advance payment is actually
a loan to the lessor, or an option
money for the property, or a
security deposit for the faithful
performance of certain obligations
of the lessee, such advance
payment is not income to the
lessor.
(2) However, a security deposit that is
applied to rental is taxable income
to the lessor.

NonResident
Corporation

NonResident
Alien

4.5%
7.5%

25%
25%

30%

25%

(2) Lease of real property

Lessor

Tax Rate

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

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
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UP COLLEGE OF LAW

Lessor

TAXATION 1

Tax Rate

TAXATION LAW

the amount already reported as income on


account of the erection of such building or
improvement. No appreciation in value due to
causes other than the premature termination
of lease shall be included (Sec. 49, Rev. Reg.
No. 2).

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

If the building or other leasehold improvement


is destroyed before the expiration of the lease,
the lessor is entitled to deduct as a loss for the
year when such destruction takes place, the
amount previously reported as income because
of the erection of the improvement, less any
salvage value, to the extent that such loss was
not compensated by insurance (Sec. 49, Rev.
Reg. No. 2),

(3) Tax treatment of:


(b) VAT added to rental/paid by the lessee
(a) Leasehold improvements by lessee
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

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.
(c) 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.

iii. Annuities, Proceeds from life insurance


or other types of insurance
Annuities are installment payments received
for life insurance sold by insurance companies.

If for any reason than a bona fide purchase


from the lessee by the lessor, the lease is
terminated, so that the lessor comes into
possession or control of the property prior to
the time originally fixed, lessor receives
additional income for the year which the lease
is so terminated to the extent of the value of
such buildings or improvements when he
became entitled to such possession exceeds

The aleatory contract of life annuity binds the


debtor to pay an annual pension or income
during the life of one or more determinate
persons in consideration of a capital consisting
of money or other property, whose ownership is
transferred to him at once with the burden of
the income. [Art. 2021, New Civil Code]

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TAXATION 1

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.

vi. 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

iv. Prizes and awards


A prize is a reward for a contest or a
competition. It represents remuneration for an
effort reflecting ones superiority.

Forgiveness of indebtedness
The
cancellation
or
forgiveness
of
indebtedness may have any of three possible
consequences:
(a) It may amount to payment of income. If,
for example, an individual performs
services to or for a creditor, who, in
consideration thereof, cancels the
debt, income in that amount is realized
by the debtor as compensation for
personal services.
(b) It may amount to a gift. If a creditor
wishes merely to benefit the debtor,
and without any consideration
therefore, cancels the debt, the
amount of the debt is a gift to the
debtor and need not be included in the
latters report of income.
(c) It may amount to a capital transaction.
If a corporation to which a stockholder
is indebted forgives the debt, the
transaction has the effect of a payment
of dividend.

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,
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.

v. Pensions, retirement
separation pay

benefit,

TAXATION LAW

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. The rule has
both an inclusionary and an exclusionary
component, i.e., the recovery is included in the
taxpayers gross income to the extent that the
taxpayer obtained a tax benefit from the prior

or

(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)]
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UP COLLEGE OF LAW

TAXATION 1

years deduction, and the recovery is excluded


to the extent that the prior years deduction did
not provide a tax benefit.

TAXATION LAW

Recovery of accounts previously written-off


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)
Illustration:

Case A

Case B

Case C

500,000
(200,000)

400,000
(480,000)

500,000
(495,000)

300,000

(60,000)

5,000

(2,000)

(2,000)

(6,000)

298,000

(62,000)

(1,000)

Recovery of Amounts Written Off 2,000

2,000

6,000

Taxable Income on the Recovery

Year 1
Gross Income
Less: Allowable Deductions
(before write-off of Uncollectible
Accounts/Debts)
Taxable Income (Net Loss)
before write-off
Deduction
for
Accounts
Receivable written off
Taxable Income (Net Loss) after
write-off

Year 2

2,000

5,000

In Case A, the entire amount recovered


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

In Case C, only P5,000 of the P6,000


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

In Case B, none of the P2,000 recovered would


be recognized as gross income in Year 2. Note

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

that even without the write-off, the taxpayer


would not have paid any income tax anyway.
The taxable income before the write-off was
actually a net loss.
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UP COLLEGE OF LAW

TAXATION 1

TAXATION LAW

income tax benefit of said deduction (i.e., the


tax benefit rule applies).

Ultimately, the situs of interest income is the


residence of the debtor.

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

Dividends
Dividends received:
(1) from a domestic corporation; and
(2) from a foreign corporation, UNLESS
less than 50% of its gross income for the
previous 3-year period was derived from
sources within the Philippines [in which
case it will be treated as income partly
from within and partly from without].
The income which is considered as derived
from within the Philippines is obtained by
using the following formula:
Philippine Gross Income* x Dividend = Income
Within Worldwide Gross Income*
NOTE: * of the corporation giving the dividend
As a rule, the situs of dividend income is the
residence of the corporation declaring the
dividend.

Note: The enumeration of tax refunds that are


not taxable (income) is derived from an
enumeration of tax payments that are not
deductible from gross income.

Services
Compensation for labor or personal services
performed in the Philippines: As a rule, the
situs of compensation is the place of
performance of the services.

If a tax is not an allowable deduction from


gross income when paid (no reduction of
taxable income, hence no tax benefit), the
refund is not taxable.

SOURCE RULES IN DETERMINING


INCOME
FROM
WITHIN
AND
WITHOUT

Rentals and Royalties


From property located in the Philippines or
from any interest in such property, including
rentals or royalties for
(1) The use of or the right or privilege to use in
the Philippines any copyright, patent, design
or model, plan, secret formula or process,
goodwill, trademark, trade brand or other
like property or right;
(2) The use of, or the right to use in the
Philippines any industrial, commercial or
scientific equipment;

The following items of gross income shall be


treated as gross income from sources WITHIN
the Philippines:
Interests
Derived from sources within the Philippines,
and interests on bonds, notes or other interestbearing obligation of residents.
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UP COLLEGE OF LAW

TAXATION 1

(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 (a), any such equipment as
is mentioned in (b) or any such knowledge
or information as is mentioned in (c);
(5) The supply of services by a nonresident
person or his employee in connection 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) Technical advice, assistance or services
rendered in connection with technical
management or administration of any
scientific, industrial or commercial
undertaking, venture, project or scheme;
and
(7) The use of or the right to use:
(i) Motion picture films;
(ii) Films or video tapes for use in
connection with television; and
(iii) Tapes for use in connection with
radio broadcasting.

Place of
PURCHASE
Philippines

TAXATION LAW
Place of
SALE
Abroad

Treatment**

Income from
Without
Abroad
Philippines Income from
Within
** in other words, the situs of the income from
the sale of personal property is the place of
sale.
Exceptions:
(1) Gain from the sale of shares of stock in
a domestic corporation
Treated as derived entirely from
sources
within
the
Philippines
regardless of where the said shares are
sold.
(2) Gains from the sale of (manufactured)
personal property:
(a) produced (in whole or in part) by
the taxpayer within and sold
without the Philippines, or
(b) produced (in whole or in part) by
the taxpayer without and sold
within the Philippines
Treated as derived partly from sources
within and partly from sources without
the Philippines.

As a rule, the situs of rental income is the place


where the property is located. The situs of
royalty income is where the rights are exercised.

Sale Of Real Property


As a rule, the situs of the income from sale of
real property is where the realty is located.

Place of
PRODUCTION
Philippines

Place of
SALE
Abroad

Abroad

Philippines

Treatment
Partly within,
partly without
Partly within,
partly without

Shares of Stock of Domestic Corporation


Treated as derived entirely from sources within
the Philippines regardless of where the said
shares are sold.

Sale Of Personal Property


General Rule: Gains, profits and income from
the sale of personal property, subject to the
following rules:

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TAXATION 1

SITUS OF INCOME TAXATION


Income

The exclusion of income should not be


confused with the reduction of gross income by
the application of allowable deductions. While
exclusions are simply not taken into account in
determining gross income, deductions are
subtracted from gross income to arrive at net
income. [De Leon]

Situs

Interest
Dividends
Services
Rentals
Royalties
Sale of Real
Property
Sale
of
Personal

TAXATION LAW

Residence of the debtor


Residence of the corporation
Place of performance
Location of the property
Place of exercise
Location of realty

Items of Exclusions representing return of


capital
(a) Amount of capital is generally recovered
through deduction of the cost or adjusted
basis of the property sold from the gross
selling price or consideration, or through
the deduction from gross income of
depreciation relating to the property used
in trade or business before it is sold.
(b) It may also related to indemnities, such as
proceeds of life insurance paid to the
insureds beneficiaries and return of
premiums paid by the insurance company
to the insured under a life insurance,
endowment or annuity contract.
(c) Damages, in certain instances, may also be
exempt because they represent return of
capital.

(a) Tangible
(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
(b) Intangible
General rule: Place of Sale

Exception: Shares of stock of


domestic corporations: Place
of incorporation
of Place of incorporation
of

Items of Exclusion because it is subject to


another internal revenue tax
The value of property acquired by gift, bequest,
devise or descent is exempt from income tax
on the part of the recipient because the receipt
of such property is already subject to transfer
taxes (estate tax or donors tax)

Shares
Stock
Domestic
Corporation

EXCLUSIONS FROM GROSS INCOME

Items of Exclusions because they are expressly


exempt from income tax
(1) Under the Constitution
(2) Under a tax treaty
(3) Under special laws

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.

Rationale for the exclusions


The term exclusions refers to items that are
not included in the determination of gross
income because:
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UP COLLEGE OF LAW

TAXATION 1

(a) They represent return of capital or are not


income, gain or profit;
(b) They are subject to another kind of internal
revenue tax;
(c) They are income, gain or profit expressly
exempt from income tax under the
Constitution, tax treaty, Tax Code, or a
general or special law. [Mamalateo]

Tax Credit refers to amounts subtracted from


the computed tax in order to arrive at taxes
payable.

(A)
EXCLUSIONS
CONSTITUTION

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.

THE

(B) EXCLUSIONS UNDER THE TAX CODE


(SEC. 32, NIRC)
(a)
Proceeds of life insurance policies.
General rule: The proceeds of life insurance
policies 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, if
such amounts are held by the insurer under an
agreement to pay interest thereon, the interest
payments received by the insured shall be
included in gross income. The interest income
shall be taxed at the graduated income tax
rates.

Exclusions distinguished from deductions and


tax credit
Exclusions from gross income refer to flow
of wealth to the taxpayer which are not
treated as part of gross income for
purposes of computing the taxpayers
taxable income, due to the following
reasons: (1) it is exempted by the
Constitution or a statute; or (2) it does not
come within the definition of income.
Deductions, on the other hand, are the
amounts which the law allows to be
subtracted from gross income in order to
arrive at net income.
Exclusions pertain to the computation of
gross income, while deductions pertain to
the computation of net income.

UNDER

(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.

Taxpayers who may avail of the exclusions

Exclusion

TAXATION LAW

(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.
This refers to the cash surrender value of the
contract.

Exclusions are something received or


earned by the taxpayer which do not form
part of gross income while deductions are
something spent or paid in earning gross
income.

Exception: If the amounts received by the


insured (when added to the amounts already
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UP COLLEGE OF LAW

TAXATION 1

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.

TAXATION LAW

whether by suit or agreement, on account of


such injuries or sickness are excluded from
gross income.
Examples of nontaxable and taxable damages
recoveries are:

(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, 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. 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 sums
subsequently paid by the transferee are
exempt from taxation.

Nontaxable

compensation
for
damages on account
of

Taxable

compensation
for
damages on account
of

Personal
(physical) Actual damages for
injuries or sickness
loss of anticipated
profits
Any other damages
recovered on account
of personal injuries or
sickness

.Moral and exemplary


damages awarded as
a result of break of
contract

Exemplary and moral Interest


damages for out-of- taxable
court
settlement, above
including attorneys
fees

for nondamages

Alienation of affection, Any damages as


or breach of promise compensation
for
to marry
unrealized income

(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).

Any amount received


as a return of capital
or reimbursement of
expenses
(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.
(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

(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,
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UP COLLEGE OF LAW

TAXATION 1

(3) Retirement Benefits from foreign


government agencies
(4) Veterans benefits
(5) Benefits under the Social Security Act
(6) GSIS benefits

A 'reasonable private benefit plan' means a


pension, gratuity, stock bonus or profit-sharing
plan maintained by an employer for the benefit
of some or all of his employees wherein
contributions are made by such employer, or
employees, or both for the purpose of
distributing to such employees the earnings
and principal of the fund thus accumulated by
the trust in accordance with such plan (trust
fund)

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.

RA 7641

RPBP

Retiring
employee
must be in the service
of same employer
CONTINUOUSLY for
at least five (5) years
Retiring
employee
must be at least sixty
(60) years old but not
more than 65 years of
age at the time of
retirement
Availed of only once,
and only when there
is no RPBP

Retiring official or
employee must have
been in the service of
the same employer for
at least ten (10) years.
Retiring official or
employee must be at
least fifty (50) years
old at the time of
retirement

TAXATION LAW

Further, it should be provided in the plan that


at no time prior to the satisfaction of all
liabilities with respect to employees under any
trust, shall any part of the corpus or income of
the fund be used for, or be diverted to, any
purpose other than for the exclusive benefit of
his employees.
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.

Retiring
employee
shall
not
have
previously availed of
the privilege under a
retirement
benefit
plan of the same or
another employer
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

The separation must not be of his own making.


Notes:
Sickness must be life-threatening or one
which renders the employee incapable of
working
Retrenchment of the employee due to
unfavorable business conditions or
financial reverses is considered as
involuntary.
However, resignation or
availment of an optional early retirement
plan is voluntary and bars a claim under
this provision.

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TAXATION LAW
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]

BIR Ruling 143-98: The terminal leave pay


(amount paid for the commutation of leave
credits) of 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 non-resident citizens or aliens
who come to reside permanently in the
Philippines from foreign government
agencies and other institutions, private or
public;
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
Social Security Act benefits Payments of
benefits received under the Social Security
Act of 1954 (RA 8282), as amended, e.g.,
Maternity Benefits
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]
Winnings, prizes and award, including those
in sports competitions.All prizes and
awards granted to athletes:
(1) in local and intern ational sports
competitions
and
tournaments

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

(C) UNDER SPECIAL LAWS


Personal Equity and Retirement Account
(1) Under R.A. 6657 (Comprehensive Agrarian
Reform Package Law), gain arising from the
transfer of agricultural property covered by
the law shall be exempt from capital gains
tax.
(2) Under R.A. 6938 (Cooperative Code of the
Philippines), as amended by R.A. 9520,
cooperatives transacting business with
both members and non-members shall not
be subject to tax on their transactions with
members. In relation to this, the
transactions of members with the
cooperative shall not be subject to any
taxes and fees, including but not limited to
final taxes on members' deposits.
(3) Under R.A. 7916 (PEZA Law), as amended,
PEZA-registered enterprises are given
income tax holidays of six or four years
from the date of commercial operations,
depending on whether their activities are
considered pioneer or non-pioneer.
(4) Under R.A. 9178 (Barangay Micro Business
Enterprises Act of 2002), BMBEs shall be
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exempt from income tax for income arising


from the operation of the enterprise.

TAXATION LAW

Types of deductions
There are three (3) types of deductions from
gross income:
(1) 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;
(2) 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
(3) the special deductions in Sections 37 and
38 of the NIRC, and in special laws like the
BOI law (E.O. 226).

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.
In general, deductions or allowable deductions
are business expenses and losses incurred
which the law allows to reduce gross business
income to arrive at net income subject to tax.
[Sec. 65, Rev. Reg. No. 2]
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.

General rules:
(a) Deductions must be paid or incurred in
connection with the taxpayers trade,
business or profession
(b) Deductions must be supported by
adequate receipts or invoices (except
standard deduction)
(c) Additional requirement relating to
withholding

If the exemption is not expressly stated in the


law, the taxpayer must at least be within the
purview of the exemption by clear legislative
intent [Commissioner of Customs v. Philippine
Acetylene Co., G.R. No. L-22443 May 29, 1971]

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.

However, if there is an express mention in the


law or if the taxpayer falls within the purview of
the exemption by clear legislative intent, the
rule on strict construction will not apply.
[Commissioner v. Anoldus Caprentry Shop, G.R.
No. 71122 March 25, 1988]

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)
(a) Sale of inventory of goods by
manufacturers and dealers of properties:
In sales of goods representing inventory,
the amount received by the seller consists
of return of capital and gain from sale of
goods or properties. That portion of the
receipt representing return of capital is not

The purpose of deductions from gross income


is to provide the taxpayer a just and reasonable
tax amount as the basis of income tax. It is
because many taxpayers spend adequate
expenditures in order to obtain a legitimate
income.

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TAXATION LAW

subject to income tax. Accordingly, cost of


goods manufactured and sold (in the case
of manufacturers) and cost of sales (in the
case of dealers) is deducted from gross
sales and is reflected above the gross
income line in a profit and loss statement.

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.

(b) Sale of stock in trade by a real estate


dealer and dealer in securities:
Real estate dealers and dealers in
securities are ordinarily not allowed to
compute the amount representing return
of capital through cost of sales. Rather
they are required to deduct the total cost
specifically identifiable to the real property
or shares of stock sold or exchanged.

Includes:
(a) Salaries, wages, and other forms of
compensation for personal services
actually rendered, including the grossedup monetary value of fringe benefits
furnished or granted by the employer to
the employee
(b) Travel expenses
(c) Rentals
(d) Entertainment, recreation and amusement
expenses
(e) Other expenses such as repairs or those
incurred by farmers and other persons in
agribusiness

(c) Sale of services:


Their entire gross receipts are treated as
part of gross income.

ITEMIZED DEDUCTIONS
Requisites for deductibility of business
expenses.
(a) Ordinary AND necessary;
ORDINARY - normal and usual in relation
to the taxpayer's business and surrounding
circumstances; need not be recurring
NECESSARY - appropriate and helpful in
the development of taxpayer's business or
are proper for the purpose of realizing a
profit or minimizing a loss
(b) Paid or incurred during the taxable year;
(c) Others: (not in the SC syllabus)
(1) Paid or incurred in carrying on 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);

These are enumerated in Section 34 of the


NIRC. Additional deductions are granted to
insurance companies in Section 37, while
losses from wash sales of stock or securities by
a dealer in securities are provided for in Section
38 of the NIRC. Other itemized deductions
could be granted under general or special laws,
e.g. additional training expenses are allowed
to enterprises registered with PEZA, BOI, and
SBMA.
Timing of Claiming Deductions
A taxpayer has the right to deduct all
authorized allowances for the taxable year. As
a rule, if he does not within any year deduct
certain of his expenses, losses, interest, taxes
or other charges, he cannot deduct them from
the income of the next of any succeeding year
[Sec. 76, Income Tax Regulations]

EXPENSES
Business expenses deductible from gross
income include the ordinary and necessary
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(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.

TAXATION LAW

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.
KINDS OF BUSINESS EXPENSES
These are:
(1) Salaries, wages and other forms of
compensation for personal services
actually rendered, including the grossedup monetary value of the fringe benefit
subjected to fringe benefit tax which tax
should have been paid (Compensation for
(2) Travelling expenses
(3) Cost of materials
(4) Rentals and/or other payments for use or
possession of property
(5) Repairs and maintenance
(6) Expenses under lease agreements
(7) Expenses for professionals
(8) Entertainment expenses
(9) Political campaign expenses
(10) Training expenses
(11) Others

Note: The expenses allowable to a nonresident alien or a foreign corporation consist


of only such expenses as are incurred in
carrying on any business or trade conducted
within the Philippines exclusively. [Sec. 77 RR
2]
COHAN Rule: This relief will apply if the
taxpayer has shown that it is usual and
necessary in the trade to entertain and to incur
similar kinds of expenditures, there being
evidence to show the amounts spent and the
persons entertained, though not itemized. In
such a situation, deduction of a portion of the
expenses incurred might be allowed even if
there are no receipts or vouchers. Absence of
invoices, receipts or vouchers, particularly lack
of proof of the items constituting the expense
is fatal to the allowance of the deduction
[Gancayco v. Collector, G.R. No. L-13325, April
20, 1961]

Salaries, wages and other forms of


compensation for personal services actually
rendered, including the grossed-up monetary
value of the fringe benefit subjected to fringe
benefit tax which tax should have been paid

Substantiation requirement Sec. 34(A)(1)(b),


NIRC: No deduction from gross income shall be
allowed unless the taxpayer shall substantiate
with sufficient evidence, such as official
receipts or other adequate records: (1) the
AMOUNT of the expense being deducted, and
(2) the DIRECT CONNECTION or relation of the
expense being deducted to the development,
management, operation and/or conduct of the
trade, business or profession of the taxpayer.

Given for personal services must be actually


rendered and reasonable.
For income payment to be allowed as
deduction, the withholding tax must have been
paid [RR No. 12-2013].
Bonuses are deductible when:
(a) made in good faith
(b) given as additional compensation for
personal services actually rendered
(c) such payments, when added to the
stipulated salaries, do not exceed a

When to ACCRUE expenses: allevents test


states that under the accrual method of
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TAXATION 1

reasonable compensation for the services


rendered

TAXATION LAW

On the accrual basis, rent is deductible as


expense when liability is incurred during the
period of use. On cash basis, rent is deductible
when it is incurred and paid.

Traveling expenses
This include transportation expenses and
meals and lodging [Sections 65 and 66, Rev.
Reg. No. 2]
(1) Expenses must be reasonable and
necessary.
(2) Must be incurred or paid while away from
home
(3) Tax home is the principal place of business,
when referring to away from home
(4) Incurred or paid in the conduct of trade or
business.

If the advance payment is a prepaid rental,


such payment is taxable income to the lessor in
the year when it was received. However, an
advance payment is not deductible expense of
the lessee until the period is used. [Valencia
and Roxas]
Repairs and maintenance
(a) Incidental or ordinary repairs are
deductible.
Repairs
which
neither
materially add to the value of the property
nor appreciably prolong its life, but keep it
in an ordinarily efficient working condition,
may be deducted as expenses, provided
the plant or property account is not
increased by the amount of such
expenditure. The life of the asset referred
to is the probable, normal, useful life for
the purpose of the allowance for the return
of the capital investment not what the
life that would have been if no repairs had
been made after the property was
damaged by a casualty. Since the repairs
prolonged the lives of the said vessels of
petitioners, the disallowance must be
sustained. [Visayan Transportation Co. v.
CTA, CTA Case No. 1119, Sept. 30, 1964]

Note: However, necessary transportation


expenses of the taxpayer (which are different
from the transportation expenses included in
the term travel expenses) in its tax home
are deductible. Thus, a taxpayer operating its
business in Manila is allowed transportation
expenses from its office to its customers place
of business and back. But the transportation
expenses of an employee from his residence to
its office and back are not deductible as they
are considered personal expenses.
Cost of materials
Deductible only to the amount that they are
actually consumed and used in operation during
the year for which the return is made, provided
that their cost has not been deducted in
determining the net income for any previous
year.

(b) Extraordinary repairs are not deductible


they are capital expenditures
(1) Repairs which add material value to
the property or appreciably prolong its
life
(2) Repairs in the nature of replacement,
to the extent that they arrest
deterioration and appreciably prolong
the life of the property, should be
charged against the depreciation
reserves if such account is kept. [Sec.
68, Rev. Regs. 2]

Rentals and/or other payments for use or


possession of property
(1) Required as a condition for continued use or
possession of property.
(2) For purposes of trade business or profession.
(3) Taxpayer has not taken or is not taking title
to the property or has no equity other than
that of lessee, user, or possessor.

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TAXATION LAW

Entertainment/Representation expenses
These are entertainment, amusement and
recreation (EAR) expenses incurred or paid
during the year that are directly connected to
the development, management and operation
of the trade, business or profession of the
taxpayer.

All maintenance expenses on account of nondepreciable vehicles for taxation purposes are
disallowed in its entirely. [RR No. 12-2012]
Expenses under lease agreements
Requisites for deductibility:
(1) Required as a condition for continued use
or possession;
(2) For purposes of the trade, business or
possession;
(3) Taxpayer has not taken or is not taking title
to the property or has no equity other than
that of lessee, user, or possessor.

Requisites for deductibility:


(a) Reasonable in amount.
(b) Paid or incurred during the taxable period.
(c) Directly connected to the development,
management, and operation of the trade,
business or profession of the taxpayer, or
that are directly related to or in furtherance
of the conduct thereof.
(d) Not to exceed such ceiling as the Secretary
of Finance prescribe (under RR 10-02, in
no case to exceed 0.50% of net sales for
sellers of goods or properties or 1% of net
revenues for sellers of services, including
taxpayers engaged in the exercise of
profession and use or lease of properties)
(e) Not incurred for purposes contrary to law,
morals, public policy or public order.
(f) Must be substantiated with sufficient
evidence such as receipts and/or adequate
records.

Expenses for professionals


Deductible in the year the professional services
are rendered, not in the year they are billed,
provided that the all events is present.
All events test requires:
(a) Fixing a right to income or liability to pay;
and
(b) The availability of reasonably accurate
determination of such income or liability.
The all-events test does not demand that the
amount of income or liability be known
absolutely; it only requires that a taxpayer has
at its disposal the information necessary to
compute the amount with reasonable accuracy,
which implies something less than an exact or
completely accurate amount. [Commissioner v.
Isabela Cultural Corporation, GR. 172231, Feb. 12,
2007]

Exclusions from EAR expenses:


(1) Expenses
which
are
treated
as
compensation or fringe benefits for
services rendered under an employeremployee relationship
(2) Expenses for charitable or fund raising
events
(3) Expenses for bona fide business meeting of
stockholders, partners or directors
(4) Expenses for attending or sponsoring an
employee to a business league or
professional organization meeting
(5) Expenses for events organized for
promotion marketing and advertising,
including concerts, conferences, seminars,

A professional may claim as deductions the


cost of supplies used by him in the practice of
his profession, expenses paid in the operation
and repair of transportation equipment used in
making professional calls, dues to professional
societies and subscriptions to professional
journals. [Mamalateo]

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workshops, conventions and other similar


events; and
(6) Other expenses of a similar nature.

TAXATION LAW
(b)
To deduct
depreciation thereof.

allowances

for

Thus, where the expansion expense has been


claimed as a deduction, no further claims for
yearly depreciation of the school facilities are
allowed.

Political campaign expenses


Amount expended for political campaign
purposes or payments to campaign funds are
NOT deductible either as business expenses or
as contribution [CTA Case No. 695, April 30,
1969, citing Mertens]

Advertising Expenses
The media advertising expenses which were
found to be inordinately large and thus, not
ordinary, and which were incurred in order to
protect the taxpayers brand franchise which is
analogous to the maintenance of goodwill or
title to ones property, are not ordinary and
necessary
expenses
but
are
capital
expenditures, which should be spread out over
a reasonable period of time. [CIR v. General
Foods Phils. Inc, GR No. 143672, April 24, 2003]

Training expenses
Under Section 30 of the Tax Code, as
implemented by Sec. 20 of the Revenue
Regulations No. 2, organization and preoperating expenses of a corporation (including
training expenses) are considered as capital
expenditures and are therefore, not deductible
in the year they are paid or incurred. But
taxpayers who incur these expenses and
subsequently enter the trade or business to
which the expenditures relate can elect to
amortize these expenditures over a period not
less than sixty (60) months. [BIR Ruling 102-97,
Sept. 29, 1997]

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.
(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,

This rule, however, does not apply to a


situation where an existing corporation incurs
these same expenditures for the purpose of
expanding its business in a new line of trade,
venture or activity.
Others
(a) Expenses Allowable to Private Educational
Institutions:
(b) In addition to the expenses allowable as
deductions under the NIRC, a private
proprietary educational institution may at
its OPTION, elect either:
(a)
To
deduct
expenditures
otherwise considered as capital outlays
or depreciable assets incurred during the
taxable year for the expansion of school
facilities, OR

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
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of passive income for interest income); effective


January 1, 2009.

TAXATION LAW
(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

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.

INTEREST SUBJECT TO SPECIAL RULES.


Interest paid in advance
(1) 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.
(2) But the deduction shall be allowed in the
year the indebtedness is paid
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

Related Taxpayers
(a) Between members of the family, i.e.
brothers and sisters (whether by the whole
or half-blood), spouse, ancestor, and lineal
descendants; or
(b) Except in case of distributions in
liquidation, between an individual and a
corporation, 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

Interest expense incurred to acquire property


for use in trade/business/profession
At the option of the taxpayer, interest expense
on a capital expenditure may be allowed as:
(1) A deduction in full in the year when
incurred;
(2) A capital expenditure for which the
taxpayer may claim only as a deduction
the periodic amortization of such
expenditure.
Should the taxpayer elect to deduct the
interest payments against its gross income, the
taxpayer cannot at the same time capitalize the
interest payments. In other words, the taxpayer
is not entitled to both the deduction from gross
income and the adjusted (increased) basis for
determining gain or loss and the allowable
depreciation charge. [Paper Industries Corp. v.
Commissioner, 250 SCRA 434]

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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]

TAXATION LAW

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
(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

This limitation is apparently intended to


counter the tax arbitrage scheme where a
taxpayer obtains an interest-bearing loan and
places the proceeds of such loan in
investments that yield interest income subject
to preferential tax rate of 20% final
withholding tax. [Valencia and Roxas]

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.

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]

Non-deductible taxes.
General Rule: All taxes, national or local, paid
or incurred during the taxable year in
connection with the taxpayer's profession,
trade or business, are deductible from gross
income

Although interest payment for delinquent


taxes is not deductible as tax, the taxpayer is
not precluded thereby from claiming said
interest payment as deduction as such. [CIR v.
Vda. de Prieto, 1960]

Exceptions:
(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)
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

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.

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Tax credit vis--vis deduction.


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

Tax Credit

TAXATION LAW

(1) Non-resident citizens


(2) Aliens, whether resident or non-resident
(3) Foreign corporations, whether resident on
non-resident
Note: Tax credits for foreign taxes are allowed
only for income derived from sources outside
the Philippines. The above taxpayers are not
entitled to tax credit; they are taxable only on
income derived from Philippine sources.

Tax Deduction

Taxes are deductible Taxes are deductible


from the Phil. Income from gross income in
tax itself
computing
the
taxable income
Effect:
Reduces Effect:
Reduces
Philippine income tax taxable income upon
liability
which the tax liability
is calculated
Sources: Only foreign Sources: Deductible
income taxes may be taxes (e.g. business
claimed as credits tax, excise tax)
against
Philippine
income tax.

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.
Formula:
Limit #1
Taxable
Limit on
Income Per
amount
Foreign
of tax
Phil.
Country
x
=
credit
Income Tax
(Per
Worldwide
Country
Taxable
Limit)
Income

An amount subtracted from an individual's or


entity's tax liability to arrive at the total tax
liability. A tax credit reduces the taxpayer's
liability, compared to a deduction which
reduces taxable income upon which the tax
liability is calculated. A credit differs from
deduction to the extent that the former is
subtracted from the tax while the latter is
subtracted from income before the tax is
computed. [CIR v. Bicolandia Drug Corp. G.R.
No. 148083, July 21, 2006]
The following may claim tax credits:
(1) Resident citizens
(2) Domestic corporations, which include all
partnerships except general professional
partnerships
(3) Members
of
general
professional
partnerships
(4) Beneficiaries of estates or trusts

Limit #2
Taxable
Income For
all Foreign
Countries
x
Worldwide
Taxable
Income

The following may NOT claim tax credits:


81

Phil.
=
Income Tax

Limit on
amount
of tax
credit
(World
Wide
Limit)

UP COLLEGE OF LAW

TAXATION 1

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.

TAXATION LAW

No loss is recognized in the following.


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

FTC Limitations lowest of the 3:


(1) Actual FTC
(2) For taxes paid to one foreign country
(3) For taxes paid to 2 or more foreign
countries

Other types of losses.


Capital losses
(1) Incurred in the sale or exchange of capital
assets (allowable only to the extent of
capital gains, 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);
(2) Resulting from securities becoming
worthless and which are capital assets
(considered loss from sale or exchange) on
last day of the taxable year;
(3) Losses from short sales of property;
(4) Losses due to failure to exercise privileges
or options to buy or sell property.

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.

Securities becoming worthless


(a) Loss in shrinkage in value of stock through
fluctuation in the market is not deductible
from gross income. (To be deductible, the
loss must be actually suffered when the
stock is disposed of.)
(b) 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.
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

In case a non-depreciable vehicle is sold at a


loss, the loss incurred from the sale of nondepreciable vehicle is not allowed as a
deduction. [RR No. 2-2013]

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UP COLLEGE OF LAW

TAXATION 1

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

TAXATION LAW

Requisites for NOLCO:


(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.

General rule: Not deductible from gross income


Exception: If by a dealer in securities in the
course of ordinary business, it is deductible.
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.

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.
(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

NOLCO (Net Operating Loss Carry Over)


Net operating loss (NOL)is the excess of
allowable deductions over gross income for
any taxable year immediately preceding the
current taxable year.
NOLCO: The NOL of the business or enterprise
which had not been previously offset as
deduction from gross income shall be carried
over as a deduction from gross incomefor the
next three (3) consecutive taxable years
immediately following the year of such loss,
provided however, that any net loss incurred in
a taxable year during which the taxpayer was
exempt from income tax shall not be allowed
as a deduction. [Sec. 34(3)(D), NIRC]
Exception: Mines other than oil and gas wells,
where a net operating loss without the benefit
of incentives provided for under EO No. 226
(Omnibus Investments Code) incurred in any of
the first ten (10) years of operation may be
carried over as a deduction from taxable
income for the next five (5) years immediately
following the year of such loss.

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.

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TAXATION 1

Other Losses:
(1) Abandonment
lossesin
petroleum
operation and producing well.
(2) Losses due to voluntary removal of
buildingincident
to
renewal
or
replacements are deductible from gross
income.
(3) Loss of useful value of capital assetsdue 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
taxpayersare
not
recognized, but the gains are taxable.

TAXATION LAW

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
declared closed due to insolvency or
similar reason
The taxpayer must show that the debt is
indeed uncollectible even in the future. He
must prove that he exerted diligent efforts to
collect:
(1) Sending of statement of accounts
(2) Collection letters
(3) Giving the account to a lawyer for
collection
(4) Filing the case in court [Phil. Refining Corp.
v. CA, G.R. No. 118794, May 8, 1996]

Losses of farmers incurred in the operation of


farm business are deductible.

BAD DEBTS
Debts resulting from the worthlessness or
uncollectibility, in whole or in part, of amounts
due the taxpayer actually ascertained to be
worthless and the corresponding receivable
should have been written off or charged off
within the taxable year.

In ascertaining the debt to be worthless, it is


not enough that the taxpayer acted in good
faith. He must show that he had reasonably
investigated the relevant facts from which it
became evident, in the exercise of sound,
objective business judgment, that there
remained no practical, but only a vague
prospect that the debt would be paid [Collector
v. Goodrich, 1967]

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

Rev. Reg. No. 5-1999:


Actually ascertained to be worthless
(1) Determination of worthlessness must
depend upon the particular facts and
circumstances of the case. A taxpayer
may not postpone a bad debt deduction
on the basis of a mere hope of ultimate
collection or because of a continuance of
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UP COLLEGE OF LAW

TAXATION 1

attempts to collect, where there is no


showing
that
the
surrounding
circumstances differ from those relating to
other notes which were charged off in a
prior year
(2) Accounts receivable may be written off as
bad debts even without conclusive
evidence that they had definitely become
worthless when:
(a) the amount is insignificant; and
(b) collection through court action may
be more costly to the taxpayer

TAXATION LAW

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]
No depreciation shall be allowed for yachts,
helicopters, airplanes and/or aircrafts, and
land vehicles which exceed the threshold
amount of P2,400,000, unless the taxpayers
main line of business is transport operations or
lease of transportation equipment and the
vehicles purchased are used in the operations.
[RR No. 12-2012]

Actually charged off from the taxpayers book


of accounts
Receivable which has actually become
worthless at the end of the taxable year has
been cancelled and written off. Mere recording
in the books of account of estimated
uncollectible accounts does not constitute a
write-off.

Methods
of
allowance.
(1) Straight-line

Effect of recovery of bad debts.


Tax Benefit Rule on Bad Debts
Bad debts claimed as 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 the
extent of the income tax benefit of said
deduction. Also called the equitable doctrine
of tax benefit.
(1) Allowance must be reasonable
(2) Charged off during the taxable year
from the taxpayers books of accounts.
(3) Does not exceed the acquisition cost of
the property.

computing

(2) Declining balance

(3) Sum-of-the-yeardigit (SYD)


(4) Any other method
which may be
prescribed by the
Secretary
of
Finance upon the
recommendation of
the CIR

DEPRECIATION
An annual reasonable allowance to reduce the
wasteful value of the tangible fixed assets
resulting from wear and tear and normal
obsolescence
For intangible assets, the annual allowance to
rduce their useful value is called amortization.
85

depreciation

cost- salvage value


estimated life
(cost depreciation)
x Rate
estimated life
nth period x costsalvage
SYD

UP COLLEGE OF LAW

CHARITABLE
CONTRIBUTIONS

TAXATION 1

AND

OTHER

TAXATION LAW

treaties or commitments entered into by


the Government of the Philippines and the
foreign institutions or international
organizations or in pursuance of special
laws
(3) Donations to Accredited Non-government
Organizations subject to conditions set forth
in RR No. 13-98 NGO means a non-stock
non-profit domestic corporation or
organization:
(a) Organized and operated exclusively
for:
i.
scientific,
ii.
research,
iii.
educational,
iv.
character-building and youth
and sports development,
v.
health,
vi.
social welfare,
vii.
cultural or
viii.
charitable purposes, or
ix.
a combination thereof,
(b) No part of the net income of which
inures to the benefit of any private
individual
(c) 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
(d) Administrative expense ,on an annual
basis, must not exceed 30% of total
expenses for the taxable year
(e) Upon dissolution, its assets would be
distributed to another accredited NGO
organized for a similar purpose or
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

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
Amount that may be deducted.
Kinds of Contributions:
(1) Contributions deductible in full;
(2) Contributions subject to the statutory limit.
Contributions Deductible in Full:
(1) Donations to the Government of the
Philippines, or to any of its agencies, or
political subdivisions, including fully owned
government corporations
(a) Exclusively to finance, provide for, or to
be used in undertaking priority activities
in
1. Education
2. Health
3. Youth and sports development
4. Human settlements
5. Science and culture, and
6. Economic development
(b) in accordance with a National Priority
Plan determined by NEDA (otherwise,
subject to statutory limit)
(2) Donations to Certain Foreign Institutions or
International Organizations which are fully
deductible in compliance with agreements,
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UP COLLEGE OF LAW

TAXATION 1

TAXATION LAW

CONTRIBUTIONS TO PENSION TRUSTS

manner as in the judgment of said


court shall best accomplish the general
purpose for which the dissolved
organization was organized.

Contribution to a pension trust may be claimed


as deduction as follows:
(a) Amount contributed for the present/normal
service cost 100% deductible
(b) Amount contributed for the past service
cost 1/10 of the amount contributed is
deductible in year the contribution is made,
the remaining balance will be amortized
equally over nine consecutive years

Contributions subject to the Statutory Limit


These contributions are not deductible in full
as specified by the law or such deduction has
not met the requirements to be deducted in
full.
Those made to:
(1) Government or any of its agencies or
political subdivisions exclusively for public
purposes (contributions for non-priority
activities)
(2) Accredited
domestic
corporation
or
associations organized exclusively for
i.
Religious
ii.
Charitable
iii.
Scientific
iv.
youth and sports development
v.
cultural
vi.
educational purposes or
vii.
rehabilitation of veterans
(3) Social welfare institutions
(4) Non-government organizations: No part of
the net income of which inures to the
benefit of any private stockholder or
individual

General Rule: An employer establishing or


maintaining a pension trust to provide for the
payment of reasonable pensions to his
employees shall be allowed as a deduction, a
reasonable amount transferred or paid into
such trust in excess of the contributions to such
trust made during the taxable year.
Requisites for deductibility of payments to
pension trusts.
(a) There must be a pension or retirement plan
established to provide for the payment of
reasonable pensions to employees;
(b) The pension plan is reasonable and
actuarially sound;
(c) It must be funded by the employer;
(d) The amount contributed must no longer be
subject to the employers control or
disposition; and
(e) The payment has not theretofore been
allowed before as a deduction.

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
The amount deductible is the actual
contribution or the statutory limit computed,
whichever is lower

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]

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TAXATION 1

OPTIONAL STANDARD DEDUCTION

TAXATION LAW

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.

Individuals, except non-resident aliens


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

(2) General Professional Partnerships (GPP)


(a) 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
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.
(b) 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 for the following reasons:
(i.) The partners distributive share in
the GPP is treated as his gross
income not his gross sales/receipts
and the 40% OSD allowed to
individuals is specifically mandated
to be deducted not from his gross
income but from his gross
sales/receipts; and,
(ii.) The OSD being in lieu of the
itemized deductions allowed in
computing taxable income as
defined under Section 32 of the Tax
Code, it will answer for both the
items of deduction allowed to the
GPP and its partners.
(c) Since one-layer of income tax is
imposed on the income of the GPP and
the individual partners where the law
had placed the statutory incidence of
the tax in the hands of the latter, the

Requisites:
(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.
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.
(a) The OSD is 40% of its gross income.
(b) 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.
(c) 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).

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TAXATION 1

type of deduction chosen by the GPP


must be the same type of deduction
that can be availed of by the partners.
Accordingly, if the GPP claims itemized
deductions, all items of deduction
allowed under Sec. 34 can be claimed
both at the level of the GPP and at the
level of the partner in order to
determine the taxable income. On the
other hand, should the GPP opt to
claim the OSD, the individual partners
are deemed to have availed also of the
OSD because the OSD is in lieu of the
itemized deductions that can be
claimed in computing taxable income.
(d) If the partner also derives other gross
income from trade, business or
practice of profession apart and
distinct from his share in the net
income of the GPP, the deduction that
he can claim from his other gross
income would follow the same
deduction availed of from his
partnership income as explained in the
foregoing rules. Provided, however,
that if the GPP opts for the OSD, the
individual partner may still claim 40%
of its gross income from trade,
business or practice of profession but
not to include his share from the net
income of the GPP. (RR 2-2010)

TAXATION LAW

spouses is deriving gross income, only such


spouse shall be allowed the personal
exemption.
Additional exemptions for taxpayer with
dependents
(1) 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)
(a) Married
Individuals:
Additional
exemptions for QDC are claimed by
only one spouse.
Generally, the spouse who is the gross
compensation earner is the claimant of
the additional exemptions.
(b) Where the husband and wife are both
compensation income earners: the
husband is the proper claimant of the
additional exemptions EXCEPT if there
is an express waiver by the husband in
favor of his wife, as embodied in the
application for registration (BIR Form
No. 1902) or in the Certificate of
Update of Exemption and of
Employers
and
Employees
Information (BIR Form No. 2305),
whichever is applicable.
(c) When the spouses have business and/or
professional income only: either may
claim the additional exemptions at the
end of the year.
(d) The employed spouse shall be
automatically entitled to claim the
additional exemptions for children in
the following instances:
(i) spouse is unemployed
(ii) spouse is a non-resident citizen
deriving income from foreign
sources

PERSONAL AND ADDITIONAL EXEMPTION


(R.A. NO. 9504, MINIMUM WAGE EARNER
LAW)
Basic personal exemptions
According to RA 9504 (effective July 6, 2008)
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) of NIRC In the case of
married individuals where only one of the
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UP COLLEGE OF LAW

TAXATION 1

(e) Legally separated spouses: Additional


exemptions can be claimed by the
spouse with custody of the child or
children (but the total amount for the
spouses shall not exceed the maximum
of four). [Sec 35(B), NIRC]
(f) If the taxpayer should have additional
dependents during the taxable year, he
may claim the corresponding additional
exemption, as the case may be, in full for
such year.

TAXATION LAW

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 prorate 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.

(2) Who is a dependent for purposes of


additional exemptions?
(i)
A taxpayers child, whether
legitimate, illegitimate or legally
adopted child
(ii)
chiefly dependent for support upon
on the taxpayer
(iii)
living with the taxpayer
(iv)
not more than 21 years old,
unmarried and not gainfully
employed or
(v)
regardless of age, is incapable of
self-support because of mental or
physical defect. [Sec 35(B), NIRC]

Note: When it comes to change of status, the


status beneficial to the taxpayer is used for
purposes of claiming deductions as long as the
taxpayer achieved such status at any time
during the taxable period.

Note: Only children (not parents) may be


considered dependent for purposes of
additional exemptions.

Exemptions claimed by non-resident aliens


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.

The definition of the term dependent


under Section 35(B) of the NIRC now
includes a Foster Child or a child placed
under planned temporary substitute
parental care by a Foster Parent or a Foster
Family. [RMC No. 41-20i3, Jan. 23, 2013]
(3) Who may claim personal exemptions?
(a) Citizens (whether resident or nonresident) and resident aliens
(b) Non-resident aliens engaged in trade or
business
are
entitled
personal
exemptions subject to reciprocity. (See
below)

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,
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TAXATION 1

but not to exceed the amount fixed by NIRC.(In


other words, whichever is lower)

TAXATION LAW

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

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.

EXEMPT CORPORATIONS
These are:
(1) Proprietary Educational Institutions
and hospitals
(2) Government owned and controlled
corporations
(3) Others

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,
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.

Corporations & associations enumerated under


Section 30 of the 1997 NIRC, as amended,
including those which have been issued tax
exemption rulings/certificates prior to June 30,
2012, shall file their respective Applications for
Tax Exemption/Revalidation with the Revenue
District Office (RDO) where they are
registered. If a corporation or association
which has been issued a Tax Exemption Ruling
fails to file its annual information return, it
shall automatically lose its income tax-exempt
status beginning the taxable year for which it
failed to file an annual information return, in
addition to the sanctions imposed under
Section 250 of the NIRC, as amended. [RMO
No. 20-2013]
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%).
All hospitals and non-stock, non-profit
organizations operating hospitals which were
issued tax exempt rulings prior to November 1,
2012 shall submit a Request for Revalidation
of their tax exemption. [Revenue Memorandum
Circular No. 4-2013]

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TAXATION 1

(See Tax on Domestic Corporations, Tax on


Proprietary Educational Institutions and
Hospitals)

TAXATION LAW

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;

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
(See Tax on Domestic Corporations, Tax on
Government-Owned
or
Controlled
Corporations, Agencies or Instrumentalities)
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
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

Note:
Notwithstanding the exemptions, income
of whatever kind and character of the
enumerated organizations from any of their
properties, real or personal, or from any of
their activities conducted for profit
regardless of the disposition made of such
income, shall be subject to tax.
RA 9178 Act to Promote the Establishment
of Barangay Micro Business Enterprises
(BMBEs) implemented by DO 17-04, April 20,
2004
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TAXATION 1

(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.

TAXATION LAW
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.

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

Basic Personal
Exemption

Additional Personal
Exemption

Tax Rates

Resident Citizen

Income from
sources within and
outside the
Philippines

Allowed

Allowed

5%-32%

Allowed

Allowed

5%-32%

Allowed

Allowed

5%-32%

No specific
provision

5%-32%

Not allowed

25%

Non-Resident Citizen

Resident Alien

Income from
sources within the
Philippines
Income from
sources within the
Philippines

Non-resident Alien
Engaged in Trade or
Business

Income from
sources within the
Philippines

Lower amount
between PE allowed
to Filipinos in the
foreign country
where he resides vs.
PE in the
Philippines

Non-resident Alien Not


Engaged in Trade or
Business

Income from
sources within the
Philippines

Not allowed

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TAXATION 1

GENERAL RULE THAT RESIDENT CITIZENS


ARE TAXABLE ON INCOME FROM ALL
SOURCES WITHIN AND WITHOUT THE
PHILIPPINES

TAXATION LAW

employer abroad and is not borne


by an entity or person in the
Philippines. They must be duly
registered with the Philippine
Overseas
Employment
Administration (POEA) with valid
Overseas Employment Certificate
(OEC).
(ii.) An OCWs income arising out of
his overseas employment is
exempt from income tax.
(2) A resident alien or non-resident alien is
taxable only on income from sources
WITHIN the Philippines.
(i.) A resident alien is an individual
whose residence is in the
Philippines and who is not a
Filipino citizen.
(ii.) A non-resident alien is an
individual whose residence and
citizenship is not in the Philippines.
(a) An alien actually present in
the Philippine who is not a
mere transient or sojourner
is a resident of the
Philippines for purposes of
the income tax.
(b) Whether he is a transient
or not is determined by his
intentions with regard to
the length and nature of
his stay. A mere floating
intention indefinite as to
time, to return to another
country is not sufficient to
constitute him a transient.
(c) If he lives in the Philippines
and has no definite
intention to stay, he is a
resident.
(d) One who comes to the
Philippines for a definite
purpose which, in its

General rule: A Filipino resident citizen is


taxable on income from all sources (within and
without the Philippines)
(1) Non-resident citizens: 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
(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
non-resident 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)
(2) Other considerations:
(1) A Filipino citizen working and deriving
abroad as an Overseas Contract
Worker is taxable only on income from
sources WITHIN the Philippines.
(i.) OCW refers to Filipino citizens in
foreign countries, who are
physically present in a foreign
country as a consequence of their
employment in that country. Their
salaries and wages are paid by an
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(iii.)

TAXATION
INCOME

TAXATION 1

nature, may be promptly


accomplished is a transient.
(e) But if his purpose is of such
a nature that an extended
stay may be necessary for
its accomplishment, and to
that end the alien makes
his home temporarily in the
Philippines, he becomes a
resident, though it may be
his intention at all times to
return to his domicile
abroad when the purpose
of which he came has been
consummated
or
abandoned. [Sec. 5, RR No.
2]
In general, 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 shall be
deemed a non-resident alien
doing
business
in
the
Philippines.
Intended
Stay
in
the
Philippines:
i. Up to 180 days
NRANETB
ii. More than 180 days up
to 2 years NRAETB
iii. Greater than 2 years
Resident alien

ON

TAXATION LAW

rank and file EEs and other forms of


compensation.
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
(i) Salary

earnings
received
periodically for a regular work
other than manual labor, such as
monthly salary of an employee
(ii) Wages all remuneration (other
than fees paid to a public official)
for services performed by an
employee for his employer,
including the cash value of all
remuneration paid in any medium
other than cash. [Sec. 78A, NIRC]
(b) Separation pay/retirement benefit not
otherwise exempt
(i) Retirement pay a lump sum
payment received by an employee
who has served a company for a
considerable period of time and
has decided to withdraw from work
into privacy. [RR 6-82, Sec. 2b]
General rule: Retirement pay is
taxable
Exceptions:
(1) SSS or GSIS retirement pays.
(2) Retirement pay (R.A. 7641) due
to old age provided the
following requirements are
met:
(1) The retirement program is
approved by the BIR
Commissioner;
(2) It must be a reasonable
benefit plan. (fair and
equitable)
(3) The retiree should have
been employed for 10
years in the said company;

COMPENSATION

Income arising from an ER-EE relationship. It


means all remuneration for services performed
by an EE for his ER, including the cash value of
all remuneration paid in any medium other
than cash. [Sec. 78(A)] It includes, but is not
limited to salaries and wages, commissions,
tips, allowances, bonuses, Fringe Benefits of

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TAXATION 1

(4) The retiree should have


been 50 years old or above
at the time of retirement;
and
(5) It should have been
availed of for the first time.
(ii) Separation pay taxable if
voluntarily availed of. It shall not
be taxable if involuntary i.e. Death,
sickness, disability, reorganization
/merger of company and company
at the brink of bankruptcy or for
any cause beyond the control of
the said official or employee
(3) Bonuses, 13th month pay, and other
benefits not exempt
(i) Tips and Gratuities those paid
directly to the employee (usually by
a customer of the employer) which
are not accounted for by the
employee to the employer. (taxable
income but not subject to
withholding tax) [RR NO. 2-98, Sec.
2.78.1]
(ii) Thirteenth month pay and other
benefits - Not taxable if the total
amount received is P30,000 or less.
Any amount exceeding P30,000 is
taxable. [Sec. 32 (7)e, NIRC]
(iii) Overtime Pay premium payment
received for working beyond
regular hours of work which is
included in the computation of
gross salary of employee. It
constitutes compensation.
(4) 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.

TAXATION LAW

(2) Nonmonetary compensation - If services


are paid for in a medium other than money,
the 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
(See Chapter on Gross Income for the
discussion of Taxable and Non-taxable
fringe benefits)
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]
EXCLUSIONS
(1) Fringe benefit subject to tax
(See Chapter on Gross Income for the
discussion of Taxable and Non-taxable
fringe benefits)
Where the recipient of the fringe benefit is not
a rank and file employee, and the said benefit
is not tax-exempt, then the same shall not be
included in the compensation income of such
employee subject to tax. The fringe benefit
[tax] is instead levied upon the employer, who
is required to pay. [Domondon]
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
(a) Facilities or privileges of relatively small
value furnished by an employer to his
employees and are as a means of
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TAXATION 1

promoting the health, goodwill,


contentment, or efficiency of his
employees.
(b) These are exempt from fringe benefit
tax and compensation income tax.

TAXATION LAW

(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
taxpayer (head of family or married),
for himself and members of his family
during the taxable year.

(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 P30,000 (amounts in excess
are considered compensation income)
(b) Benefits include:
(i) Benefits received by government
employees under RA 6686
(ii) Benefits received by employees
pursuant to PD 851 (13th Month
Pay Decree)
(iii) Benefits received by employees not
covered by PD 851 as amended by
Memorandum Order No. 28; and,
(iv) Other benefits such as productivity
incentives and Christmas bonus

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.
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
(1) Individual taxpayers earning purely
compensation income during the year.
(2) Individual taxpayer earning business
income or in practice of his profession.

DEDUCTIONS
(1) Personal exemptions and additional
exemptions (See the Chapter on Deductions
for the full discussion of Personal and
additional exemptions)
(a) Basic Personal Exemptions
According to RA 9504 (effective July 6,
2008) basic personal exemption is
Fifty thousand pesos (P50,000) for
each individual taxpayer, regardless
whether single, married or head of the
family.
(b) Additional Exemptions (AE)- depends
on the number of qualified dependent
children
Amount allowed as a deduction
P25,000 per dependent child, but not
to exceed four children [RA 9504]

TAXATION OF COMPENSATION INCOME OF A


MINIMUM WAGE EARNER
Statutory minimum wage earner shall refer to
rate fixed by the Regional Tripartite Wage and
Productivity Board, as defined by the Bureau of
Labor and Employment Statistics (BLES) of the
Department of Labor and Employment. [Sec.22
GG, as amended by RA 9504]
Minimum wage earner shall refer to a worker
in the private sector paid the statutory
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TAXATION 1

minimum wage, or to an employee in the


public sector with compensation income of not
more than the statutory minimum wage in the
non-agricultural sector where he/she is
assigned. [Sec.22 HH, as amended by RA 9504]

TAXATION LAW
(1)
(2)
(3)
(4)

Interest income
Royalties
Dividends from domestic corporations
Prizes and other winnings

Interest income
(a) on any currency bank deposit, yield or any
other monetary benefit from deposit
substitutes, trust funds and similar
arrangements - 20% final tax
(b) under the expanded foreign currency
deposit system (EFCDS) - 7.5% final tax for
residents, exempt if non-residents
(c) Treatment of income from long-term
deposits

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
Income also subject to tax exemption: holiday
pay, overtime pay, night shift differential, and
hazard pay

On long-term deposit or investment


certificates (LTDIC) in banks (e.g., savings,
common or individual trust funds, deposit
substitutes, investment management
accounts and other investments, which
have maturity of 5 years or more) exempt

Compensation income including overtime pay,


holiday pay and hazard pay, earned by
minimum wage earners who has no other
returnable income are NOT taxable and not
subject to withholding tax on wages [RA 9504]

Should LTDIC holder pre-terminate LTDIC


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

TAXATION
OF
BUSINESS
INCOME/INCOME FROM PRACTICE OF
PROFESSION
All income obtained from doing business
and/or engaging in the practice of a profession
shall be included in the computation of taxable
income. (5-32% For citizens, resident aliens &
NRA Engaged in trade or business; 25% in case
of NRANETB)

4 years to less than 5 years


3 years to less than 4 years
less than 3 years

5%
12%
20%

Royalties
(See summary table)

TAXATION OF PASSIVE INCOME

Dividends from domestic corporation


(a) cash and/or property dividends actually or
constructively received by an individual
from
(1) a domestic corporation
(2) a joint stock company
(3) insurance or mutual fund companies
(4) regional operating headquarters of
multinational companies

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:
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(b) share of an individual in the distributable


net income after tax of a partnership
(except a general professional partnership)
of which he is a partner
(c) share of an individual member or coventurer in the net income after tax of an
association, a joint account, or a joint
venture or consortium taxable as a
corporation
(d) RATE:
(1) 10%for residents (RC, RA) and non
resident citizens (NRC);
(2) 20% for NRAETB(non-resident aliens
engaged in trade or business)
(e) A stock dividend representing the transfer
of surplus to capital account shall not be
subject to tax.
(f) However, if a corporation cancels or
redeems stock issued as a dividend at such
time and in such manner as to make the
distribution
and
cancellation
or
redemption, in whole or in part, essentially
equivalent to the distribution of a taxable
dividend, the amount so distributed in
redemption or cancellation of the stock
shall be considered as taxable income to

TAXATION LAW
the extent that it represents a distribution
of earnings or profits. [Sec. 73B, NIRC]
(1)
In other words, stock dividends are
generally not subject to tax as long
as there are no options in lieu of
the shares of stock.
(2)
On the other hand, a stock dividend
constitutes income if it gives the
shareholder an interest different
from that which his former
stockholdings represented.

PRIZES AND OTHER WINNINGS


(1) Winnings, except Philippine Charity
sweepstakes / lotto winnings 20%
(2) Prizes exceeding P10,000 20%
Prize, differentiated from winnings
A prize is the result of an effort made (e.g.,
prize in a beauty contest), while winnings are
the result of a transaction where the outcome
depends upon chance (e.g., betting).

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TAXATION 1

TAXATION LAW

Summary Table of Rates


NOTE: Bar Syllabus 2015 EXCLUDES NRA-NETB
Section 24(B). Final Tax Rates on Certain Passive Income from Philippine sources

INTEREST, ROYALTIES, PRIZES AND OTHER WINNINGS


(a) Interest from any currency bank deposit
(b) Yield or any other monetary benefit from deposit
substitute
(c) Yield or any other monetary benefit from trust funds and
similar arrangements
(d) Royalties, in general (other than royalties described in
letter e)
(e) Royalties on books as well as other literary works and
musical compositions
(f) Prizes exceeding P10,000
(g) Other winnings (other than Philippine Charity
Sweepstakes and Lotto winnings)
(h) Interest incomes received from a depositary bank under
expanded foreign currency deposit system

(i) Interest income from long-term deposit or investment


evidenced by certificates prescribed by BSP.
If
preterminatedbefore fifth year, a final tax shall be
imposed based on remaining maturity:
(1) 4 years to less than 5 years
(2) 3 years to less than 4 years
(3) Less than 3 years
CASH AND/OR PROPERTY DIVIDENDS
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)
Share of an individual in the distributable net income after tax
of a PARTNERSHIP (other than a general professional
partnership) (beginning January 1, 2000)
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)
100

Citizens,
Residents
20%

NRAETB

NRANETB

20%

25%

20%

20%

25%

20%

20%

25%

20%

20%

25%

10%

10%

25%

20%

20%

25%

20%

20%

25%

Exempt

Exempt

Exempt

25%

5%
12%
20%

25%
25%
25%

NRAETB

NRANETB

10%

20%

25%

10%

20%

25%

10%

20%

25%

7 1/2%
Note: NRC
Exempt
(RR 12011)
Exempt

5%
12%
20%
Citizens,
Residents

UP COLLEGE OF LAW

TAXATION 1

(a) For interest from foreign currency loans


granted by FCDUs to residents other than
Offshore Banking Units (OBUs) or other
depository banks under the expanded
system tax rate is 10% if payors are
RESIDENTS, whether individuals or
corporations.

TAXATION LAW

PASSIVE INCOME NOT SUBJECT TO TAX


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

(b) For interest from foreign currency loans


granted by OBUs to residents other than
OBUs or local commercial banks, including
branches of foreign banks that may be
authorized by the BSP to transact business
with OBUs - tax rate is 10% if payors are
RESIDENTS, whether individuals or
corporations.

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:
(1) Four (4) years to less than five (5) years 5%;
(2) Three (3) years to less than four (4) years 12%; and
(3) Less than three (3) years - 20%.

(c) Gross income from all sources within the


Philippines derived by non-resident
cinematographic film owners, lessors or
distributors tax rate is 25% if payee is: (a)
non-resident alien individual, or (b) nonresident foreign corporation. The term
cinematographic films includes motion
picture films, films, tapes, discs and other
such similar or related products.

Any income of nonresidents, whether


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

(d) Informers reward given to persons who


voluntarily provide definite and sworn
information that lead to or was
instrumental in the discovery of fraud or
violation of the provisions of the NIRC or
special laws being administered by the BIR
and resulted in the actual recovery or
collection of revenues, surcharges and fees
and/or the conviction of the guilty party or
parties, and/or the imposition of any fine
or penalty or the actual collection of a
compromise amount, in case of amicable
settlement, shall be subject to income tax,
collected as a final withholding tax, at the
rate of 10%, pursuant to Sec. 282 of the
NIRC [RR 16-2010]

TAXATION OF CAPITAL GAINS


INCOME FROM SALE OF SHARES OF STOCK
OF A PHILIPPINE CORPORATION
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.
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UP COLLEGE OF LAW

TAXATION 1

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:

TAXATION LAW

(b) Under Sec. 24(A), at the option of the


taxpayer.
(2) In case of the sale of or disposition of their
principal residence by natural persons
(a) Requirements:
(1) Sale or disposition by a natural
person of his principal residence,
(2) The proceeds of which is fully
utilized in acquiring/constructing a
new principal residence,
(3) Such
acquisition/construction
taking place within 18 calendar
months from the date of sale or
disposition,
(4) The
taxpayer
notifies
the
Commissioner within 30 days from
the sale/disposition through a
prescribed return of his intention to
avail of the exemption,
(5) The tax exemption can only be
availed of once every 10 years.
(b) 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.
(c) How taxable portion and tax
determined:

On the net capital gain:


Not over P100,000 = Final Tax of 5%
On any amount in excess of P100,000 = plus
Final Tax of 10% on the excess
Key Definitions
(a) Net capital gain: selling price less cost
(b) Selling price: consideration on the sale OR
fair market value of the shares of stock at
the time of the sale, whichever is higher
(c) Cost: original purchase price
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
General rule: 6% ofwhichever is higher
(a) Gross selling price, or
(b) Fair market value (determined in
accordance with Sec. 6(E)).
Except
(1) In case of sales made to the government,
any of its political subdivisions or agencies,
or to GOCCs, it can be taxed either:
(a) Under Sec. 24(C)(1) 6% CGT, or

(1) The historical cost or adjusted


basis of the real property sold or
disposed shall be carried over to
the new principal residence built
or acquired.
(2) Computation for the basis of new
principal residence:
XXX
Historical cost of old principal
residence
Add: Additional cost to acquire
XXX
102

UP COLLEGE OF LAW
new principal residence*
Adjusted cost bases of the new
principal residence
*Additional cost to acquire new
principal residence:
Cost to acquire new principal
residence
Less: Gross selling price of old
principal residence
Additional cost to acquire new
principal residence

TAXATION 1

TAXATION LAW

XXX

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


is a corporation.
Rule: Capital gain/loss is recognized in full.

XXX

Capital assets shall refer to all real properties


held by a taxpayer, whether or not connected
with his trade or business, and which are not
included among the real properties considered
as ordinary assets under Section 39(A)(1) of the
NIRC.

(XXX)
XXX

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

Ordinary assets shall refer to all real properties


specifically excluded from the definition of
capital assets under Section 39(A)(1) of the
NIRC, namely:
(1) Stock in trade of a taxpayer or other real
property of a kind which would properly be
included in the inventory of the taxpayer if
on hand at the close of the taxable year; or
(2) Real property held by the taxpayer
primarily for sale to customers in the
ordinary course of his trade or business; or
(3) Real property used in trade or business (i.e.,
buildings and/or improvements) of a
character which is subject to the allowance
for depreciation provided for under Sec.
34(F) of the Code; or
(4) Real property used in trade or business of
the taxpayer.

Summary Tables of Rates


(Tables include NRAETB and NRANETB)

excess
of
P100,000

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))

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

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%

Amount in
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TAXATION 1
Resident
CITIZEN

Category of Income
(1) Compensation / Business
Profession
(2)
(3) Prizes of P10,000 or less

All sources

(4) Interest from any currency bank


deposit , etc., Royalties (other
than from books, literary works
and musical compositions),
Winnings / Prizes (except prizes
P10,000 and below)
(5) Royalties from books, literary
works, musical compositions
(6) Interest from long-term deposit
or investment certificates, which
have a maturity of 5 years or
more

(7) Cash / Property Dividends from a


domestic corporation, etc., OR
share in the distributable net
income after tax of a partnership
(except a general professional
partnership), etc.
(8) Interest (Expanded Foreign
Currency Deposit System)
(9) Winnings
on
Philippine
Sweepstakes / Lotto
(10) Capital Gains on Sale of Shares
of Domestic Corp. (not traded in
a domestic stock exchange)
(11) Capital Gains on Sale of Real
Property in the Philippines
(12) Sale of Shares of Domestic Corp.
(traded in a domestic stock
exchange)
(13) Sale of Real Property located
Abroad
(14) Sale of Shares of Foreign Corp
(15) Passive Income from Abroad

TAXATION LAW

ALIEN

Non-Resident
CITIZEN
NRAETB

NRANETB

Within
the
Philippines

Within the
Philippines

Within the
Philippines

Within the
Philippines

Based on Taxable (i.e, Net) Income


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

Gross Income Within the Philippines (GIW) 20%


Final Withholding Tax

GIW 10% Final Withholding Tax

GIW 25%

EXEMPT; However:
In case of pre-termination, with remaining maturity
of:
4 years to less than 5 years 5% on entire income
3 years to less than 4 years 12% on entire income
less than 3 years 20% on entire income

GIW 10% Final Withholding Tax

GIW

7.5%
Withholding Tax

Final

GIW- 20%

EXEMPT

EXEMPT
Net Capital Gains within:
Not Over P100,000 5% Final Tax
Amount in Excess of P100,000 plus 10% Final Tax on the excess
Gross Selling Price or FMV, whichever is higher
6% Final Withholding Tax
of 1% of the Selling Price (Stock Transaction Tax)
Note: Stock Transaction Tax is not an income tax, but a business
(percentage) tax
Schedular Income Tax Rates (Sec. 24 , NIRC)
(i.e, 5% to 32%)

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TAXATION 1

Computations
Pure Compensation Income

Less:

x
Less:

Gross Compensation Income


Personal & Additional Exemptions
and hospitalization/health insurance
premium
Taxable Income
Rate
Income Tax
Creditable
Withholding
Tax
on
Compensation Income
Tax Payable

TAXATION
OF
NON-RESIDENT
ALIENS ENGAGED IN TRADE OR
BUSINESS

xx

(See above summary tables)


xx
xx

GENERAL RULES
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

xx
xx
xx

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


business income/income from the practice of
profession)
Less:

ADD:
Less:

x
Less:

Gross Compensation Income


Personal & Additional Exemptions
and hospitalization/health insurance
premium
Taxable Compensation Income
Gross Business Income &/or
Income from Practice of Profession
Allowable Deduction (itemized
or optional deduction)
Taxable Income
Rate
Income Tax
Creditable
Withholding
Tax
on
Compensation Income/Other Allowable
Tax Credit
Tax Payable

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

Xx

CASH AND/OR PROPERTY DIVIDENDS

Xx
Xx

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
an association, a joint account, or a
joint venture taxable as a corporation
of which he is a member or a coventurer;
(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

Xx
Xx
Xx
Xx

Xx
Xx

Pure Business/Professional Income

Less:

x
Less:

Gross Business Income &/


or Income from Practice of Profession
Allowable Deduction
(itemized or optional deduction)
Personal & Additional Exemptions
and hospitalization/health insurance
premium
Total Taxable Income
Rate
Income Tax
Creditable
Withholding
Tax
on
Compensation Income/Other Allowable
Tax Credit
Tax Payable

TAXATION LAW

Xx
xx

xx
Xx
Xx

Xx
Xx

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TAXATION 1

other winnings (except Philippine Charity


Sweepstakes and Lotto winnings);

TAXATION LAW

(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

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
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:
(i) Four (4) years to less than five (5) years 5%;
(ii) Three (3) years to less than four (4) years 12%; and
(iii) Less than three (3) years - 20%.

NON-RESIDENT
ALIENS
NOT
ENGAGED IN TRADE OR BUSINESS
(1) Alien individuals employed by:
(a) Regional or Area Headquarters
(RAHQ) and Regional Operating
Headquarters (ROHQ) established in
the Philippines by multinational
companies
Multinational company, defined a
foreign firm or entity engaged in
international trade with affiliates or
subsidiaries or branch offices in the
Asia-Pacific Region and other foreign
markets
(b) Offshore Banking Units established in
the Philippines
(2) Alien individuals who are permanent
residents of a foreign country but who are
employed and assigned in the Philippines
by a foreign service contractor or by a
foreign service subcontractor engaged in
petroleum operations in the Philippines

Tax Rate and Base - 15% of gross income


received as salaries, wages, annuities,
compensation, remuneration and other
emoluments, such as honoraria and
allowances.

CAPITAL GAINS
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

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

106

UP COLLEGE OF LAW

TAXATION 1

units and petroleum service contractors and


subcontractors.

(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).

Note that the coverage of the special


classification (and the corresponding tax rate)
is limited to income received as wages. Hence,
any income earned from all other sources within
the Philippines by the alien employees shall be
subject to the pertinent income tax (example:
sale of real property in the Philippines is
subject to 6% capital gain tax, imposed on the
gross selling price or fair market value of the
property at the time of the sale, whichever is
higher)

INDIVIDUAL TAXPAYERS
FROM INCOME TAX

TAXATION LAW

MINIMUM WAGE EARNERS


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

EXEMPT

Individual Taxpayers exempt from income tax


are:
(1) Senior Citizens
(2) Minimum wage earners
(3) Exemptions granted under international
agreements

EXEMPTIONS
GRANTED
UNDER
INTERNATIONAL AGREEMENTS (SEC.
32(B))
See RMC No, 31-2013, April 12, 2013 taxation
of compensation income of Philippine
nationals and alien individuals employed by
foreign governments/embassies/diplomatic
missions and international organizations
situated in the Philippines

All individuals and entities claiming exemption


from imposition of taxes on income and,
consequently, from withholding taxes are
required to provide a copy of a valid, current
and subsisting tax exemption certificate or
ruling, as per existing administrative issuances
and any issuance that may be issued from time
to time, before payment of the related income.
The tax exemption certificate or ruling must
explicitly recognize the grant of tax exemption,
as well as the corresponding exemption from
imposition of withholding tax. Failure on the
part of the taxpayer to present the said tax
exemption certificate or ruling as herein
required shall subject him to the payment of
appropriate withholding taxes due on the
transaction. [RMC No. 8=2014]

TAXATION
OF
CORPORATIONS

DOMESTIC

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

SENIOR CITIZENS
Who covered: any resident citizen
(a) At least 60 years old, and
107

XXX
XXX
XXX

UP COLLEGE OF LAW

TAXATION 1

This means that the term gross income will


also include all items of gross income
enumerated under Section 32(A) of the NIRC,
except: (a) income exempt from income tax,
and (b) income subjected to FWT.

MINIMUM CORPORATE INCOME TAX


(MCIT)
(1) 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.
(2) 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).
(3) Tax rate: 2% of the Gross Income
Imposition of MCIT
Gross Sales
Less: Sales Returns
Sales
Discounts
Allowances
Cost of Goods Sold
MCIT GI

The computation by type of business.


Merchandising/Manufacturing Service Concerns
Concerns
Net Sales
P Gross
xxx
receipts/revenue
P xxx
Less: Cost of Sales
Less: Direct cost
xxx
of services
xxx
Gross Income
P Gross income
xxx
P xxx
Net Sales is gross sales less sales returns,
discounts and allowances.

XXX
XXX
& XXX
XXX

TAXATION LAW

Direct cost of services includes salaries of


personnel rendering the services, expenses on
the facilities directly utilized, cost of supplies,
and the like. Direct costs and expenses shall
only pertain to those costs exclusively and
directly incurred in relation to the revenue
realized by the sellers of services. These refer
to costs which are considered indispensable to
the earning of the revenue such that without
such costs, no revenue can be generated.

XXX
XXX

COMPUTATION OF GROSS INCOME.


The term Gross Income shall be equivalent
to gross sales less sales returns, discounts and
allowances and cost of goods sold. Cost of
goods sold shall include all business
expenses directly incurred to produce the
merchandise to bring them to their present
location and use.

Pointers.
MCIT is in the nature of a tax credit, not an
allowable deduction. Its purpose is to prevent
corporations from escaping being taxed by
including frivolous expenses in their statement
of income.

If apart from deriving income from core


business activities there are other items of
gross income realized or earned by the
taxpayer which are subject to the normal
corporate income tax, they must be included as
part of gross income for computing MCIT. [Sec.
27 (E), NIRC; RR 12-2007]

Is the Minimum Corporate Income Tax (MCIT) an


addition to the regular or normal income tax?
No, the MCIT is not an additional tax. The MCIT
is compared with the regular income tax, which
is due from a corporation. If the regular income

108

UP COLLEGE OF LAW

TAXATION 1

is higher than the MCIT, then the corporation


does not pay the MCIT.

TAXATION LAW

MCIT gross income differentiated from the


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

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.

What amount of income tax is paid by the


corporation to the BIR?
Whichever is higher between the normal tax
and the minimum corporate income tax
Illustration:
E Co., a domestic trading corporation, in its
fourth year of operations had a gross profit
from sales of P300,000 and net taxable
income of P100,000. How much was the
income tax paid by the corporation for the
year?

These special corporations are:


(1) Corporations that are subject to ten percent
(10%) preferential tax rate: Proprietary
educational
institutions,
nonprofit
hospitals, Offshore Banking Units (OBUs)
on their income from foreign currency
transactions which has been subjected to a
final income tax at 10% of such income,
and depository banks under the expanded
foreign currency deposit system on their
income from foreign currency transactions
which has subjected to final income tax at
10%; RFCs engaged in business as
Regional Operating Headquarters
(2) Firms under special income tax regime
such as those under the PEZA law [RA
7916], the Bases Conversion Development
Act [RA 7227] and forms enjoying Income
Tax Holiday (ITH) under EO No. 226;
(3) International carriers subject to tax at 2
% of their gross Philippine billings;

MCIT (P300,000 x 2%)


P6,000
Normal income tax
(P100,000 x 30%)
P30,000
Income Tax to be paid for the year
(whichever is higher)
P30,000
Quarterly MCIT Computation.
The computation and the payment of MCIT
shall likewise apply at the time of filing the
quarterly corporate income tax. In the
computation of the tax due for the taxable
quarter, if the quarterly MCIT is higher than the
quarterly normal income tax, the tax due to be
paid for such taxable quarter at the time of
filing the quarterly corporate income tax return
shall be the MCIT.

Note: For domestic corporations whose


operations or activities are partly covered by
the regular income tax and partly covered
under a special income tax system, the MCIT
shall apply on operations covered by the
regular corporate income tax system.

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).
Excess MCIT from the previous taxable year/s
shall not be allowed to be credited against the
quarterly MCIT tax due.

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UP COLLEGE OF LAW

TAXATION 1

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.

TAXATION LAW

Excess MCIT from the previous taxable year/s


shall not be allowed to be credited against the
annual MCIT due as the same can only be
applied against normal income tax.
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.
CARRY FORWARD OF EXCESS MINIMUM TAX
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.

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.

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

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.

MCIT
NT

Yr 4
80K
20K

Yr 5
50K
30K

Yr 6
30K
40K

Yr 7
40K
20K

Yr 8
35K
70K

The excess MCIT over NT carry-forward is


shown as follows:

110

UP COLLEGE OF LAW

MCIT
NT

Year 4
80,000
20,000

NT is higher
n/a
Less:
MCIT
carry-fwd

TAXATION 1
Year 5
50,000
30,000

Year 6
30,000
40,000

40,000

n/a

TAXATION LAW
Year 7
40,000
20,000

Year 8
35,000
70,000

70,000

n/a
>

> (40,000)*

>

(20,000)
(20,000)

From Year 4
From Year 5
From Year 7
Tax Due

80,000

50,000

40,000

30,000

Arrow pointing downward means that the


normal tax is higher so that there can be an
excess MCIT carry-forward against it.

(3) Legitimate business reverses (substantial


losses due to fire, robbery, theft or other
economic reasons).

*Cannot carry forward an amount higher than


the NT, hence the excess of 60K from Year 4
was reduced to 40K. The unused P20,000
cannot be used in Year 8 because Year 8 was
beyond three years from Year 4.

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, after the following conditions have
been satisfied:

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

Tax effort ratio


Ratio of Income Tax collection
to total tax revenues
VAT tax effort
Ratio of Consolidated Public
Sector Financial Position
(CPSFP) to GNP

20% of GNP
40%
4% of GNP
0.90%

Ratio of the Corporations Does


not
Cost of Sales to Gross Sales
exceed 55%

111

UP COLLEGE OF LAW
Gross Sales
Less: Sales Returns
SalesDiscounts&
Allowances
Cost of Goods Sold
GI

TAXATION 1
XXX
XXX
XXX
XXX

TAXATION LAW

Note: Words in regular letters are found in Sec.


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

XXX

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

XXX

The election of the gross income tax option by


the corporation shall be irrevocable for three
(3) consecutive taxable years during which the
corporation is qualified under the scheme.
For purposes of gross income tax, gross
income should be the same as gross income
for purposes of MCIT in cases of trading,
merchandising and manufacturing concern
business. However, for service enterprises,
gross income means gross receipts less sales
returns, discounts, allowances and cost of
services.

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

Note: At present, the OGIT has not been


implemented in the Philippines.

CORPORATIONS EXEMPT FROM THE


MCIT: (BIPTENG)
(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.

Optional standard deduction


Before RA 9504, effective July 6, 2009, OSD
only applied to individuals except non-resident
aliens.
But by virtue of RA 9504, it now also applies to
corporations, except non-resident foreign
corporation.
Moreover, the rate was increased from 10% to
40%.

TAXATION OF PASSIVE INCOME


PASSIVE INCOME SUBJECT TO TAX

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TAXATION 1

TAXATION LAW

Note: (1) and (5) below are more appropriate for


the next section. The SC Syllabus, however,
included both in this section

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

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
(2) Capital gains from the sale of shares of
stock not traded in the stock exchange
(3) Income derived from depository bank
under the expanded foreign currency
deposit system
(4) Inter-corporate dividends
(5) Capital gains realized from the sale,
exchange, or
of
lands
and/or
buildings

Capital gains realized from the sale, exchange,


or disposition of lands and/or buildings
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%
Note: Tax treatment is the same as that of
individuals.
The capital gains tax is applied on the gross
selling price, or the current fair market value at
the time of the sale, whichever is higher. Any
gain or loss on the sale is immaterial because
there is a conclusive presumption by law that
the sale resulted in a gain.

Interest from deposits and yield or any other


monetary benefit from deposit substitutes and
from trust funds and similar arrangements and
royalties
On any currency bank deposit, yield or any
other monetary benefit from deposit
substitutes,
trust funds
and similar
arrangements - 20%

PASSIVE INCOME NOT SUBJECT TO TAX


(1) 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
expanded foreign currency deposit system
shall
be
exempt
from
incomeexemptfromincome tax

Capital gains from the sale of shares of stock


not traded in the stock exchange
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) First P100,000: Final Tax of 5%
(2) On any amount in excess of P100,000:
plus 10% Final tax on the excess

Except: net income from transactions


specified by the Secretary of Finance upon
recommendation by the Monetary Board

Income derived from depository bank under the


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

BUT: Interest income from foreign currency


loans granted by such depository banks
under said expanded foreign currency
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TAXATION 1

deposit system to residents, other than


offshore banking units in the Philippines,
shall be subject to a final tax at the rate of
10%.

TAXATION LAW

there is a conclusive presumption by law that


the sale resulted in a gain.

TAX
ON
PROPRIETARY
EDUCATIONAL INSTITUTIONS AND
NON-PROFIT HOSPITALS

(2) Any income of nonresidents, whether


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

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

TAXATION OF CAPITAL GAINS

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.

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:

Unrelated trade, business or other activity any


trade, business or other activity, the conduct of
which is not substantially related to the
exercise or performance by such educational
institution or hospital of its primary purpose or
function.

On the net capital gain:


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

INCOME FROM THE SALE OF REAL


PROPERTY
SITUATED
IN
THE
PHILIPPINES

Proprietary educational institution any private


school maintained and administered by private
individuals or groups with an issued permit to
operate from the DECS, CHED or TESDA. [Sec.
27(B), NIRC]

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%

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:
(1) Government Service Insurance System
(GSIS)
(2) Social Security System (SSS)

Note: Tax treatment is the same as that of


individuals.
The capital gains tax is applied on the gross
selling price, or the current fair market value at
the time of the sale, whichever is higher. Any
gain or loss on the sale is immaterial because
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TAXATION 1

(3) Philippine Health Insurance Corporation


(PHIC)
(4) Local water districts (LWDs)
(5) Philippine Charity Sweepstakes Office
(PCSO)
[Sec. 27(C), NIRC]

FOR
INSTRUMENTALITIES
AGENCIES OF GOVERNMENT:

TAXATION LAW
concept. Thus, the income from sources
within the Phils. of the foreign head office
shall thus be taxable to the Philippine
branch.

But, when the head office of a foreign


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

AND

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
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]

Definition of doing business under the Foreign


Investment Act of 1991
The phrase "doing business" shall include
soliciting orders, service contracts, opening
offices, whether called "liaison" offices or
branches; appointing representatives or
distributors domiciled in the Philippines or who
in any calendar year stay in the country for a
period or periods totaling one hundred eighty
[180] days or more; participating in the
management, supervision or control of any
domestic business, firm, entity or corporation
in the Philippines; and any other act or acts
that imply a continuity of commercial dealings
or arrangements and contemplate 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 of the purpose and object
of the business organization: Provided,
however, That the phrase "doing business"
shall not be deemed to include mere
investment as a shareholder by a foreign entity
in domestic corporations duly registered to do
business, and/or the exercise of rights as such
investor; nor having a nominee director or
officer to represent its interests in such
corporation; nor appointing a representative or
distributor domiciled in the Philippines which

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.

TAXATION OF RESIDENT FOREIGN


CORPORATIONS
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
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transacts business in its own name and for its


own account; [Sec. 3 (d)]

TAXATION LAW

On any currency bank deposit, yield or any


other monetary benefit from deposit
substitutes,
trust funds
and similar
arrangements Final tax of 20%

WITH RESPECT TO THEIR INCOME FROM


SOURCES WITHIN THE PHILIPPINES

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%

Resident foreign corporations are subject to


any or some of the following:
(1) Capital Gains Tax
(2) Final Tax on Passive Income
(3) Normal Tax [OR] Minimum Corporate
Income Tax (MCIT) [OR] Gross Income Tax
(GIT)
(4) Branch Profit Remittance Tax

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 NIRCexempt
Exclude:
(1) International carrier
(2) Offshore banking units
(3) Branch profits remittances
(4) Regional or area headquarters and
regional operating headquarters of
multination companies
(Note: Expressly excluded as indicated in the SC
Syllabus.
The following discussion is for
information purposes)

TAX ON CERTAIN INCOME

INTERNATIONAL CARRIER
Tax Rate and Base 2.5% on Gross Philippine
Billings (GPB)

INTEREST FROM DEPOSITS AND YIELD OR


ANY OTHER MONETARY BENEFIT FROM
DEPOSIT SUBSTITUTES, TRUST FUNDS AND
SIMILAR ARRANGEMENTS AND ROYALTIES
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What is GPB.
In the case of International Air Carriers, GPB
refers to the amount of:
(a) gross revenue derived from carriage of
persons, excess baggage, cargo and mail
originating from the Philippines in a
continuous and uninterrupted flight,
irrespective of the place of sale or issue
and the place of payment of the ticket or
passage document
(b) gross revenue from tickets revalidated,
exchanged and/or indorsed to another
international airline if the passenger
boards a plane in a port or point in the
Philippines
(c) for flights which originate from the
Philippines,
but
transshipment
of
passenger takes place at any port outside
the Philippines on another airline, the
gross revenue consisting of only the aliquot
portion of the cost of the ticket
corresponding to the leg flown from the
Philippines to the point of transhipment
transshipment [RR 15-2002]

TAXATION LAW

sale or payments of the passage or freight


documents.
OFFSHORE BANKING UNITS
Coverage of the Rule.
Only income derived by offshore banking units
from foreign currency transactions with:
(1) non-residents,
(2) other offshore banking units
(3) local commercial banks including branches
of foreign banks that may be authorized by
the Bangko Sentral ng Pilipinas (BSP) to
transact business with offshore banking
units
Tax Rate.
Exempt from all taxes, except net income from
such transactions as may be specified by the
Secretary of Finance, upon recommendation by
the Monetary Board to be subject to the
regular income tax payable by banks
Exception: Interest income derived from foreign
currency loans granted to residents other than
offshore banking units or local commercial
banks, including local branches of foreign
banks that may be authorized by the BSP to
transact business with offshore banking units,
shall be subject only to a final tax at the rate of
10%.

Air Canada vs. CIR (CTA Case No. 6572):


(a) A foreign airline company selling tickets in
the Philippines through their local agents
shall be considered as resident foreign
corporation engaged in trade or business
in the country.
(b) The absence of flight operations within the
Philippine territory cannot alter the fact
that the income received was derived from
activities within the Philippines.
(c) The test of taxability is the source, and the
source is that activity which produced the
income.

BRANCH PROFITS REMITTANCES


Taxable transaction any profit remitted by a
branch of a multinational corporation to its
head office
Tax Rate and Base 15% final tax based on the
total profits applied or earmarked for
remittance without any deduction for the tax
component.
The 15% final tax should
excluding: (a) profits on activities which are
registered with the Philippine Economic Zone
Authority (PEZA) and (b) passive income gains
and profits received not directly connected

In the case of International Shipping, GPB


means:
Gross revenue whether for passenger, cargo or
mail originating from the Philippines up to
final destination, regardless of the place of

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TAXATION 1

with the conduct of its trade or business in the


Philippines.

TAXATION LAW
(2) business planning and coordination
(3) sourcing and procurement of raw
materials and components
(4) corporate finance advisory services
(5) marketing control and sales promotion
(6) training and personnel management
(7) logistic services
(8) research and development services
and product development
(9) technical support and maintenance
(10) data processing and communications,
and
(11) business development.

Income not treated as branch profits unless


effectively connected with the conduct of trade
or business in the Philippines:
(1) Interests, dividends, rents, royalties
remuneration for technical services
(2) salaries, wages premiums, annuities,
emoluments
(3) other fixed or determinable annual,
periodic or casual gains, profits, income
(4) capital gains received during each taxable
year from all sources within the Philippines
Notes:
(1) imposed whether the head office of the
foreign corporation is located in a tax
treaty country, in a tax haven or other nontreaty country.
(2) imposed only on the profits remitted by a
Philippine branch to the head office of a
foreign corporation.

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.

REGIONAL OR AREA HEADQUARTERS AND


REGIONAL OPERATING HEADQUARTERS OF
MULTINATIONAL COMPANIES
Regional or area headquarters: not subject to
income tax
Regional or area headquarters a branch
established in the Philippines by multinational
companies and which headquarters do not
earn or derive income from the Philippines and
which act as supervisory, communications and
coordinating center for their affiliates,
subsidiaries, or branches in the Asia-Pacific
Region and other foreign markets.

TAX ON CERTAIN INCOME


INTEREST ON FOREIGN LOANS
(1) on foreign loans contracted on or after
August 1, 1986 20%
(2) under the expanded foreign currency
deposit system (EFCDS) - exempt

Regional operating headquarters


(a) 10% of their taxable income
(b) a branch established in the Philippines by
multinational companies which are
engaged in any of the following services:
(1) general administration and planning

INTERCORPORATE DIVIDENDS
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TAXATION 1

(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 least 15%
(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
(b) On any amount in excess of P100,000
plus Final Tax of 10% on the excess

Exclude:
(1) Film rentals and other payments to nonresident cinematographic film owner,
lessor or distributor
Final tax of 25% of gross income from all
sources within the Philippines
(2) Rental, lease and charter fees payable to
non-resident owner or lessor of vessels
chartered by Philippine nationals
Final tax of 4.5% of gross rentals, lease or
charter fees from leases or charters to
Filipino citizens or corporations, as
approved by the Maritime Authority

CAPITAL GAINS FROM SALE OF SHARES OF


STOCK NOT TRADED IN THE STOCK
EXCHANGE
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:

(3) Rentals, charter and other fees payable to


non-resident owner or lessor of aircraft
machineries and other equipment
Final tax of 7.5% of gross rentals or fees

ON THE NET CAPITAL GAIN:


(a) First P100,000 Final Tax of 5%

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TAXATION LAW

Summary of Tax Bases and Rates of Special Corporations (Quick Glance)


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
Gross Philippine Billings
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
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
120

10%

10%

2.5%

10%

10%
10%

25%
4.5%
7.5%

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TAXATION 1

IMPROPERLY
ACCUMULATED
EARNINGS OF CORPORATIONS

TAXATION LAW

How to prove the reasonable needs of the


business
The corporation should prove that there is
(1) an immediate need for the accumulation of
the earnings and profits; or
(2) a direct correlation of anticipated needs to
such accumulation of profits.

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


which prescribes rules governing the
imposition of IAET
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.

Composition
The following constitute accumulation of
earnings for the reasonable needs of the
business:
(1) Allowance for the increase in the
accumulation of earnings up to 100% of
the paid-up capital of the corporation as of
Balance Sheet date,
(2) inclusive of accumulations taken from
other years;
(3) Earnings reserved for definite corporate
Expansion projects or programs requiring
considerable capital expenditure as
approved by the Board of Directors or
equivalent body;
(4) Earnings reserved for Building, Plant or
Equipment Acquisition as approved by the
Board of Directors or equivalent body;
(5) Earnings reserved for compliance with any
Loan Covenant or pre-existing obligation
established under a legitimate business
agreement;
(6) Earnings required by Law or applicable
regulations to be retained by the
corporation or in respect of which there is
legal prohibition against its distribution;
(7) In the case of subsidiaries of foreign
corporations in the Philippines, all
undistributed earnings intended or
reserved for Investments within the
Philippines as can be proven by corporate
records and/or relevant documentary
evidence.

Rationale: It is a tax in the nature of a penalty


to the corporation for the improper
accumulation of its earnings, and a deterrent
to the avoidance of tax upon shareholders who
are supposed to pay dividends tax on the
earnings distributed to them. The touchstone
of the liability is the purpose behind the
accumulation of the income and not the
consequences of the accumulation.
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
Immediacy Test
It states that the reasonable needs of the
business are the
(1) immediate needs of the business; and
(2) reasonably anticipated needs.

Covered Corporations
Only domestic corporations classified as closelyheld corporations are liable for IAET.
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TAXATION 1

TAXATION LAW
reason of the application of (a) or (c) shall,
for purposes of applying (1) or (2), be
treated as actually owned by such person.

Closely-held corporations are those:


(1) at least 50% in value of the outstanding
capital stock; or
(2) at least 50% of the total combined voting
power of all classes of stock entitled to
vote
(3) is owned directly or indirectly by or for not
more than 20 individuals. Domestic
corporations not falling under the
aforesaid definition are, therefore, publiclyheld corporations.

But stock constructively owned by the


individual by reason of the application of
(b) shall NOT be treated as owned by him
for purposes of again applying such
paragraph in order to make another the
constructive owner of such stock.
BIR RULING 025-02
The ownership of a domestic corporation for
purposes of determining whether it is a closely
held corporation or a publicly held corporation
is ultimately traced to the individual
shareholders of the parent company.

To determine whether the corporation is


closely held corporation, insofar as such
determination is based on stock ownership, the
following rules shall be applied:
(1) Stock Not Owned by Individuals. - Stock
owned directly or indirectly by or for a
corporation, partnership, estate or trust
shall be considered as being owned
proportionately by its shareholders,
partners or beneficiaries.
(2) Family and Partnership Ownership. - An
individual shall be considered as owning
the stock owned, directly or indirectly, by or
for his family, or by or for his partner.

Where at least 50% of the outstanding capital


stock or at least 50% of the total combined
voting power of all classes of stock entitled to
vote in a corporation is owned directly or
indirectly by at least 21 or more individuals, the
corporation is considered as a publicly-held
corporation, thus, exempt from IAET.
DETERMINATION OF REASONABLE NEEDS OF
THE BUSINESS:
An accumulation of earnings or profits
(including undistributed earnings or profits of
prior years) is unreasonable if it is not
necessary for the purpose of the business,
considering all the circumstances of the case.

For purposes of this paragraph, the family


of an individual includes his brothers or
sisters (whether by whole or half-blood),
spouse, ancestors and lineal descendants.
(3) Option to Acquire Stocks. - If any person
has an option to acquire stock, such stock
shall be considered as owned by such
person.

To determine the reasonable needs of the


business in order to justify an accumulation of
earnings, the Regulations adhere to the socalled Immediacy Test under American
jurisprudence as adopted in this jurisdiction.
Accordingly, the term reasonable needs of the
business means the immediate needs of the
business, including reasonably anticipated
needs. In either case, the corporation should
be able to prove: (a) an immediate need for the
accumulation of the earnings and profits, or (b)

For purposes of this paragraph, an option


to acquire such an option and each one of
a series of option shall be considered as an
option to acquire such stock.
(4) Constructive
Ownership
as
Actual
Ownership. - Stock constructively owned by
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TAXATION 1

the direct correlation of anticipated needs to


such accumulation of profits. Otherwise, such
accumulation would be deemed to be not for
the reasonable needs of the business, and the
penalty tax would apply.

TAXATION LAW

NPC in general is subject to income tax;


PAGCOR is not subject to income tax [RA
9337]
QUALIFICATION FOR TAX EXEMPTION UNDER
SECTION 30 OF THE 1997 NIRC:
(1) It must be a non-stock corporation or
association organized and operated
exclusively for religious, charitable,
scientific, athletic or cultural purposes, or
for the rehabilitation of veterans.
(2) It should meet the following tests:
(a) Organizational Test requires that the
corporation
or
associations
constitutive documents exclusively
limit its purposes to one or more of
those described in paragraph (E) of
Section 30 of the 1997 NIRC.
(b) Operational Test mandates that the
regular activities of the corporation or
association be exclusively devoted to
the accomplishment of the purposes
specified in paragraph (E) of Section
30 of the 1997 NIRC, as amended. A
corporation or association fails to meet
this test if a substantial part of its
operations may be considered
activities conducted for profit.
(3) All the net income or assets of the
corporation or association must be devoted
to its purpose/s and no part of its net
income or asset accrues to or benefits any
member or specified person.
(4) It must not be a branch of a foreign nonstock, non-profit corporation.
[RMO No. 20-2013]

TAX EXEMPT CORPORATIONS


(1) Government educational institutions.
(2) Non-stock and non-profit educational
institutions.
(3) Nonprofit
labor,
agricultural
or
horticultural organizations
(4) Associations of farmers, fruit growers, and
the like whose primary function is to
market the product of their members
(5) Organizations with a purely local operation
whose income is derived only from
assessment, duties and fees collected from
their members to meet operational
expenses such as fire insurance company,
farmers or other mutual typhoon
associations, mutual ditch or irrigation
company and mutual or cooperative
telephone company
(6) Non-stock corporation or association
organized and operated exclusively for
religious, charitable, scientific, athletic, or
cultural purposes or for the rehabilitation
of veterans, provided that no individual
person owns its assets or no individual
person receives benefit on its earnings
(7) Non-stock/ non-profit mutual savings
bank or non-stock/ non-profit cooperative
bank
(8) Non-profit civic league or organization
operating exclusively for the promotion of
social welfare
(9) Cemetery company owned and operated
exclusively for the benefit of its members
(10) Non-profit business league, chamber of
commerce, or board of trade
(11) Associations, orders, beneficiary societies
operating for the exclusive benefits of their
members. [Sec.30, NIRC]

TAXATION OF PARTNERSHIPS
CLASSIFICATION OF
FOR TAX PURPOSES

PARTNERSHIPS

(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
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TAXATION 1

is derived from engaging in any trade or


business. 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%.

TAXATION LAW

(2) When a donor makes a gift of an undivided


property in favor of two or more donees.
When Co-ownership is not subject to tax
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.

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.

Automatically converted into an unregistered


partnership the moment the said common
properties and/or the incomes derived from
them are used as a common fund with intent to
produce profits for the heirs in proportion to
their respective shares in the inheritance as
determined in a project partition either duly
executed in an extrajudicial settlement or
approved by the court in the corresponding
testate or intestate proceeding. [Ona v. CIR,
May, 25 1972]

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
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)]
CO-OWNERSHIP
There is co-ownership
(1) When two or more heirs inherit and
undivided property from a decedent.

JOINT VENTURE AND CONSORTIUM


To constitute a joint venture, certain factors
are essential. Each party to the venture must
make a contribution, not necessarily of capital,
but by way of services, skill, knowledge,
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TAXATION 1

material or money,; profits must be shared


among the parties; there must be a joint
proprietary interest and right of mutual control
over the subject matter of the enterprise; and
usually, there is single business transaction.

TAXATION LAW

(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.

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 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
(1) The joint venture must be an
unincorporated entity formed by two or
more persons
(2) 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.

GPP IS NOT A TAXABLE ENTITY


The GPP is deemed to be no more than a mere
mechanism or a flow-through entity in the
generation of income by, and the ultimate
mechanism distribution of such income to the
individual partners. [Tan v. Commissioner (Oct.
3, 1994)]
But the partnership itself is required to file
income tax returns for the purpose of
furnishing information as to the share in the
gains or profits which each partner shall
include in his individual return. [RR 2- 1998]

TAXATION OF GENERAL PROFESSIONAL


PARTNERSHIPS

The share of an individual partner in the net


profit of a general professional partnership is
deemed to have been actually or constructively
received by the partner in the same taxable year
in which such partnership net income was
earned, and shall be taxed to them in their
individual capacities, whether actually
distributed or not, at the graduated income tax
ranging from 5% to 32%.

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.

Thus, the principle of constructive receipt of


income or profit is being applied to
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TAXATION 1

undistributed profits of GPPs. The payment [to


the partners] of such tax-paid profits in
another year should no longer be liable to
income tax. [Mamalateo]

TAXATION LAW

In addition, the withholding tax that should


have been withheld and remitted to the BIR as
well as the penalties for non-, late or erroneous
payment of the withholding tax such as
surcharges and deficiency interest are
assessed by the BIR. [Mamalateo]

WITHHOLDING TAX

WITHHOLDING AGENT
Any person or entity who is required to deduct
and remit the taxes withheld to the
government.
(a) In general, any juridical person, whether or
not engaged in trade or business;
(b) An individual, with respect to payments
made in connection with his trade or
business. However, insofar as taxable sale,
exchange or transfer of real property is
concerned, individual buyers who are not
engaged in trade or business are also
constituted as withholding agents. In any
case,
no
Certificate
Authorizing
Registration
(CAR)/Tax
Clearance
Certificate (TCL) shall be issued to the
buyer unless the withholding tax due on
the sale, transfer or exchange of real
property has been duly paid; ac. All
government offices, including GOCCs, as
well as local government units.

CONCEPT
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.
The withholding of income tax on
compensation income, on certain income
payments made to resident taxpayers, and on
income payments made to non-resident
taxpayers is very important for all taxpayers,
because the obligation to withhold and remit
the tax is mandatory and prescribed by law.
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.

All income payments which are required to be


subjected to withholding tax shall be subject to
the corresponding withholding tax rate to be
withheld by the person having control over the
payment and who, at the same time, claims
the expenses. [RR 30-2003]
Duties and Obligations of the Withholding
Agent
(1) To Register - withholding agent is required
to register within ten (10) days after
acquiring such status with the Revenue
District office having jurisdiction where the
business is located
(2) To Deduct and Withhold - withholding
agent is required to deduct tax from all

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.

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(3)

(4)

(5)

(6)

(7)

(8)

TAXATION 1

money payments subject to withholding


tax
To Remit the Tax Withheld - withholding
agent is required to remit tax withheld at
the time prescribed by law and regulations
To File Annual Return - withholding agent
is required to file the corresponding
Annual Information Return at the time
prescribed by law and regulations
To Issue Withholding Tax Certificates withholding
agent
shall
furnish
Withholding Tax Certificates to recipient of
income payments subject to withholding
(Available, BIR Website)
To submit an alphabetical list of
employees and list of payees on income
payments subject to creditable and final
withholding taxes which are required to be
attached as integral part of the Annual
Information Returns (BIR Form No. 1604CF/1604-E) and Monthly Remittance
Returns (BIR Form No. 1601-C, etc.). [RR
No. 1-2014, as clarified by RMC No. 52014]
For hospitals and clinics, to submit the
names and addresses of medical
practitioners in the following classifications,
every 15th day after the end of each
calendar quarter, to the Collection Division
of the Revenue Region for non-large
taxpayers and at the Large Taxpayers
Document Processing and Quality
Assurance Division (LTDP&QAD) in the
National Office or Large Taxpayers District
Office (LTDO) in the Region for large
taxpayers, where such hospital or clinic is
registered, using the prescribed format.
[RR No. 14-2013]
In cases covered by substituted filing, to
furnish each employee with the original
copy of Certificate of Compensation/Tax
Withheld (BIR Form No. 2316) and submit
to the BIR the duplicate copy not later than
February 28 following the close of the
calendar year.

TAXATION LAW

Withholding agents shall require all


individuals and entities claiming exemption
from imposition of taxes on income and,
consequently, from withholding taxes to
provide a copy of a valid, current and
subsisting tax exemption certificate or ruling,
as per existing administrative issuances and
any issuance that may be issued from time to
time, before payment of the related income.
The withholding agents failure to withhold
notwithstanding the lack of tax exemption
certificate or ruling shall cause the imposition
of penalties under Section 251 and other
pertinent Sections of the 1997 Tax Code. [RMC
No. 8-2014]

KINDS
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.
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.

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Withholding of creditable tax (RR 2-98)


(a) Under the creditable withholding tax
system, taxes withheld on certain income
payments are intended to equal or at least
approximate the tax due of the payee on
said income.
(b) The income recipient is still required to file
an income tax return, to report the income
and/or pay the difference between the tax
withheld and the tax due on the income.
(c) Taxes withheld on income payments
covered by the expanded withholding tax
and compensation income are creditable in
nature.

TAXATION LAW
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.

TAXES AS SPECIAL FUND IN TRUST


The taxes deducted and withheld by employers
shall be held in a special fund in trust for the
Government until the same are paid to the said
collecting officers.
RETURN AND PAYMENT IN CASE OF
GOVERNMENT EMPLOYEES
If the employer is the Government of the
Philippines or any political subdivision, agency
or instrumentality thereof, the return of the
amount deducted and withheld upon any wage
shall be made by the officer or employee
having control of the payment of such wage, or
by any officer or employee duly designated for
the purpose.

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

STATEMENTS AND RETURNS


Every employer required to deduct and
withhold a tax shall:
(1) Furnish to each such employee in respect
of his employment a written statement
confirming the wages paid by the employer
to such employee during the calendar year,
and the amount of tax deducted and
withheld and such other information as the
Commissioner may prescribe
(a) During the calendar year, on or before
January thirty-first (31st) of the
succeeding yea; or
(b) If his employment is terminated before
the close of such calendar year, on the
same day of which the last payment of
wages is made
(2) Submit to the Commissioner an annual
information return on or before January
thirty-first (31st) of the succeeding year
containing:
(a) A list of employees;

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
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
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TAXATION 1

(b) The total amount of compensation


income of each employee;
(c) The total amount of taxes withheld
therefrom
during
the
year,
accompanied by copies of the written
statements furnished to employees,
and such other information as may be
deemed necessary.

TAXATION LAW

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
(i)
cash and/or property dividend
(ii)
share in the distributable net
income of a partnership
(iii)
Interest on any bank deposits
(iv)
Royalties
(v)
Prizes
(except
prizes
amounting to P10,000 or less
which is subject to tax under
Sec. 25(A)(1) of the Tax Code.
(vi)
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

The Commissioner may grant to any employer


a reasonable extension of time to furnish and
submit the statements and returns required.

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]
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.
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
(b)
Royalties
(c)
Prizes (except prizes amounting to
P10,000 or less which is subject to
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TAXATION 1

(4) Income Derived by Alien Individual


Employed by a Regional or Area
Headquarters and Regional Operating
Headquarters of Multinational Companies
(5) Income Derived by Alien Individual
Employed by Offshore Banking Unit
(6) Income of Aliens Employed by Foreign
Petroleum Service Contractors and
Subcontractors
(7) 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
(8) 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

TAXATION LAW

royalties derived from sources within


the Philippines
(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
(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
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TAXATION 1

(c)
(d)
(e)
(f)

Interest on loans
Expenses for foreign travel
Holiday and vacation expenses
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

TAXATION LAW

Income payments subject to Expanded


Withholding Tax:
(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:
(i) Transportation contractors which
include common carriers for the
carriage
of
goods
and
merchandise of whatever kind by
land, air or water, where the gross

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 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.
An income payment is subject to the expanded
withholding tax if the following conditions
concur:
An expense is paid or payable by the taxpayer,
which is income to the recipient thereof subject
to income tax;
(a) The income is fixed or determinable at
the time of payment;
(b) The income is one of the income
payments listed in the regulations that
is subject to withholding tax;
(c) The income recipient is a resident of
the Philippines liable to income tax;
and
(d) The payor-withholding agent is also a
resident of the Philippines.

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TAXATION 1

payments by the payor to the


same payee amounts to at least
two thousand pesos (P2,000) per
month, regardless of the number
of shipments during the month
(ii) Filling, demolition and salvage
work contractors and operators of
mine drilling apparatus
(iii) Operators of dockyards
(iv) Persons
engaged
in
the
installation of water system, and
gas or electric light, hear or power
(v) Operators
of
stevedoring,
warehousing
or
forwarding
establishments
(vi) 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
(vii) Advertising agencies, exclusive of
payments to media
(viii) Independent
producers
of
television, radio and stage
performances or shows
(ix) Independent
producers
of
"jingles"
(x) Labor recruiting agencies
(xi) Persons
engaged
in
the
installation of elevators, central air
conditioning units, computer
machines and other equipment
and
machineries
and
the
maintenance services thereon
(xii) Messengerial, janitorial, security,
private detective and other
business agencies
(xiii) Persons engaged in landscaping
services
(xiv) Persons engaged in the collection
and disposal of garbage

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(xv) TV and radio station operators on


sale of TV and radio airtime, and
(xvi) TV and radio blocktimers on sale
of TV and radio commercial spots
(xvii) 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
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(19) Income payments by government offices


on their purchase of goods and services,
from local/resident suppliers
(20)
Tolling fees paid to refineries
(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

medical practitioner and his patient. [RR No.


14-2013]

Income payments to RESPs (i.e., real estate


consultants, real estate appraisers and real
estate brokers) who passed the licensure
examination given by the Real Estate Service
under
the
Professional
Regulations
Commission (PRC) are classified as
professional fees subject to 10%/15% EWT.

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

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.

On the other hand, income payments to RESPs


(i.e., real estate consultants, real estate
appraisers and real estate brokers) who failed
or did not take up the licensure examination
given by the Real Estate Service under the PRC
are classified as commission/brokerage fees
subject to 10% EWT. [RR No. 10-2013]
It shall be the duty and responsibility of the
hospitals, clinics, HMOs and similar
establishments to withhold and remit taxes
due on the professional fees of their respective
accredited medical practitioners, paid by
patients who were admitted and confined to
such hospitals and clinics. [RR No. 14-2013]

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.

The withholding tax on professional fees paid


to medical practitioners shall not apply
whenever there is proof that no professional
fee has in fact been charged by the medical
practitioner and paid by his patient, as shown
in a sworn declaration jointly executed by the

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(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;
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

TAXATION LAW

(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)
(i) Mandatory 1 month basic salary
received after the twelfth *12th) month
pay
(ii) 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
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
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(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.

TAXATION LAW

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]

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

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I. ESTATE TAX

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laid neither on the property nor on the


transferor or the transferee. In other words, it is
an excise or privilege tax imposed on the right
to succeed to, receive, or take property by or
under a will or the intestacy law, or deed, grant,
or gift to become operative at or after death.
(Lorenzo v Posadas)

A. BASIC PRINCIPLES
...death is the generating source from which
the taxing power takes its being, and that it is
the power to transmit or the transmission from
the dead to the living on which the tax is more
immediately based. Hence it accrues as of the
death of the decedent by operation of law.
Lorenzo v Posadas (1937)

D. PURPOSE OR OBJECT
Purpose: To tax the shifting of economic
benefits and enjoyment of property from the
dead to the living.

(1) Inheritance tax accrues at the time of the


decedents death, but the obligation to pay
the same is different and is fixed by law.
The tax is measured by the value of the
property AT THE TIME OF DEATH.
(2) Inheritance tax is measured (i.e. tax base)
by the value at that time of such property
as passes to him (i.e. death). Subsequent
appreciation or depreciation is immaterial;
(3) Inheritance taxation is governed by the
statute in force at the time of the death of
the decedent Tax laws cannot be given
retroactive effect unless they explicitly
provide for it.
(Note that inheritance taxes are no longer
imposed under the NIRC. Only estate taxes are
imposed.)

Taxable objects/subjects:
(1) Right/privilege of the deceased person to
transmit his/her estate to his/her lawful
heirs and beneficiaries at the time of death;
(2) on certain transfers, during his lifetime,
which are made by law as equivalent to
testamentary disposition.
4 Justification Theories for the Imposition of
Estate Tax
(1) Benefit received theory The State collects
the tax because of the services it renders in
the distribution of the estate of the
decedent, either by law or in accordance
with his will.
(2) Privilege theory or state partnership theory
Succession to the property of a deceased
person is not a right but a privilege granted
by the State and consequently, the
legislature can constitutionally burden
such succession with a tax. The State
collects the tax because of the protection it
provides in the acquisition of large estates.
Hence, the State is a silent or passive
partner in the accumulation of said large
property.
(3) Ability to pay theory Receipt of
inheritance, which is in the nature of
unearned wealth or windfall, places assets
into the hands of the heirs and
beneficiaries. This creates an ability to pay

B. 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. There must be a
transfer of ownership or quantifiable interest
or economic benefits from the decedent to the
living person.

C. NATURE
Estate tax is not a direct tax on property.
Neither is it a capitation tax; that is, the tax is
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the tax and thus contributes to


government income.
(4) Redistribution of wealth theory Receipt of
inheritance is a contributing factor to the
inequalities in wealth and income. The
imposition of estate tax reduces the
property received by the successor, which
helps promote a more equitable
distribution of wealth in society. The tax
base is the value of the property and the
progressive scheme of taxation is precisely
motivated by the desire to mitigate the
evils of inheritance in the present form. The
taxes paid by rich people are programmed
for disbursement by Congress for the
benefit of the poor in terms on social
services, education, health, etc.

E. TIME AND
PROPERTIES

TRANSFER

TAXATION LAW 2

(2) The statute that governs estate taxation.


(3) The accrual of the estate tax.
Art. 777, Civil Code. The rights to the
succession are transmitted from the moment
of the death of the decedent.
Sec. 3, RR 2-2003. THE LAW THAT GOVERNS
THE IMPOSITION OF ESTATE TAX. It is a wellsettled rule that estate taxation is governed by
the statute in force at the time of death of the
decedent. The estate tax accrues as of the
death of the decedent and the accrual of the
tax is distinct from the obligation to pay the
same. Upon the death of the decedent,
succession takes place and the right of the
State to tax the privilege to transmit the estate
vests instantly upon death.
Taxable Transfers
Taxable transfers are complete when the
transferor divested himself of all economic
beneficial interest in himself or his estate.

OF

Decedents interest is to its extent at the time


of his death. (Sec. 85(A))

(1) Transfers Mortis Causa Gratuitous


transfers that take effect after death, either
testate or intestate. 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. In a
donation mortis causa "the right of
disposition is not transferred to the donee
while the donor is still alive." The requisites
of a testamentary disposition should be
fulfilled.

Estate taxation is governed by the statute in


force at the time of death of the decedent.
Estate tax accrues as of the death of the
decedent and the accrual of the tax is distinct
from the obligation to pay the same. Upon the
death of the decedent, succession takes place
and the right of the State to tax the privilege to
transmit the estate vests instantly upon death.
(Sec. 3, RR 2-2003)
Despite the transfer of properties and rights at
the time of death, the executor or
administrator shall not deliver a distributive
share to any party interested in the estate,
unless there is a certification from CIR that
estate tax has been paid. (Sec94)

Characteristics: (Maglasang v Heirs of


Cabatingan, 2002)
(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 will, ad nutum; but revocability may

Time of death governs:


(1) The determination of the extent of the
decedents interest for computing his gross
estate.
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TAXATION 2

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.

TAXATION LAW 2

whenever absent, one intends to return


(animus revertendi), and depends on facts and
circumstances, in the sense that they disclose
intent. It is therefore, not necessarily the actual
place of residence. (Corre v Tan Corre, 1956)
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 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

Donation Mortis Causa is subject to Estate Tax.


(2) Transfers Inter Vivos Gratuitous transfers
that take effect after death, either testate
or intestate. (See Donors Tax for
requisites)
General Rule: Donation Inter Vivos are
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]
(a) Transfer with retention or reservation
of certain rights [Sec. 85(B), NIRC]
(b) Revocable transfers [Sec. 85(C), NIRC]
(c) Transfers of property arising under
general power of appointment [Sec.
85(D), NIRC]
(d) Transfers for insufficient consideration
[Sec. 85(G), NIRC]
Note: see further discussion in the valuation of
Gross Estate

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

F.2. RULE OF RECIPROCITY

F.1. CONCEPT OF RESIDENCE

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

Residence
and
domicile
are
used
interchangeably without distinction. For
purposes of estate taxation, residence refers
to the permanent home, the place to which
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TAXATION 2

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

TAXATION LAW 2

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.

G. GROSS ESTATE VIS--VIS NET ESTATE


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 (see Annex A for expanded formulae)


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

H. DETERMINATION OF GROSS ESTATE AND NET ESTATE (AND COMPOSITION)


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 The value at the time of his death of all the
deceaseds:
deceaseds:
a. Real property wherever situated
a. Real property located in the Phil.
b. Tangible personal property wherever
b. Tangible personal property located in the
situated, and
Phil., and
c. Intangible personal property wherever
c. Intangible personal property with a situs in
situated
the Phil. (subject to the rule of reciprocity)
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RC/NRC/RA

TAXATION LAW 2
NRA

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
k. Transmission from the first heir, legatee, or done in favour of another beneficiary, in
accordance with the desire of their predecessor
l. Acquisition and/or transfer expressly declared as not taxable
m. Bequests, devises, legacies or transfers to social welfare, cultural and charitable institutions
a.
b.
c.
d.
e.
f.
g.
h.
i.
j.

Deductions from GROSS estate to arrive at the NET estate


Ordinary deductions
(1) Expenses, losses, indebtedness, taxes. (ELIT)
(a) Funeral expenses
(b) Judicial expenses
(c) Claims against the estate
(d) Claims against insolvent persons
(e) Unpaid mortgage and debt
(f) Taxes
(g) 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

Ordinary deductions1
(1) Proportionate deductions for expenses, losses,
indebtedness, taxes. (ELIT)2
(a) Funeral expenses
(b) Judicial expenses
(c) Claims against the estate
(d) Claims against insolvent persons
(e) Unpaid mortgage and debt
(f) Taxes
(g) Losses
(2) Vanishing deductions
(3) Transfers for public use
No Amounts received under R.A. 4917
No special deductions
Share in conjugal property

1 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 =
ELIT

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TAXATION LAW 2

Valuation of Gross Estate (Sec 88)


General Rule: Gross Estate = FMV at the time
of the decedents death

(1) Probable life of the beneficiary in


accordance with the latest basic standard
mortality table shall be taken into account.

Real Property
(1) 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.
(2) 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.

J. ITEMS TO BE INCLUDED IN GROSS


ESTATE
Items to be included in the Gross Estate
[Sec. 85, NIRC]
(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:
(a) Transfers in contemplation of death
[Sec. 85(B), NIRC];
(b) Transfers with retention or reservation
of certain rights [Sec. 85(B), NIRC];
(c) Revocable transfers [Sec. 85(C), NIRC];
(d) Property passing under general power
of appointment [Sec. 85(D), NIRC];
(e) Transfers for insufficient consideration
[Sec. 85(G), NIRC];
(f) Proceeds of life insurance [Sec. 85(E),
NIRC];
(g) Claims against insolvent persons; and
(h) Capital of the surviving spouse [Sec.
85(H), NIRC].

Personal Property
(1) 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)
(2) Stocks, bonds, and other securities.
(a) 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)
(b) If unlisted stocks = (ordinary common
shares) book value at time of death or
(preferred shares) par value
NB: Bonds, mortgages, and Certificates of
Stocks are taxable at the place where they
are physically located.
(3) Proceeds of Life Insurance with Revocable
Beneficiary: face value of policy (not cash
surrender value)

Property Owned Actually and Physically


This includes properties and interest in
properties possessed such as land, buildings,
shares of stock, vehicles, bank deposits, etc.
The decedent is actually and physically in
possession of.
Decedents interest (Sec. 85(A))
This includes any interest having value or
capable of being valued which is owned by the
decedent existing at the time of death, such as
dividend declared on or before death, but is
received by the estate after death, partnership
profits which have accrued before his death,
but received after death. This also includes

Right to Usufruct use or habitation, and annuity

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those transferred by the decedent at the time


of his death.
Note: When decedent had relinquished his
interest BEFORE his death, he could not be
deemed to have transmitted interest in such
property at his death.

TAXATION LAW 2

(2) The enjoyment thereof was subject at the


date of his death to any change through
the exercise of a power (in whatever
capacity exercisable) by:
(a) The decedent alone;
(b) The decedent in conjunction with any
other person without regard to when or
from what source the decedent
acquired such power, to alter, amend,
revoke, or terminate; or
(c) Where any such power is relinquished
in contemplation of the decedent
death.

Transfers in Contemplation of Death (Sec.


85(B))
The term in contemplation of death, as used
in estate taxation, does not refer to the general
expectation of death. The words mean that it is
the thought of death, as a controlling motive,
which induces the disposition of the property
for the purpose of avoiding the tax. The
decedents motive is a question of fact. Thus,
the imminence of death may afford convincing
evidence of the impelling cause of transfer.
However, it is a contemplation of death and
not necessarily contemplation of imminent
death to which the statute refers. These
transfers should be without or with insufficient
considerations.

Exception: Bona fide sale for an adequate


and full consideration in money or moneys
worth
Note: The power to alter, amend or revoke
shall be considered to exist on the date of the
decedents death EVEN THOUGH:
(a) The exercise of the power is subject to a
precedent giving of notice, or
(b) The alteration, amendment or revocation
takes effect only on the expiration of a
stated period after the exercise of the
power, whether or not on or before the
date of the decedents death notice has
been given or the power has been
exercised.

The law does not specify the number of years


prior to a decedents death within which a
transfer can be considered in contemplation of
death. (De leon)
Transfers with retention or reservation of
certain rights
These are transfers with retention or
reservation of certain rights that result to the
incapacity of transferee to freely enjoy and
dispose of the property until the transferors
death, and the transfer may be regarded as
having been intended to take effect in
possession or enjoyment at the transferors
death. These does not include bona fide sale
for an adequate and full consideration.

If notice has not been given or the power has


not been exercised before the date of his death,
such notice shall be considered to have been
given, or the power exercised, on the date of
his death.
Transfer of property under general power of
appointment (Sec. 85(D))
Power of Appointment the right to designate
the person or property who shall enjoy and
possess certain property from the estate of a
prior decedent. (Domondon)
(i) General Power of Appointment: when it
gives to the decedent the power to appoint
any person he pleases including himself.

Revocable Transfers (Sec. 85(C))


General Rule: A transfer is a revocable transfer
where:
(1) There is a transfer by trust or otherwise,
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The decedent holds the appointed property


with all the attributes of ownership. He had
a power exercisable in favor of himself, his
creditors or creditors of his estate (AmJur)
(ii) Special Power of Appointment: when the
decedent can appoint only among a
designated class of persons other than
himself, his estate, the creditors of his
estate, or if it the power of appointment
expressly not exercisable in favor of the
decedent, his estate, his creditors, or
creditors of his estate.

TAXATION LAW 2

consideration in money or moneys worth, but


is NOT a bona fide sale for an adequate and
full consideration in money or moneys worth.
The value to be included in the gross estate is
the excess of the fair market value of the
property at the time of the decedents death
over the consideration received.
Example:
Case A: If bona fide sale no value shall be
included in the gross estate
Case B: If not a bona fide sale - the excess of
the fair market value at the time of death over
the value of the consideration received by the
decedent shall form part of his gross estate.
Case C: If inter vivos transfer is proven
fictitious/simulated total value of the
property at the time of death included in the
gross estate.

General Rule: Property over which the


decedent held a power of appointment is
excluded in his gross estate
Exception: (included, if) the power of
appointment is GENERAL. Among those to be
included in the gross estate is property arising
under a general power of appointment
exercised by the decedent:
(1) By will; or
(2) By deed executed in contemplation of or
intended to take effect in possession or
enjoyment at or after his death; or
(3) By deed under which he has retained for
his life or any period not ascertainable
without reference to his death or for any
period which does not in fact end before
his death
(a) The possession or enjoyment of, or the
right to the income from the property;
or
(b) The right either alone or in conjunction
with any person, to designate the
persons who shall enjoy or possess the
property or the income therefrom.

Over

Case
A

FMV, transfer

2,000 1,500 2,500

FMV, death

2,500 2,000 2,000

Consideration received

2,000 800

Value included in the 0


Gross Estate

Case
B

Case
C

1,200 2,000

The transfer for insufficient consideration must


fall under any of the following:
(1) Transfer in contemplation of death;
(2) Revocable transfer, or
(3) Property passing under a GPA.
- Otherwise, the tax imposed is donors tax.

Transfers for insufficient consideration (Sec.


85(G))
Transfers, trusts, interests, rights, or powers
(denominated as transfer in contemplation of
death, revocable transfer and property passing
under general power of appointment) made,
created, exercised or relinquished for a

Proceeds of life insurance (Sec. 85(E))


Inclusion of proceeds of life insurance to the
gross estate depends on i) designated
beneficiary; ii) revocability of the insurance; iii)
period and source of funds used in premiums.

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When taxable (included in the Gross Estate)


Proceeds of life insurance taken out by the
decedent on his own life shall be included in
the gross estate in the following cases:
(1) Beneficiary is the estate of the deceased,
his executor or administrator, irrespective
of whether or not the insured retained the
power of revocation; or
(2) Beneficiary is other than the decedents
estate, executor or administrator, when
designation of beneficiary is not expressly
made irrevocable.
Note: Under the Insurance Code of 1978, if not
clear or silent, the designation of the
beneficiary is presumed to be revocable; hence,
includible in the decedents gross estate.

TAXATION LAW 2

employees , which are exempt from all


taxes; (PD 1146)
(5) Benefits accruing under the SSS law (RA
1161)
(6) Proceeds of life insurance payable to heirs
of deceased members of military personnel
(RA 360)
To determine the conjugal or separate character
of proceeds, the following factors are considered:
(1) Policy was taken before marriage Source
of funds determines ownership of the
proceeds of life insurance
(2) Policy was taken during marriage
(a) Beneficiary is estate of the insured
Proceeds are presumed conjugal;
hence, one-half share of the surviving
spouse is not taxable
(b) Beneficiary is third person Proceeds
are payable to beneficiary even in
premiums were paid out of the
conjugal

When not taxable


(1) Accident insurance proceeds as the Tax
Code specifically mentions only life
insurance policies
(2) Proceeds of a group insurance policy taken
out by a company for its employees
(3) Amount receivable by any beneficiary
irrevocably designated in the policy of
insurance by the insured. The transfer is
absolute and the insured did not retain any
legal interest in the insurance
(4) Proceeds of insurance policies issued by
the GSIS to government officials and
should be proven. As a rule, regardless of the
amount the debtor is unable to pay, the full
amount of the claim against the insolvent
person should be included in the gross estate
of the decedent. The portion of the claim
which is not collectible should be allowed as a
deduction from the gross estate.

Claims Against Insolvent Persons


For estate tax purposes, an insolvent is a
person whose properties are not sufficient to
satisfy, whether fully or partially, his debts. A
judicial declaration of insolvency is not
required but the incapacity of the debtor
Deductions and/or losses already deducted
from gross income can no longer be deducted
from gross estate. Further, deductions should
not be compensated for any insurance or
extrajudicial settlement. Otherwise, they are
not valid deductions.

K.1 ORDINARY DEDUCTIONS

Capital of the Surviving Spouse[Sec.85(H),


NIRC]
It is NOT part of the gross estate of the
deceased spouse. (See Exclusions)

1.A. EXPENSES, LOSSES,


INDEBTEDNESS AND TAXES, ETC. (ELIT)
i. Funeral Expenses (Sec. 86 (A)(1)(a))
Actual funeral expenses shall mean (i) those
which are actually incurred (ii) in connection

K. DEDUCTIONS FROM ESTATE

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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. They include:
(a) The mourning apparel of the surviving
spouse and unmarried minor children of
the deceased bought and used on the
occasion of the burial;
(b) Expenses for the deceaseds wake,
including food and drinks;
(c) Publication charges for death notices;
(d) Telecommunication expenses incurred in
informing relatives of the deceased;
(e) Cost of burial plot, tombstones, monument
or mausoleum but not their upkeep. In
case the deceased owns a family estate or
several burial lots, only the value
corresponding to the plot where he is
buried is deductible;
(f) Interment and/or cremation fees and
charges; and
(g) All other expenses incurred for the
performance of the rites and ceremonies
incident to interment.

TAXATION LAW 2

expenses borne or defrayed by relatives and


friends of the deceased are not deductible. (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 22003)
Illustrations
(a) If five percent (5%) of the gross estate is
P220,000 and the amount actually
incurred is P215,000, the maximum
amount that may be deducted is only
P200,000;
(b) If five percent (5%) of the gross estate is P
100,000 and the total amount incurred is
P150,000 where P20,000 thereof is still
unpaid, the only amount that can be
claimed as deduction for funeral expenses
is P100,000. The entire P50,000 excess
amount consisting of P30,000 paid
amount and P20,000 unpaid amount can
no longer be claimed as FUNERAL
EXPENSES. Neither can the P20,000
unpaid portion be deducted from the gross
estate as CLAIMS AGAINST THE ESTATE.

ii. 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.

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 02-200)
Not included are: (i) Expenses incurred after
the interment, such as for prayers, masses,
entertainment, or the like are not deductible.
(ii) Any portion of the funeral and burial
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Judicial expenses may include:


(1) Fees of executor or administrator
(2) Attorneys fees (Commissioner v CA (2000)
(3) Court fees
(4) Accountants fees
(5) Appraisers fees
(6) Clerk hire
(7) Costs of preserving and distributing the
estate
(8) Costs of storing or maintaining property of
the estate
(9) Brokerage fees for selling property of the
estate

TAXATION LAW 2

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
collect from the decedent must not have
prescribed.
(e) They must be reasonably certain in amount,
and substantiated.

Not deductible
(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.

Substantiation Requirements
In case of simple loan (including advances):
(1) The debt instrument must be duly
notarized at the time the indebtedness was
incurred, such as promissory note or
contract of loan, except for loans granted
by financial institutions where notarization
is not part of the business practice/policy
of the financial institution-lender.
(2) Duly

notarized Certification from the


creditor as to the unpaid balance of the
debt, including interest as of the time of
death
- If the creditor is a corporation, the sworn
certification should be signed by the
President, or Vice-President, or other
principal officer of the corporation.
- If the creditor is a partnership, the sworn
certification should be signed by any of the
general partners.

iii. 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)
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- In case the creditor is a bank or other


financial institutions, the Certification shall
be executed by the branch manager of the
bank/financial institution which monitors
and manages the loan of the decedentdebtor.
- If the creditor is an individual, the sworn
certification should be signed by him. In
any of these cases, the one who should
certify must not be a relative of the
borrower within the fourth civil degree,
either by consanguinity or affinity, except
when the requirement below is complied
with.
When
the
lender,
or
the
President/Vice-president/principal
officer of the creditor-corporation, or
the general partner of the creditorpartnership is a relative of the debtor in
the degree mentioned above, a copy of
the promissory note or other evidence
of the indebtedness must be filed with
the RDO having jurisdiction over the
borrower within 15 days from the
execution thereof.

TAXATION LAW 2
creditor of his capacity to lend at the
time when the loan was granted,
authenticated or certified to as such by
the tax authority of the country where
the non-resident creditor is a resident;

(4) A statement under oath executed by the

administrator or executor of the estate


reflecting the disposition of the proceeds of
the loan if it was contracted within 3 years
prior to the death of the decedent.
If the unpaid obligation arose from purchase of
goods or services:
(1) Pertinent documents evidencing the
purchase of goods or service, such as sales
invoice/delivery receipt (for sale of goods),
or contract for the services agreed to be
rendered (for sale of services), as duly
acknowledged, executed and signed by
decedent-debtor and creditor, and
statement of account given by the creditor
as duly received by the decedent-debtor
(2) Duly notarized certification from the
creditor as to the unpaid balance of the
debt, including interest as of the time of
death.

(3) Proof of financial capacity of the creditor to

lend the amount at the time the loan was


granted, as well as its latest audited
balance sheet with a detailed schedule of
its receivable showing the unpaid balance
of the decedent-debtor
- In case the creditor is an individual
who is no longer required to file
income tax returns with the Bureau, a
duly notarized declaration by the
creditor of his capacity to lend at the
time when the loan was granted
without prejudice to verification that
may be made by the BIR to
substantiate such declaration of the
creditor. If the creditor is a nonresident, the executor/ administrator
or any of the legal heirs must submit a
duly notarized declaration by the

(3) Certified true copy of the latest audited


balance sheet of the creditor with a
detailed schedule of its receivable showing
the unpaid balance of the decedent-debtor.
Moreover, a certified true copy of the
updated latest subsidiary ledger/records of
the debtor-decedent, should likewise be
submitted.
Where the settlement is made through the
Court in a testate or intestate proceeding,
pertinent documents filed with the Court
evidencing the claims against the estate,
and the Court Order approving the said
claims, if already issued, in addition to the

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documents mentioned in the preceding


paragraphs.

TAXATION LAW 2

decedents interest therein, should always


form part of the taxable gross estate. (RR 22003)

iv. 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:

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

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.

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.

v. Unpaid Mortgages, Losses and Taxes (Sec.


86(A)(1)(e))
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.
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

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 2-2003)

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NOTE: See Formula for computing Ordinary


Deductions of NRA above.

TAXATION LAW 2

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.

1. B. PROPERTY PREVIOUSLY
TAXED/PPT (SEC. 86(A)(2))
ALSO CALLED AS VANISHING
DEDUCTIONS
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

Limitations
(1) Value of property The deduction is
limited by the value of property previously
taxed or 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.
(2) 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.
(3) 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:
(a) Expenses, losses, indebtedness, and
taxes (ordinary deductions), and
(b) Transfers for public use as the amount
otherwise deductible for property
previously taxed bears to the value of
the decedents gross estate; and
(4) Percentage of deductions The vanishing
deduction shall be the value (final basis) in
#3 multiplied by the ff. percentages:

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

VD
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TAXATION 2

TAXATION LAW 2

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

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.

40%

1.D. AMOUNTS RECEIVED BY HEIRS


UNDER RA 4917

20%

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

(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
death of the decedent-employee in accordance
with RA 4917, provided that such amount is
included in the gross estate of the decedent.
These include:
(1) Retirement benefits from private firms with
private benefit plan, if the retiring
employee is 50 years old or older. This can
only be once availed.
(2) Benefits granted in case of separation
beyond the control of the employee.
RA 4917 provides that retirement benefits of
private employees shall not be subject to
attachment, levy execution or any tax.

FORMULA FOR VANISHING DEDUCTIONS:


(please take note of the limitations above)
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

( + )

SPECIAL DEDUCTIONS
(A) Family Home (Sec. 86(A)(4))
It is the dwelling house, including the land on
which it is situated, where the husband and
wife, or a head of the family, and members of
their family reside, as certified to by the
Barangay Captain of the locality. It is deemed
constituted on the house and lot from the time
it is actually occupied as the family residence
and considered as such for as long as any of its
beneficiaries actually resides therein. (Arts. 152
and 153, Family Code)

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.

1. 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
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Temporary absence from the constituted


family home due to travel or studies or work
abroad, etc. does not interrupt actual
occupancy. The family home is generally
characterized by permanency, that is, the place
to which, whenever absent for business or
pleasure, one still intends to return. (Sec. 6(D),
RR 2-2003)

TAXATION LAW 2

Beneficiaries of a Family Home


(1) The husband and wife, or an unmarried
person who is the head of a family; and
(2) Their parents, ascendants, descendants,
brothers and sisters, whether the
relationship be legitimate or illegitimate,
who are living in the family home and who
depend upon the head of the family for
legal support.

It must be part of the ACP or CPG, or the


exclusive properties of either spouse. It may
also be constituted by an unmarried head of a
family on his or her own property. (Sec. 6(D),
RR 2-2003 citing Art. 156, FC). For purposes of
availing this deduction, a person may constitute
only one family home. Sec. 6(D), RR 2-2003
citing Art. 161, FC.

Limitation: P 1,000,000.00
(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.

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) Medical Expenses (Sec. 86(A)(6), NIRC; Sec.

6(F), RR 2-2003)
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
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
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from the gross estate under Claims against


the estate. (RR 2-2003, Sec. 6-F)

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interest in the estate is taxed. Net share of the


surviving spouse is neither an ordinary nor a
special deduction.

NET SHARE OF THE SURVIVING spouse in the


conjugal partnership property (Sec. 86(C),
NIRC; Sec. 6(H), RR 2-2003)

L. EXCLUSIONS FROM ESTATE


Capital of the Surviving Spouse (Sec. 85(H))
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)

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

Exclusive Property of Each Spouse


If ACP governs property relations
If CPG governs property 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)

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 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 (1) The following are exclusive property of each
community property.
spouse:
(b) Property for personal and exclusive use of
(a) That which is brought to the marriage as
either spouse; however, jewelry shall form
his or her own
part of the community property.
(b) That which each acquires DURING the
(c) Property acquired before the marriage by
marriage by gratuitous title
either spouse who has legitimate
(c) That which is acquired by right of
descendants from a former marriage, and
redemption, by barter or by exchange with
the fruits as well as the income, if any, of
property belonging to only one of the
such property. (Art. 92 Family Code)
spouses
(2) Property acquired during the marriage is
(d) That which is purchased with exclusive
presumed to belong to the community, unless
money of the wife or the husband (Art.
it is proved that it is one of those excluded
109, Family Code)
therefrom.
(2) Property bought on instalments paid partly
from exclusive funds of either or both spouses
and partly from conjugal funds belong to the
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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.
(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)
Exemptions under special laws
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(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

M. TAX CREDIT FOR ESTATE TAXES PAID IN A FOREIGN COUNTRY


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.
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.

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.

( )

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.

( )

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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.
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.
Illustration:
Net Estate Philippines (reduced by all allowable P1,050,000
deductions, except standard deduction)
Country G Net Estate

300,000

Country H Net Estate

150,000

Tax paid/incurred:
Philippines
Country G
Country H

15,000
5,000
1,400

Net Estate Philippines (reduced by all allowable P1,050,000


deductions, except standard deduction)
Net taxable estate is P500,000 (1,050,000 + 300,000 + 150,000 1,000,000 standard deduction).
The Philippine estate tax on P500,000 is P15,000
Solution Limitation A
(1) Apply Formula A. The result after applying the formula above is compared to the tax actually paid
for each foreign country.
(2) The lower of the two amounts for each foreign country will be added to get the total tax credit
allowed under Limitation A.
Amount
lower)
Country G
(300/1500 x 15,000)

3,000

Actually paid to Country G

5,000

Country H
(150/1500 x 15,000)

1,500

Actually paid to Country H

1,400

3,000

1,400

Tax credit allowed under Limitation A P 4,400


Solution Limitation B:

156

Allowed

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(1) Apply Formula B. The result after applying the formula above is compared to the tax actually paid
in total to foreign countries.
(2) The lower of the two amounts will be added to get the total tax credit allowed under Limitation B.
Amount Allowed (Lower)
450/1500 x 15,000

4,500

Total foreign income taxes


6,400
paid
Tax credit allowed under Limitation A

P 4,400
from tax, the value of the gross estate exceeds
P20,000.

N. EXEMPTION OF CERTAIN
ACQUISITIONS AND
TRANSMISSIONS

Period of sending notice: A written Notice of


Death must be given to the BIR.
(a) Within 2 months after the death of the
decedent or
(b) Within 2 months after the executor or
administrator or executor qualifies as such.

(1) Merger of usufruct in the owner of the


naked title
(2) Transmission or delivery of the inheritance
or legacy by the fiduciary heir (1st heir) to
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.
(3) Transmission from the first heir, legatee or
done in favour of another beneficiary, in
accordance with the desire of the
predecessor.
(4) 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.

Who will file: executor, administrator, or any of


the legal heirs, as the case may be.

P. ESTATE TAX RETURN


(Section 90 91)
When Required (Copies in duplicate)
(1) When the estate is subject to estate tax,
OR
(2) When, though exempt from tax, the gross
value of the estate exceeds Two hundred
thousand pesos (P200,000), OR
(3) Regardless of the gross value of the estate,
when the said estate consists of registered
or registrable property such as real
property, motor vehicle, shares of stock or
other similar property for which a
clearance from the Bureau of Internal
Revenue is required as a condition
precedent for the transfer of ownership
thereof in the name of the transferee.

O. FILING OF NOTICE OF DEATH


(Section 89)
Notice of Death
When needed: (i) in all cases of transfers
subject to tax or (ii) where, though exempt
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Contents
The executor, or the administrator, or any of
the legal heirs, as the case may be, shall file a
return under oath in duplicate, setting forth:
(1) The value of the gross estate of the
decedent at the time of his death, or in
case of a nonresident, not a citizen of the
Philippines, of that part of his gross estate
situated in the Philippines;
(2) The deductions allowed from gross estate
in determining the net taxable estate; and
(3) Such part of such information as may at
the time be ascertainable and such
supplemental data as may be necessary to
establish the correct taxes.
(4) For estate tax returns showing a gross
value exceeding P2,000,000 - there must
be a statement duly certified to by a
Certified Public Accountant containing the
following:
(a) Itemized assets of the decedent with
their corresponding gross value at the
time of his death, or in the case of a
non-resident, not a citizen of the
Philippines, of that part of his gross
estate situated in the Philippines;
(b) Itemized deductions from gross estate
allowed in Section 86; and
(c) The amount of tax due whether paid or
still due and outstanding.

constructive possession of any property of the


decedent may file this return.

Period for Filing


General Rule: Filed within 6 months from the
decedent's death.

Non-resident decedent does not have an


executor or administrator in the Philippines
The estate tax return shall be filed with and
the TIN for the estate shall be secured from the
Office of the Commissioner through RDO 39
QC.
The foregoing provisions notwithstanding,
the Commissioner of Internal Revenue may
continue to exercise his power to allow a
different venue/place in the filing of tax
returns.

Where to file the estate tax return and pay the


tax due (Sec. 9, RR 2-2003)
Resident Citizen (RC and RA)
The executor or administrator shall register the
estate of the decedent and secure a new TIN
from the RDO where the decedent was
domiciled at the time of his death and shall file
the estate tax return and pay the
corresponding estate tax with:
(1) An authorized agent bank (AAB), or
(2) Revenue District Officer (RDO), or
(3) Collection Officer,
(4) Duly authorized Treasurer of the city or
municipality in which the decedent was
domiciled at the time of his death, or
Non-resident decedent (NRA/NRC) with
executor or administrator in the Philippines
The estate tax return shall be filed with and
the TIN for the estate shall be secured from the
RDO where such executor or administrator is
registered.
If the executor or administrator is not
registered, the estate tax return shall be filed
with and the TIN for the estate shall be secured
from the RDO having jurisdiction over the
executor or administrators legal residence.

Exception: The Commissioner shall have


authority to grant, in meritorious cases, a
reasonable extension not exceeding 30 days
for filing the return.
Who will file: executor, administrator, or any of
the legal heirs, as the case may be, under oath.
If there is no executor or administrator
appointed, qualified, and acting within the
Philippines, any person in actual or
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Payment: Pay as you file


At the time the return is filed by the executor,
administrator or the heirs.
The executor or administrator means the
executor or administrator of the decedent, or if
there is none appointed, qualified, and acting
within the Philippines, then any person in
actual or constructive possession of any
property of the decedent. The estate tax shall
be paid by the executor or administrator before
the delivery of the distributive share in the
inheritance to any heir or beneficiary.

TAXATION LAW 2

date of the expiration of the period of the


extension
(2) Suspension of the running of statute of
limitations for deficiency assessment for
the period of any extension
(3) Any amount paid after the statutory due
date of the tax, but within the extension
period, shall be subject to interest but not
to surcharge.
Can estate tax be paid in installments? Yes!
In case the available cash of the estate is not
sufficient to pay its total estate tax liability, the
estate may be allowed to pay the tax by
installment and a clearance shall be released
only with respect to the property the
corresponding/computed tax on which has
been paid. (Sec. 9(F), RR 2-2003)

Exception: In meritorious cases, the


Commissioner grant reasonable extension not
exceeding 30 days from filing.
Extension of Payment (Sec. 9(E), RR 2-2003)
The Commissioner may allow an extension of
payment, if he finds that the payment on the
due date of the estate tax or of any part thereof
would impose undue hardship upon the estate
or any of the heirs:
(1) Extension not to exceed 5 years, in case the
estate is settled judicially, or
(2) 2 years in case the estate is settled
extrajudicially.

Who are liable for the payment of estate taxes


Primarily, the estate, through the executor or
administrator.
(1) Payment shall be made before the delivery
of the distributive share in the inheritance
to any heir or beneficiary.
(2) If there are two or more executors or
administrators, all of them are severally
liable for the payment of the tax.
(3) The estate tax clearance issued by the
Commissioner or the RDO having
jurisdiction over the estate, will serve as
the authority to distribute the remaining
properties/share in the inheritance to the
heir or beneficiary.

Where the taxes are assessed by reason of


negligence, intentional disregard of rules and
regulations, or fraud on the part of the
taxpayer, no extension will be granted by the
Commissioner.
If extension granted, the Commissioner may
require the executor, or administrator, or
beneficiary, as the case may be, to furnish a
bond in such amount, not exceeding double
the amount of the tax and with such sureties as
the
Commissioner
deems
necessary,
conditioned upon the payment of the said tax
in accordance with the terms of the extension.

Subsidiarily, heirs or beneficiaries, for the


payment of that portion of the estate which his
distributive share bears to the value of the total
net estate.
The extent of his liability, however, shall in
no case exceed the value of his share in the
inheritance.
Claims for taxes, whether assessed before
or after the death of the deceased, can be
collected from the heirs even after the
distribution of the properties of the decedent,

Effects of granting an extension


(1) Payment of the amount in respect of which
the extension is granted on or before the
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xxx. The heirs shall be liable therefor, in


proportion to their share in the inheritance.
Marcos v. CA (1997)

TAXATION LAW 2

(1) Sue all the heirs and collect from each of


them the amount of tax proportionate to
the inheritance received
(2) By virtue of a lien created under Sec 219,
sue only one heir and subject the property
he received from the estate to the payment
of estate tax. Such heir may go against the
other heirs.

Note: When there is income tax deficiency of


the estate and the estate has been distributed
to the heirs, the remedies are:

Tax Rates:
If the Net Estate is

Over

But not Over


P 200,000.00

P 200,000.00 500,000.00

The Tax Shall be

Plus

Of the Excess Over

Exempt
5%

P 200,000.00

8%

500,000.00

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

11 %

2,000,000.00

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

15 %

5,000,000.00

10,000,000.00

20 %

10,000,000.00

500,000.00

2,000,000.00 P 15,000.00

1,215,000.00

Exempt: If net taxable estate 200,000

II. DONORS TAX


perfection/completion of the donation shall
govern the imposition of the donors tax. (Sec.
11, RR 2-2003)

A. BASIC PRINCIPLES
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
supplements the estate tax by preventing the
avoidance of the latter through the device of
donating the property during the lifetime of the
deceased.

B. DEFINITION
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 whether the
transfer is in trust or otherwise, whether the
gift is direct or indirect, and whether the
property is real or personal, tangible or
intangible. [Sec. 98(B), NIRC]

It shall not apply unless and until there is a


completed gift. The transfer of property by gift
is perfected from the moment the donor knows
of the acceptance by the donee; it is completed
by delivery, either actually or constructively, of
the donated property, to the donee. Thus, the
law in force at the time of the

It is the tax on donations. Thus, it is a tax on (i)


an act of the donor disposing gratuitously of a
thing/right in favour of a done located within
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the Philippines, and on (ii) sales/exchanges of


properties, other than real property (defined in
Sec 24D) classified as capital asset within the
Philippines, for less than adequate and full
consideration in money or moneys worth.

(1)
(2)
(3)
(4)
(5)

C. NATURE
Donors tax is not a property tax but a tax
imposed on the transfer of property by way of
gift inter vivos. [Sec 11, RR 2-2003 citing Lladoc
v. CIR (1965)]

(2)

Donative intent of the donor3


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

In order that the donation of an immovable


may be valid, it must be made in a public
document specifying therein the property
donated. The acceptance may be made in the
same Deed of Donation or in a separate public
document, but it shall not take effect unless it
is done during the lifetime of the donor. If the
acceptance is made in a separate instrument,
the donor shall be notified thereof in an
authentic form, and this step shall be noted in
both instruments. (Sec. 11, RR 2-2003)

D. PURPOSE OR OBJECT
(1)

TAXATION LAW 2

To supplement estate tax;


To prevent avoidance of income tax
through the device of splitting income
among numerous donees, who are usually
members of a family or into many trusts,
with the donor thereby escaping the effect
of the progressive rates of income tax.

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]

Taxable transaction/object/event
: gratuitous transfer of property between two
or more persons who are living at the time of
the transfer, whether the transfer is in trust or
otherwise, whether the gift is direct or indirect
and whether the property is real or personal,
tangible or intangible
NB: If donor is RC/NRC/RA = liable for donors
tax REGARDLESS of where the gift was made
or where property is located

F. TRANSFERS WHICH MAY BE


CONSTITUTED AS DONATION

NRA = liable for donors tax only if the property


donated is w/in the Phil.

(1) Sale, exchange or transfer of property for


insufficient consideration
(2) Condonation or remission of debt where
the debtor did not render service in favor of
the creditor

E. REQUISITES OF VALID DONATION


(Art 725, NCC)
Requisites of a VALID and COMPLETE donation

Note: The transfers which may be constituted as


donation is exempt from the donative intent
requirement.
3

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Condonation or remission of debt is


defined as an act of liberality, by virtue of
which, without receiving any equivalent,
the creditor renounces the enforcement of
the obligation, which is extinguished in its
entirety or in that part or aspect of the
same to which the remission refers. It is an
essential characteristic of remission that it
be gratuitous, that there is no equivalent
received for the benefit given; once such
equivalent exists, the nature of the act
changes. It may become dation in payment
when the creditor receives a thing different
from that stipulated; or novation, when the
object or principal conditions of the
obligation should be changed; or
compromise, when the matter renounced
is in litigation or dispute and in exchange
of some concession which the creditor
receives. (Dizon v CTA, 2008)
(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
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 2

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.

H. CLASSIFICATION OF DONOR
Donors Tax applies to individuals and
corporations (in their secondary purpose). They
may be classified into:
(a) Residents (RC/RA/DC/RFC)
(b) 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 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

G. 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
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(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

TAXATION LAW 2

(1) Did not impose a transfer tax of any


character, in respect of intangible personal
property of citizens of the Philippines not
residing in that foreign country; OR
(2) Allowed a similar exemption from transfer
tax in respect of intangible personal
property owned by citizens of the
Philippines not residing in that country

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:

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.

I. DETERMINATION OF GROSS GIFT (INCLUDING COMPOSITION OF GROSS GIFT)


Resident

Nonresident

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)
Note: If there is reciprocity, intangible assets are
excluded from gross gifts

Deductions and Exemptions from GROSS gift to arrive at NET Gifts

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Resident

TAXATION LAW 2

Nonresident

Deductions (These are exempt donations but are Deductions (These are exempt donations but are
deductible from, and not treated as exclusions deductible from, and not treated as exclusions
from the gross gift)
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
(2) Gifts made to or for the use of the National
Government or any entity created by any of its
agencies which is not conducted for profit, or
to any political subdivision of the said
Government.
(3) Gifts in favor of an educational and/or
charitable, religious, cultural or social welfare
corporation,
institution,
accredited
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.

(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 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) 2. Donations made to entities exempted under
special laws.

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) Gift to Parish Priest or Church (applies only
to real property tax)
(3) Onerous Donations or Donations in
exchange for goods/services (since they
are subject to income tax)

SUBJECT TO DONORS TAX


Gratuitous Donations to
Association

Homeowners

J. VALUATION OF GIFTS MADE IN


PROPERTY
Taxable Base:

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Net gifts i.e. net economic benefit from the


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

TAXATION LAW 2
Thus, what the seller avoids in
the payment of the donors tax, it pays
for in the capital gains tax.

(3) 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.
(4) If unlisted stocks = Adjusted Net Asset
Method shall be used whereby all assets
and liabilities are adjusted to fair market
values. The net of adjusted asset minus the
adjusted liability value is the indicated
value of the equity.
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]
However, where the consideration is fictitious,
the entire value of the property shall be subject
to donors tax.

K. TAX CREDIT FOR DONORS TAXES PAID IN A FOREIGN COUNTRY


Who may claim the tax credit
(1) Resident citizen
(2) Non-resident citizen
(3) Resident alien
1. Per Country Limit
( )


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TAXATION LAW 2

2. Worldwide Limit
( )


personal, tangible or intangible. (Sec. 98,
NIRC)

L. EXEMPTIONS OF GIFTS FROM


DONORS TAX
(See table above)

DONORS TAX RETURN

(1) Encumbrances on the property donated if

When Required (Copies in duplicate):


When there is a transfer by gift.

assumed by the donee in the deed of


donation.
(2) Donations made to entities exempted
under special laws.
(a) Aquaculture
Department
of the
Southeast
Asian
Fisheries
Development Center of the Philippines
(b) Development
Academy
of
the
Philippines
(c) Integrated Bar of the Philippines
(d) International Rice Research Institute
(e) National Museum
(f) National Library
(g) National Social Action Council
(h) Ramon Magsaysay Foundation
(i) Philippine Inventors Commission
(j) Philippine
American
Cultural
Foundation
(k) Task Force on Human Settlement on
the donation of equipment, materials
and services

NOTE: Separate return is filed for each gift


made on different dates during the year
reflecting therein any previous net gifts made
in the same calendar year. 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. If the gift involves
CPG, each spouse shall file separate return wrt
his/her respective share in the CPG.
Contents
(1) Each gift made during the calendar year
which is to be included in computing net
gifts;
(2) The deductions claimed and allowable;
(3) Any previous net gifts made during the
same calendar year;
(4) The name of the donee;
(5) Relationship of the donor to the donee;
(6) Such
further information as the
Commissioner may require.

M. PERSON LIABLE
(see Classification of Donor)

Period for Filing


General Rule: The return must be filed within
30 days after the date when the gift was made
or completed. The tax due thereon shall be
paid at the same time that the return is filed.

Every person, whether natural or juridical,


resident or non-resident, who transfers or
causes to transfer property by gift, whether in
trust or otherwise, whether the gift is direct or
indirect and whether the property is real or
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Who will file: Any person who made a gift, such


must be filed under oath.

TAXATION LAW 2

Net Gifts
(a) The net economic benefit from the transfer
that accrues to the donee.
(b) 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 22003)

Where to file the donors tax return and pay the


tax due (Sec. 9, RR 2-2003)
Resident
Unless the Commissioner permits otherwise,
the return shall be filed and tax paid to:
(1) To Authorized Agent Bank (AAB) or the
Revenue District Officer having jurisdiction
over the place of the domicile of the donor
at the time of the transfer.
(2) If no AAB = to the Revenue Collection
Officer or duly Authorized City or Municipal
Treasurer where the donor was domiciled
at the time of the transfer,
(3) if no legal residence in Phil or NRA = with
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.

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

Non-residents
(1) The Philippine Embassy or Consulate in
the country where he is domiciled at the
time of the transfer, or
(2) Directly
with the Office of the
Commissioner.

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
----------------------------------------------------=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

Payment: Pay as you file.


Who are liable for the payment of donors tax
Every person, whether natural or juridical,
resident or non-resident, who transfers or
causes to transfer property by gift, whether in
trust or otherwise, whether the gift is direct or
indirect and whether the property is real or
personal, tangible or intangible. (Sec. 98,
NIRC)

N. TAX BASIS
The tax for each calendar year shall be
computed on the basis of the total net gifts
made during the calendar. (Sec. 99, NIRC)
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TAXATION LAW 2

Tax Rate
(1) IF NOT A STRANGER

Net Gift Over

But not Over

The Tax Shall be

Plus

Of the Excess
Over

100,000.00

Exempt

100,000.00

200,000.00

2%

100,000.00

200,000.00

500,000.00

P 2,000.00

4%

200,000.00

500,000.00

1,000,000.00

14,000.00

6%

500,000.00

1,000,000.00

3,000,000.00

44,000.00

8%

1,000,000.00

3,000,000.00

5,000,000.00

204,000.00

10%

3,000,000.00

5,000,000.00

10,000,000.00

404,000.00

12%

5,000,000.00

10,000,000.00

and over

1,004,000.00

15%

10,000,000.00

(2) IF A STRANGER: 30%


(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.
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

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TAXATION LAW 2

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.
E: not exceeding 30 days (in meritorious cases)
NB: Written notice of death to CIR w/in 2 mos. After
death
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.

NOTE: separate return is filed for each gift made on


different dates during the year reflecting therein any
previous net gifts made in the same calendar year.
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.
If the gift involves CPG, each spouse shall file separate
return wrt his/her respective share in the CPG.

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


by CIR 2x amount of tax

Where to file and to whom paid


General Rule: to the Authorized Agent Bank (AAB),
Revenue Collection Officer (RCO) or duly authorized
Treasurer of the city or municipality in the Revenue
District Office having jurisdiction over the place of
domicile of the decedent at the time of his death

Resident
GR: to AAB of the RDO having jurisdiction over the place of
the domicile of the donor at the time of the transfer.

Exception:
(1) If no AAB = to the RCO or duly Authorized City or
Exception: If NRA/NRC,
Municipal Treasurer where the donor was domiciled at
If w/ Aor, Eor in Phil = to the AAB of the RDO where such
the time of the transfer,
Aor,Eor is registered/domiciled, if not yet registered with
the BIR.
(2) If no legal residence in Phil or NRA = with Revenue
If w/o Aor,Eor in Phil = to AAB under the jurisdiction of
District No. 39 - South Quezon City or with the
RDO No. 39
Philippine Embassy or Consulate in the country where
donor is domiciled at the time of the transfer.
Non-resident
(1) The Philippine Embassy or Consulate in the country
where he is domiciled at the time of the transfer, or
(2) Directly with the Office of the Commissioner.

Who should file


(1) 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:
(a) In all cases of transfers subject to estate tax;
(b) Where though exempt from estate tax, the gross
value of the estate exceeds two hundred
thousand (P200,000) pesos; or
(c) Regardless of the gross value of the estate, where
the said estate consists of registered or

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.

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TAXATION 2

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.
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.

170

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TAXATION 2

TAXATION LAW 2

ESTATE TAX FORMULAE


EXCLUSIVE

COMMUNITY

Gross Estate4
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

TOTAL

Value Taken of Property


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

Less: (Ordinary Deductions)


7 ELIT9
Vanishing Deductions
Transfers for Public Use
Retirement Benefits received by heirs

VANISHING DEDUCTION
**Proportionate Deduction

Net Estate
Less: (Special Deductions10)
Standard Deduction
Family Home
Medical Expenses
Amounts received by heirs
Net Taxable Estate (before share of surviving spouse)
Less: Share of Surviving Spouse

( + )

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


Estate Tax Credit =

OR actual estate tax paid to foreign country


Net Taxable Estate
Multiply by Tax Rate
Estate Tax Due
Less: Tax Credit11, if any

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


Estate Tax Credit =
OR

ESTATE TAX DUE

OR actual estate tax paid to foreign country

DO NOT INCLUDE: EXEMPTIONs

Amount included in the GE = FMV at the time of death consideration amount

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.
9 If NRA, Allowable Deduction wrt ELIT =

10
These are not allowable deductions when TP is NRA.
11
Applies only to RC/NRC/RA

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TAXATION LAW 2

DONORS TAX
ON FIRST DONATION
Gross Gift
Less: Deductions (those not beneficial
to the done e.g. mortgage)

xxx

Net Gift
Less: Exemptions, if applicable

xxx
xxx

Net Taxable Gift


Multiply by Tax Rate

xxx
xx%

Donors Tax Due


Less: Tax Credit12, if any
DONORS TAX DUE

xxx
xxx
xxx

xxx

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


Tax Credit =

ON SUBSEQUENT DONATIONS w/in the same calendar year


Gross Gift
Less: Deductions (those not beneficial
to the done e.g. mortgage)

xxx
xxx


/ /

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


Tax

Credit


/ /

Net Gift
Less: Exemptions, if applicable

xxx
xxx
xxx
xxx
xxx
xx%

Donors Tax on Aggregate Net Gifts


Less: Donors tax on previous net gifts during the year

xxx
xxx

Donors Tax Due


Less: Tax Credit13, if any
DONORS TAX DUE

xxx
xxx
xxx

12
13

Applies only to RC/NRC/RA


Applies only to RC/NRC/RA

172

OR
/

Net Taxable Gift


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

/ /

OR actual donors tax paid to foreign country

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TAXATION LAW 2

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

Prepare the LIST of assets


and liabilities and their
supporting documents

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

CANCEL TIN

Transfer
properties to
the heirs

DONORS TAX

NO TAX RETURN
NECESSARY

Full Exemption
COMPLETION/
PERFECTION OF
DONATION

Exempt
Partial Exemption
w/in 30d after
gift was made

DONORS
TAX
RETURN + PAYMENT
(NB: Date of payment
may be extended 6
months)

Liable

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TAXATION 2

III. Value-Added Tax


(VAT)
(d)

A. 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

(e)

(f)

B. CONSTITUTIONALITY OF VAT

(g)

ABAKADA Guro Party List, et. al. v Ermita


(2005):
(a) The validity of raising the VAT rate from
10% to 12% by the President was upheld by
SC.
(b) 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.
(c) 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%

TAXATION LAW 2
limitation on the creditable input tax, 5year amortization of input tax on purchase
of capital goods, or the 5% final
withholding tax by the government.
It is equitable: The law is equipped with a
threshold margin (P1.5M). Also, basic
marine and agricultural products in their
original state are still not subject to tax.
Congress also provided for mitigating
measures to cushion the impact of the
imposition of the tax on those previously
exempt.
Excise taxes on petroleum
products and natural gas were reduced.
Percentage tax on domestic carriers was
removed.
Power producers are now
exempt from paying franchise tax.
VAT, by its very nature, is regressive. BUT
the Constitution does not really prohibit the
imposition of indirect taxes (which is
essentially regressive).
What it simply provides is that Congress
shall evolve a progressive system of
taxation.
In Tolentino v. Sec. of Finance (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.

Tolentino v. Secretary of Finance (1995):


(a) 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.
(b) The regressive effects are corrected by
the zero rating of certain transactions
and through the exemptions

C. CHARACTERISTICS/ELEMENTS OF
A VAT-TAXABLE TRANSACTION
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TAXATION 2

TAXATION LAW 2
the regulations of the Bangko Sentral ng
Pilipinas

General Characteristics/Nature:
(1) 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)
(2) 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.
(3) Indirect Tax it may be shifted or passed
on to the buyers, transferee, or lessee of
the goods, properties or services as part of
the purchase price.
(4) 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

Transactions Covered and their elements


(summary):
General Requirements
(1) 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
(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.

General Features:
(1) VAT uses the Tax Credit Method
(2) All goods, properties and services (except
exempt) including goods subject to excise
taxes, and use or lease of properties,
whether real or presonal, are subject to tax
at all levels of distribution.
(3) Although tax is levied at all stages, the
total value of the goods is subject to tax
only once.
(4) VAT, as a general rule, follow the
destination principle (goods and services
are taxed only in the country where they
are consumed). Therefore, no VAT shall be
imposed to form part of the cost of goods
destined for consumption outside the
territorial border of the taxing authority.

Taxable Transactions and Specific Requirements


(1) Sale, Barter, Exchange or Lease (SBEL) of
Goods or Properties14
Goods/Personal Properties
(i) Actual/deemed sale for a valuable
consideration
(ii) for use or consumption in the Phil
(regardless
of
the
payment
arrangements)
(iii) not exempt from VAT (NIRC, special
law, special agreement)

EXCEPTIONS:
(a) The service is performed in the Philippines;
(b) The service falls under any of the
categories provided in Section 102(b) of the
Tax Code; and
(c) It is paid for in acceptable foreign currency
that is accounted for in accordance with
14 Sec

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D. IMPACT OF TAX
TAX

Real Properties (RP) 15:


(i) Seller (w/n natural) executes contract
to SBE of RP
(ii) RP is in the Phil
(iii) Seller is engaged in sale or exchange
of RP or real estate (dealer, developer,
lessor)
(iv) 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)
(v) Not exempt from VAT (NIRC, special
law, special agreement)

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.

16

Impact

Incidence

The
impact
of
taxation is on the
statutory
taxpayer,
the one from whom
the
government
collects.
Seller/Importer

Seller/Importer is the
one who collects the
tax and pays to the
government

The incidence of tax is


on the one who bears
the burden of taxation

Buyer/Final
Consumer

the
buyers is the one who
bears the burden of
the taxation.

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.

15

Residential
House and
Lot

INCIDENT OF

A VAT-registered person is entitled to credit


input taxes evidenced by VAT invoice or official
receipt against the output tax payable. The tax
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.

(1) Importation of Goods

Residential
Lot

V.

E. TAX CREDIT METHOD

Sale of Services16
(i) for
a
valuable
consideration
(actually/constructively received)
(ii) performed ICTB in the Phil.
(iii) not exempt from VAT (NIRC, special
law, special agreement)
(iv) person rendering service is VAT-liable
(v) no ee-er relationship

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

TAXATION LAW 2

Subject to CGT (6%)

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.

Subject to 12% VAT


If monthly rental 12,800 = VAT and OPTexempt
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

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:

If SP > 3,199,200.00 = subject to VAT


IF SP 3,199,200.00 = VAT-exempt

Sec 108

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TAXATION 2

(a) The output tax exceeds the input tax, the

TAXATION LAW 2
(2) the service falls under any of the
categories provided in Section 102(b) of
the Tax Code; and
(3) it is paid for in acceptable foreign
currency that is accounted for in
accordance with the regulations of the
BSP.

excess shall be paid by the VAT-registered


person
(b) The input tax exceeds the output tax, the
excess shall be carried over to the
succeeding quarter or quarters

F. DESTINATION PRINCIPLE

G. PERSONS LIABLE

This provides that the destination of goods


determines the taxation or exemption from
VAT.

Transactions subject to VAT:


(1) Sale, Barter or Exchage of Goods or
Properties
(2) Sale of Services, including Lease or use of
Properties
(3) Importation of Goods.

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)

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.

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.
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]

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
If real property: persons engaged in
real estate business:
(i) Any person who SBE of real
properties ICT/B
(ii) Real estate lessors/ sub-lessors
(iii) NRA/NRC lessors when RP is in
Phil
(iv) non-stock,
non-profit
corp
engaged in SBE of real properties
ICT/B, regardless of disposition of
income
(v) Govt inc GOCCs in SBEL of RP
ICT/B

CIR v. American Express (2005):


The court enumerated the exceptions to the
destination principle.
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:
(1) The service is performed in the
Philippines;
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(1) Who renders services


(2) 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 2

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.
Who Pays: Paid by SELLER/TRANSFEROR.
(Sec. 106, NIRC)

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)

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)
(2) 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.
(3) Additional Requirements depending on the
nature of property:

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.

G. VAT ON SALE OF GOODS OR


PROPERTIES
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TAXATION 2

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

or not it sells exclusively to members or their


guests), or government entity.
Exception:
(1) Non-resident persons who perform
services in the Philippines are deemed to
be making sales in the course of trade or
business, even if the performance of
services is not regular. (Sec. 105, NIRC; RR
16-2005)
(2) Importation of Goods, may be for business
or non-business use.

Real Properties (RP) 17:


(i) Seller (w/n natural) executes contract to
SBE of RP
(ii) RP is in the Phil
(iii) Seller is engaged in sale or exchange of RP
or real estate (dealer, developer, lessor)
(iv) 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)
(v) not exempt from VAT (NIRC, special law,
special agreement)

CIR v CA (2002): In the course of trade or


business requires the regular conduct or
pursuit of a commercial or economic activity,
regardless of WON it is profit-oriented.
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.

In the course of trade or business


Rule of Regularity: the regular conduct or
pursuit of a commercial or an economic activity,
including transactions incidental thereto, by
any person regardless of whether or not the
person engaged therein is a nonstock,
nonprofit private organization (irrespective of
the disposition of its net income and whether

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 payments19,
interests and penalties (if instalment),
commission income (if exported), purchase
price, charges for packing, delivery and
insurance
If goods/personal properties,
GSP = amount paid in consideration
IF DEEMED SALE: FMV at the time of
the transaction

17

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

Residential
Lot
Residential
House and
Lot

TAXATION LAW 2

Subject to CGT (6%)

Subject to 12% VAT


If monthly rental 12,800 = VAT and OPTexempt
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

18

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

If SP > 3,199,200.00 = subject to VAT


IF SP 3,199,200.00 = VAT-exempt

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NB: in retirement/cessation, inventory


(raw materials, finished goods,
machinery,
equipment,
furniture,
fixture), tax base = whichever is lower,
i. acquisition cost
ii. current market price of goods
If real property,
GSP = amount higher:
i. consideration stated in the sales
document
ii. FMV, whichever is higher of:
i. Zonal value: FMV as determined
by CIR
ii. Real Property Tax Value: FMV as
determined by provincial & city
assessors
IF ON INSTALLMENT (RR16-2005)20:
GSP = down payments received +
interests + penalties + other charges
amount of mortgage (paid)
Note:

TAXATION LAW 2
consideration, the additional VAT shall
be paid accordingly (RMC 03-96)
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 and 2) when GSP is
unreasonably lower than AMV22

AS REGARDS SALE OF REAL PROPERTY


Taxable:
(1) On installment plan
(2) Pre-selling by real estate dealers
(3) Sale of residential lot >P1,919,500 ; or
house and lot/other residential dwelling
>P3,199,200
(4) Lease of residential units (rental per unit >
12,800/mont
h OR total
If zonal/FMV, tax base =
rental from
U
ALL
p ( ) ,
units>P1,919,
o ( )
500/year)
n
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

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

20

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.

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
22 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.

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.

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(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)
General Rule: 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 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 Taxfree exchange)
(8) Advance payment by the lessee
(9) Security deposits for lease agreements.23

TAXATION LAW 2
(b) The value of goods or properties sold
and subsequently returned or for which
allowances were granted by a VATregistered person may be deducted
from the gross sales or receipts for the
quarter in which a refund is made or a
credit memorandum is issued.

(2) Sales Discounts bona fide or regular


discounts given to purchasers, which are
ascertainable and definitely agreed upon
between the vendor and the vendee at the
time of sale are deductible from the GSP.
(a) If given after the sale or are in the
nature of a rebate or partial remission
of indebtedness, they will not be
allowed as a deduction from the GSP.
(b) Furthermore the discuont must be
expressly indicated in the sales invoice
and the amount forming part of the
gross sales duly recorded in the books
fo accounts.
(c) Credits for allowances to cover roll
back in prices and other adjustments
are not deductible.

I. ZERO-RATED SALES OF GOODS OR


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

Allowable Deductions from Gross Selling Price


The following are deductible from the gross
selling price:
(1) Sales returns and allowances the selling
price of the goods or properties returned
and not sold necessarily reduces the gross
sales on which the rate is applied.
(a) Sales returns and allowances for which
a proper credit/refund was made
during the month or quarter to the
buyer for sales previously recorded as
table sales are allowed as a deduction
in the period when they are made.
Excess may be carried over to the
succeeding period.

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,

23 Please

take note of the difference between security deposits


and those applied to rent.

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TAXATION 2

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

TAXATION LAW 2

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.
(b) 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)
(6) Those considered export sales under the
Omnibus Investment Code of 1987, and
other special laws (ex. Bases Conversion &
Development Act of 1992)

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.
(3) (i) Sale of raw materials or packaging
materials (ii) to export-oriented enterprise
(iii) whose export sales exceed seventy
percent (70%) of total annual production.
(a) Any enterprise whose export sales
exceed 70% of the total annual
production of the preceding taxable
year shall be considered an exportoriented enterprise upon accreditation
under the rules & regulations of Export
Development Act, RA 7844 (RR 7-95)
(4) Sale of gold to the Bangko Sentral ng
Pilipinas (BSP)
(5) The sale of goods, supplies, equipment
and fuel to persons engaged in
international shipping or international air
transport operations (RA 9337)
(a) Limited to goods, supplies, equipment
and fuel pertaining to or attributable to

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
(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.
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(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 reissued. (RR 16-2005)

TAXATION LAW 2

(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
shall be managed and
operated by the PEZA as separate customs
territory. (Sec. 8, RA 7916 Special Economic
Zone Act of 1995). Consequently, sales made
by a person in the customs territory to a PEZAregistered 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.

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.
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
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)

Tax treatment of sales to & by PEZA-registered


enterprise within & without the ecozone [rmc 7499]:
(1) Any sale of goods, property or services
made by a VAT registered supplier from
the Customs Territory** to any registered
enterprise operating in the ecozone,
REGARDLESS of the class or type of the
latters PEZA registration, is actually
qualified and thus LEGALLY ENTITLED TO
THE 0% VAT.
**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]
(2) By a VAT-Exempt Supplier from the
Customs Territory to a PEZA registered
enterprise

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.

Sale of goods, property and services by


VAT-Exempt supplier from the Customs
Territory to a PEZA registered enterprise
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TAXATION 2

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.
(3) By a PEZA Registered Enterprise
(a) Sale of Goods by a PEZA registered
enterprise to a buyer from the Customs
Territory (ie domestic sales) -- this 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.
(b) 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.
(c) Sale of Goods by a PEZA registered
enterprise to Another PEZA registered
enterprise (ie Intra-ECOZONE Sales of
Goods) this shall be EXEMPT from
VAT.
(4) Sale of Services by ECOZONE enterprise,
to Another ECOZONE enterprise (IntraECOZONE enterprise Sale of Service)
(a) if PEZA registered seller is subject to
5% special tax regime - EXEMPT from
VAT
(b) if PEZA registered seller is subject to
taxes under NIRC (ie not subject to 5%
special tax regime) subject to 0%
VAT pursuant to cross border doctrine

TAXATION LAW 2

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)
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
(a) Shareholders or investors as share in
the profits of the VAT-registered
persons;
(b) Creditors in payment of debt;
(3) Consignment of goods if actual sale is not
made within 60 days following the date
such goods were consigned
(4) Retirement from or cessation of business,
with respect to inventories of taxable
goods existing as of such retirement or
cessation

J. TRANSACTIONS DEEMED SALE


(SEC. 106 (B)

Not in the course of business of goods or


properties originally intended for sale or for use
in the course of business
cf Sec 40 (C) (2) regarding capital assets
Example: when a VAT-registered person
withdraws goods from his business for his
personal use. (RR 16-2005)

Rate: 12% VAT


Basis: Market value of the goods deemed sold
as of the time of the occurrence of the
transactionsor 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

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
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TAXATION 2

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)

TAXATION LAW 2

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
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.
(2) Approval of request for cancellation of a
registration due to reversion to exempt
status
(3) 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)
(4) 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

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)

K. 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.

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
transferor, for shares of stocks, whether
resulting in corporate control or not, is
SUBJECT TO VAT (RR 10-11)

VAT shall apply to goods disposed of or


existing as of a certain date if under the
circumstances to be prescribed in rules and
regulations to be promulgated by the
Secretary of Finance, upon recommendation of
the Commissioner, the status of a person as a
VAT-registered person changes or is
terminated.

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TAXATION 2

(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

TAXATION LAW 2

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.
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.
(a) Other taxes (special import tax)
(b) Bank charges
(c) Arrastre charges
(d) Wharfage dues
(e) Brokerage fees
(f) All other charges or expenses

L. 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)

Landed Cost - invoice amount including costs


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

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
paymentof duties/taxes/other charges and
issuance of permit to withdraw.

M. VAT ON SALE OF SERVICE AND


USE OR LEASE OF PROPERTIES
[Sec 108]
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TAXATION 2

TAXATION LAW 2

or consideration. (Sec 108, Diaz v Secretary of


Finance, 2011). It includes:

Rate: 12%
Basis: Gross receipts derived from the sale or
exchange of services, including the use or lease
of properties.

(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 795:
(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.
(11) Transportation contractors on their
transport of goods or cargoes, including
persons who transport goods or cargoes
for hire and other domestic common

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)
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.
(a) Deposit in banks which are made available
to the seller of services without restrictions
(b) Issuance by the debtor of a notice to offset
any debt or obligation and acceptance
thereof by the seller as payment for
services rendered
(c) Transfer of the amounts retained by the
contractee to the account of the contractor.
(RR 16-2005)
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

24
SUBJECT TO VAT

Sale/Exchange of Services: means the


performance of all kinds of services in the
Philippines for others for a fee, remuneration

Pre-Paid Rental
Security deposit when applied
to the rental

187

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
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TAXATION 2

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;
EXCEPT crop insurance, life and
disability insurance, and health and
accident insurance

TAXATION LAW 2

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.
(16) Similar services regardless of whether or
not the performance thereof calls for the
exercise or use of the physical or mental
faculties
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
(2) formula or process, goodwill, trademark,
trade brand or other like property or right
(3) The lease of the use of, or the right to use
of any industrial, commercial or scientific
equipment
(4) The supply of scientific, technical,
industrial or commercial knowledge or
information
(5) 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
(6) 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
(7) 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
(8) The lease of motion picture films, films,
tapes and discs
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(9) The lease or the use of or the right to use


radio, television, satellite transmission and
cable television time

TAXATION LAW 2

outside the Philippines which goods are


subsequently exported, where the services
are paid for in acceptable foreign currency
AND accounted for in accordance with the
rules and regulations of the BSP
(2) Services other than those mentioned in the
preceding paragraph rendered to a person
engaged in business conducted outside the
Philippines or 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;
(iv) AND 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)
(3) Services rendered to persons or entities
whose exemption under special laws or
international agreements to which the
Philippines is a signatory effectively
subjects the supply of such services to zero
percent (0%) rate (as amended by RA
9337)
(4) Services rendered to persons engaged in
international shipping or international air
transport operations, including leases of
property for use thereof [as amended by
RA 9337];
Provided, however, that the services
referred to herein shall not pertain to those
made to common carriers by air and sea
relative to their transport of passengers,
goods or cargoes from one place in the Phil.

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)
The performance of the services should not be
in pursuit of an employer-employee
relationship between the service-provider and
the service-recipient.

N. 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 are
effectively 0% VAT sales of services:
(1) Processing, manufacturing or repacking
goods for other persons doing business
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to another place in the Phil. (the same


being subject to 12% VAT under Sec. 108)
(5) Services performed by subcontractors
and/or
contractors
in
processing,
converting, or manufacturing goods for an
enterprise whose export sales exceed
seventy percent (70%) of total annual
production.
(6) Transport of passengers and cargo by air
or sea vessels from the Philippines to a
foreign country (as added by RA 9337) and;
(7) Sale of power or fuel generated through
renewable sources of energy such as, but
not limited to, biomass, solar, wind,
hydropower, geothermal, ocean energy,
and other emerging energy sources using
technologies such as fuel cells and
hydrogen fuels. (as added by RA 9337)
Zero-rating shall apply strictly to the
sale of power or fuel generated through
renewable sources of energy, and shall not
extend to the sale of services related to the
maintenance or operation of plants
generating said power.

TAXATION LAW 2

(a) 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.
(b) The person making the exempt sale of
goods, properties or services shall not bill
any output tax to his customers. (RR 162005)
(c) But, the VAT-registered person may elect
that the exemption not apply to its sale of
goods or 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).
Exempt Transactions Enumerated
(1) Sale/import of agricultural, marine food
products in original state; of livestock and
poultry; breeding stock and genetic
materials
Original state even if they have
undergone the simple processes of
preparation or preservation for the
market, such as freezing, drying,
salting, broiling, roasting, smoking or
stripping. Also includes preservation
using advanced technological means
of packaging, such as shrink wrapping
in plastics, vacuum packing, tetra-pack,
and other similar packaging methods
(RR 16-2005)
Polished and/or husked rice, corn grits,
raw cane sugar and molasses, ordinary
salt, AND COPRA shall be considered
in their original state
Livestock or poultry do not include
fighting cocks, race horses, zoo
animals and other animals generally
considered as pets.
(2) Sale/ import of fertilizers; seeds, seedlings
and fingerlings; fish, prawn, livestock and
poultry feeds (including ingredients)

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 zerorated transactions found in prior Revenue
Regulations (inc. RR 16-2005) with respect
to prior application from the BIR.

O. VAT EXEMPT TRANSACTIONS


Vat Exempt Transactions, in general
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(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
Does not include vehicles, vessels,
aircrafts, machineries, and other goods
for use in manufacturing in commercial
quantities)
(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:
Laboratory services are exempted. If
the hospital or clinic operates a
pharmacy or drug store, the sale of
drugs and medicine is subject to VAT.
[RR 16-2005]
(8) Educational services rendered by private
educational institutions, duly accredited by
DEPED, CHED, TESDA, and those rendered
by government educational institutions;
Educational services does not
include seminars, in-service training,
review classes and other similar
services rendered by persons who are
not accredited by the DepED, CHED,
and/or TESDA. [RR 16-2005]
(9) Services rendered by individuals pursuant
to an employer-employee relationship
(10) Services rendered by regional or area
headquarters
established
in
the
Philippines by multinational corporations
which act as supervisory, communications
and coordinating centers for their affiliates,
subsidiaries or branches in the Asia-Pacific

TAXATION LAW 2

Region and do not earn or derive income


from the Philippines
(11) Transactions which are exempt under
international agreements to which the
Philippines is a signatory or under special
laws, except those under 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.
Sale by agricultural cooperatives to
non-members can only be exempted
from VAT if the producer of the
agricultural products sold is the
cooperative itself. If the cooperative is
not the producer (e.g., trader), then
only those sales to its members shall
be exempted from VAT. [RR 16-2005]
(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.
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TAXATION LAW 2
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.
(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
12-month period of 2 or more
adjacent residential lots, house
and lots or other residential

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 4-2007]
(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
1992" and other related laws, such as
RA No. 7835 and RA No. 8763.
Low-cost housing" refers to
housing projects intended for
homeless
low-income
family
beneficiaries, undertaken by the
Government or private developers,
which may either be a subdivision
or a condominium registered and
licensed by the Housing and Land
Use Regulatory Board/Housing
(HLURB) under
BP Blg. 220, PD No. 957 or any
other similar law, wherein the unit
selling price is within the selling
price
ceiling
per
unit
of
P750,000.00 under RA No. 7279,
and other laws, such as RA No.
7835 and RA No. 8763.
(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.
ZZZZZ"Socialized housing" refers
to housing programs and projects
covering houses and lots or home
lots only undertaken by the
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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.

TAXATION LAW 2

(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;
(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;

Lease of residential units where the


monthly rental per unit exceeds
P12,800 but the aggregate of such
rentals of the 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.

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TAXATION LAW 2

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:
o for passenger and/or cargo vessels,
the age limit is 15 years old,
o for tankers, the age limit is 10 years
old, and
o for high-speed passenger crafts,
the age limit is 5 years old [RR 162005]
(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
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]

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
preceding 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 purely cooperative
(6) companies or associations) doing life
insurance business of any sort in the
Philippines;
(7) Services rendered by fire, marine or
miscellaneous insurance agents of foreign
insurance companies;
(8) Services rendered by proprietors, lessees or
operators of cockpits, cabarets, night or
day clubs, boxing exhibitions, professional
basketball games, jai-alai and race tracks;
and
(9) Receipts on sale, barter for exchange of
shares of stock listed and traded through

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TAXATION 2

the local stock exchange or through initial


public offering.

TAXATION LAW 2

(2) Purchase of real properties for which VAT


has actually been paid
(3) Purchase of services in which VAT has
actually been paid
(4) Transactions deemed sale
(5) Presumptive Input Tax
(6) Transitional Input Tax

P. 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)

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.

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.
(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]

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.
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

Q. 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
(e) For use in trade or business for which
deduction
for
depreciation
or
amortization is allowed under the Code.

Transitional Input Tax (Sec 111)


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
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(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.

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)

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

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)

Transitional tax
The 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

R. 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

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 Please refer below for the example.

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S.3. ALLOCATION OF INPUT TAX ON


MIXED TRANSACTIONS26

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

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.

Output VAT Input VAT = VAT Payable

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.

S.1. 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%)

Output VAT in a sale of services shall be


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

= ( 12%)

S.2. 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 VATregistered 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.

S.4. 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

(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.

26 Please refer below for the example

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TAXATION LAW 2

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.

Illustration:
For a given taxable quarter ABC Corp. has
output VAT of 100 and input VAT of 80. Since
output tax exceeds the input tax for such
taxable quarter, all of the input tax may be
utilized to offset against the output tax. Thus,
the net VAT payable is 100 minus 80 = 20.
If the input tax inclusive of input tax carried over
from the previous quarter exceeds the output
tax, the input tax inclusive of input tax carried
over from the previous quarter that may be
credited in every quarter shall not exceed
seventy percent (70%) of the output tax;
Provided, That, the excess input tax shall be
carried over to the succeeding quarter or
quarters; Provided, however, that any input tax
attributable to zero-rated sales by a VATregistered person may at his option be
refunded or applied for a tax credit certificate
which may be used in the payment of internal
revenue taxes, subject to the limitations as
may be provided for by law, as well as, other
implementing rules.

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.

T. SUBSTANTIATION OF INPUT TAX


CREDITS
(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) For 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
required under Secs. 113 and 237 of the
Tax Code.

Illustration:
For a given taxable quarter XYZ Corp. has
output VAT of 100 and input VAT of 110. Since
input tax exceeds the output tax for such
taxable quarter, the 70% limitation is imposed
to compute the amount of input tax which may
be utilized. The total allowable input tax which
may be utilized is 70 (70% of the output tax).
Thus, the net VAT payable is 100 less 70 = 30.
The unutilized input tax amounting to 40 is
carried over to the succeeding month.
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
comprised of the gross selling price/gross
receipts plus the correct amount of VAT. Hence,
the output tax shall be computed by
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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.

TAXATION LAW 2

(4) 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.

(2) TRANSITIONAL INPUT TAX shall be


supported by an inventory of goods as
shown in a detailed list to be submitted to
the BIR.

(5) Advance VAT on sugar shall be supported


by the Payment Order showing payment of
the advance VAT.

(3) Input tax on "deemed sale" transactions


shall be substantiated with the invoice
required.

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Example regarding the input tax on goods where deduction for depreciation is allowed from RR 162005
Illustration: LBH Corporation sold capital goods on installment on October 1, 2005. It is agreed
that the selling price, including the VAT, shall be payable in five (5) equal monthly installments. The
data pertinent to the sold assets are as follows:
Selling Price
Passed-on VAT
Original Cost of Asset
Accumulated Depreciation
at the time of sale

P 5,000,000.00 (exclusive of VAT)


500,000.00
3,000,000.00
1,000,000.00

Unutilized Input Tax (Sold Asset)

100,000.00

Accounting:

SELLER

BUYER

Oct. 1, 2005
Cash
P 1,100,000.00
Installment Receivable
4,400,000.00
Accumulated Depreciation 1,000,000.00
Output Tax
500,000.00
Asset
3,000,000.00
Gain on sale of asset
3,000,000.00

Oct. 1, 2005
Asset
Input Tax

To Record VAT Liability:

------------

Output Tax
Input Tax
VAT Payable

P 5,000,000.00
500,000.00

Cash
Installment Payable

1,100,000.00
4,400,000.00

500,000.00
100,000.00
400,000.00

Periodic Receipt of Installment:

Periodic Subsequent Payment:

Cash

Installment Payable
Cash

1,100,000.00
Installment Receivable
1,100,000.00

1,100,000.00
1,100,000.00

* The input tax of P 500,000.00 on the bought capital goods worth P 5,000,000.00 shall be
spread evenly over a period of 60 months starting the month of purchase.
If the depreciable capital good is sold/transferred within a period of five (5) years or prior to the
exhaustion of the amortizable input tax thereon, the entire unamortized input tax on the capital
goods sold/transferred can be claimed as input tax credit during the month/quarter when the sale
or transfer was made but subject to the limitation prescribed under Sec. 4.110-7 of these Regulations.

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TAXATION LAW 2

Example regarding the allocation of input tax on mixed transactions from RR 16-2005
Illustration: ERA Corporation has the following sales during the month:
Sale to private entities subject to 10%
Sale to private entities subject to 0%
Sale of exempt goods
Sale to govt. subjected to
5% final VAT Withholding
Total sales for the month

P100,000.00
100,000.00
100,000.00

100,000.00
P400,000.00

The following input taxes were passed on by its VAT suppliers:


Input tax on taxable goods (10%)
Input tax on zero-rated sales
Input tax on sale of exempt goods
Input tax on sale to government
Input tax on depreciable capital good
not attributable to any specific activity
(monthly amortization for 60 months)

P5,000.00
3,000.00
2,000.00
4,000.00

P20,000.00

A. The creditable input tax for the month shall be computed as follows:
Input tax on sale subject to 10% P 5,000.00
Input tax on zero-rated sale
3,000.00
Ratable portion of the input tax not directly attributable to any activity:
Taxable sales (0% and 12%)
Total Sales

P100,000.00
400,000.00

Amount of input tax not directly attributable

X P20,000.00

- P5,000.00

Total input tax attributable to sales - P9,000.00


to government

B. The input tax attributable to sales to government for the month shall be computed as follows:
Input tax on sale to govt.
P 4,000.00
Ratable portion of the input tax not directly attributable to any activity:
Taxable sales to the government
Total Sales

P100,000.00 X P20,000.00
400,000.00

Amount of input tax not directly attributable

- P5,000.00
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Total input tax attributable to sales to government

TAXATION LAW 2

P 9,000.00

C. The input tax attributable to VAT-exempt sales for the month shall be computed as
follows:
Input tax on VAT-exempt sales
P 2,000.00
Ratable portion of the input tax not directly attributable to any activity:
VAT-exempt sales
Total Sales

Amount of input tax not directly attributable

P100,000.00 X P20,000.00
400,000.00

P 5,000.00

Total input tax attributable to VAT-exempt sales

P 7,000.00

The table below shows a summary of the foregoing transactions of ERA Corporation:
Output
VAT

Input VAT not


directly
Attributable
to any Activity

Creditable
Input
VAT

Net VAT
Payable

Excess
Input
VAT for
carryover/

VAT for
refund

Unrecove
rable
VAT

Sale Subject to 10%


VAT
10,000
5,000
5,000
10,000
10,000
0
0
0
0
Sale Subject to 0%
VAT
0
3,000
5,000
8,000
8,000
0
0
8,000
0
Sale of Exempt
Goods
0
2,000
5,000
7,000
0
0
0
0
7,000*
Sale to Government
subject to 5% Final
withholding
VAT
4,000 for input5,000
5,000
5,000*** as cost0or expense.
0 **4,000*
* These
amounts 10,000
are not available
tax credit9,000
but may
be**recognized

Standard input VAT of 5% on sales to Government as provided in SEC. 4.114-2(a)


*** Withheld by Government entity as Final Withholding VAT
The input tax attributable to VAT-exempt sales shall not be allowed as credit against the output
tax but should be treated as part of cost or expense.
Notwithstanding the foregoing provisions, for persons engaged in both zero-rated sales under Sec.
108(B)(6) of the Tax Code and non-zero rated sales, the aggregate input taxes shall be allocated
ratably between the zero-rated sale and non-zero-rated sale.
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or sea vessels from the Philippines to a


foreign country, the input taxes shall be
allocated ratably between his zero-rated
sales and non-zero-rated sales (sales
subject to regular rate, subject to final
VAT withholding and VAT-exempt sales).
(RR 16-2005)

U. REFUND OR TAX CREDIT OF


EXCESS INPUT TAX (CF REFUND OF
ERRONEOUSLY PAID TAXES)
Who may claim for refund/apply for issuance of
tax credit certificate
(1) Zero-Rated Sales (Sec. 112(A), NIRC)
(a) Any VAT-registered person, whose sales
are zero-rated or effectively zero-rated
may apply for the issuance of a tax
credit certificate/refund of creditable
input tax due or paid attributable to
such sales, EXCEPT transitional input
tax, to the extent that such input tax has
not been applied against output tax,
within two (2) years after the close of the
taxable quarter when the sales were
made. The input tax that may be subject
of the claim shall exclude the portion of
input tax that has been applied against
the output tax.
(b) The acceptable foreign currency
exchange proceeds must have been duly
accounted for in accordance with the
rules and regulations of the Bangko
Sentral ng Pilipinas (BSP) in the case of
zero-rated transactions paid for in
acceptable foreign currency and
requiring that such be accounted for in
accordance with BSP rules & regulations
(Secs. 106(A)(2)(a)(1) and (2), and Sec.
106(A)(2)(b) and Sec. 108(B)(1) and (2),
NIRC).
(c) Where the taxpayer is engaged in zerorated or effectively zero-rated sale and
also in taxable or exempt sale of goods
of properties or services, and the
amount of creditable input tax due or
paid cannot be directly and entirely
attributed to any one of the transactions,
it shall be allocated proportionately on
the basis of the volume of sales.
(d) In the case of a person engaged in the
transport of passenger and cargo by air

Requirements:(Summary)
(i) The claimant should be a VATregistered person
(ii) There should be an application
filed with the BIR or DOF center, as
the case may be, within 2yrs after
close of taxable quarter.
(iii) The claimed input tax must not
have been applied to any output
tax during the period covered and
subsequent periods covered by the
claim.
(iv) The claimed input tax must have
been deducted from the VAT
quarterly return.
(v) The claimed input tax are directly
attributable
to
0%-rated
transactions.
(vi) Acceptable
foreign
currency
exchange proceeds must have
been duly accounted for
(vii) Claimed input tax must be duly
supported by VAT invoices/receipts.
(viii)
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
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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.

TAXATION LAW 2
from the receipt of said denial or
inaction.

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 zerorated sales that is claimed as a deduction for
income tax purposes.

Period to file claim/apply for issuance of tax


credit certificate
This period 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 retirement or
cessation of business, or change of
status, the 2 year period shall be after
the date of cancellation
(2) Administrative Claim
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

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)

V. INVOICING REQUIREMENTS
(Sec 113)
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
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OR shall not give rise to any input tax. [RR 1605]

TAXATION LAW 2

(d) If the sale involves goods, properties or


services some of which are subject to
and some of which are VAT zero-rated
or VAT-exempt, the invoice or receipt
shall clearly indicate the breakdown of
the sale price between its taxable,
exempt and zero-rated components,
and the calculation of the value-added
tax on each portion of the sale shall be
shown on the invoice or receipt. The
seller has the option to issue separate
invoices or receipts for the taxable,
exempt, and zero-rated components of
the sale.
(3) The date of transaction, quantity, unit cost
and description of the goods or properties
or nature of the service; and
(4) In the case of sales in the amount of one
thousand pesos (P1,000) or more where
the sale or transfer is made to a VATregistered person, the name, business style,
if any, address and taxpayer identification
number (TIN) of the purchaser, customer or
client.
(5) Name of buyer and seller

Note: VAT component of all transactions shall


be separately indicated in the VAT invoice or
receipt. (RR 18-2011)
Information Contained in the VAT Invoice or
VAT Official Receipt:
(1) A statement that the seller is a VATregistered person, followed by his
taxpayer's identification number (TIN);
(2) The total amount which the purchaser pays
or is obligated to pay to the seller with the
indication that such amount includes the
VAT:
(a) The amount of the tax shall be shown
as a separate item in the
invoice/receipt;
(b) If the sale is exempt from VAT, the
term "VAT-exempt sale" shall be
written or printed prominently on the
invoice or receipt;
(c) If the sale is subject to zero percent
(0%) value-added tax, the term "zerorated sale" shall be written or printed
prominently on the invoice or receipt;

Invoicing Requirements and Recording in Deemed Sale Transactions


Transaction
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
Distribution
or
transfer
to
shareholders/investors or creditors

Invoicing Requirement
Memorandum entry in the subsidiary sales journal to
record withdrawal of goods for personal use

Invoice, at the time of the transaction, which should


include all the info prescribed above; data in the
invoice shall be duly recorded in the subsidiary sales
journal
Consignment of goods if actual sale is not Invoice, at the time of the transaction, which should
made within 60 days
include all the info prescribed above; data in the
invoice shall be duly recorded in the subsidiary sales
journal

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TAXATION LAW 2

Retirement from or cessation of business An inventory shall be prepared and submitted to the
with respect to all goods on hand
RDO who has jurisdiction over the taxpayers principal
place of business not later than 30 days after
retirement or cessation from business. An invoice shall
be prepared for the entire inventory, which shall be the
basis of the entry into the subsidiary sales journal. The
invoice need not
enumerate the specific items appearing in the
inventory regarding the description of the goods. If the
business is to be continued by the new owners or
successors, the entire amount of output tax on the
amount deemed sold shall be allowed as input taxes.
Consequences of issuing erroneous vat invoice
or vat official receipt

(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]

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.

W. 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.

Issuance of a VAT Invoice or VAT Receipt on an


Exempt Transaction by a VAT-registered Person
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:

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/over-payment as of the end of a
quarter.

Administrative and Penal Provisions (Sec 115)


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TAXATION 2

(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:
(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).

TAXATION LAW 2

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)
Sales to Government
(1) The Government or any of its political
subdivisions, instrumentalities or agencies,
including GOCCs shall, before making
payment on account of each purchase of
goods and services which are subject to the
VAT (Secs.
(2) 106 and 108, NIRC), deduct and withhold a
final VAT due at the rate of five percent
(5%) of the gross payment thereof.
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.
(a) The payor or person in control of the
payment is considered as the
withholding agent.
(b) The VAT withheld shall be remitted
within ten (10) days following the end
of the month the withholding was
made.
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

X. 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:
(1) Gross payments by the government shall
be subject to the 5% final withholding tax;
(2) 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)
* Beginning Nov. 1, 2005, when R.A. 9337
became effective, all sales of goods, properties,
207

UP COLLEGE OF LAW

TAXATION 2

TAXATION LAW 2

difference must be closed to expense


or cost, in effect reducing it.
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.)
(1) Should actual input VAT exceed 7% of the
gross payments, the excess may form part
of the sellers expense or cost.
(2) 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:
(1) Lease or use of properties or property
rights owned by non-residents;
(2) Services rendered to local insurance
companies, with respect to reinsurance
premiums payable to non-residents; and;
Other services rendered in the Philippines by
non-residents.
VAT FORMULA (IN GENERAL)
Actual Sales/Receipts
Add: Excise Tax
Transactions Deemed Sale

xxx
xxx
xxx

Less: Sales Returns and Allowances


Sales Discounts

xxx
xxx

Remaining Merchandise (Cessation of VAT-registered Status)

Total Sales (Taxable Base)


Multiplied by 12%
Output VAT on sales or gross recipts
Less: Input VAT on purchases and services
Transitional Input VAT, if applicable
Presumptive Input VAT, if applicable
Input VAT Carry-over from previous period
Creditable VAT withheld
Net VAT payable (refundable)
208

xxx
xxx
xxx
xxx
xxx
xxx

xxx
xxx
xxx
xxx
12%

xxx
xxx

UP COLLEGE OF LAW

TAXATION 2

MONTHLY RETURN
Gross Sales/Receipts for the Month
Multiplied by VAT rate
Output VAT
Less Input Taxes:
Transitional/Presumptive Input Tax
On taxable goods/services
Net VAT Payable
Add Penalties:
Surcharge
Interest
Compromise
Total Amount Payable

TAXATION LAW 2

xxx
12%
xxx
xxx
xxx
xxx
xxx
xxx

xxx
xxx

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

xxx

xxx
xxx

OUTPUT VAT Payable:


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

209

xxx
xxx
xxx
xxx

xxx
xxx
xxx

UP COLLEGE OF LAW

TAXATION 2

TAXATION LAW 2

Quick Notes on VAT


Transactions subject to VAT
General Requirements
(1) 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
(2) Gross sales or receipts for the past 12 months or the next 12 months > 1,919,500php
OR there are reasonable grounds to believe
Taxable Transactions and Specific Requirements
(1) SBEL of Goods or Properties27
Goods/Personal Properties
(i) Actual/deemed sale (4) for a valuable consideration
(ii) for use or consumption in the Phil (regardless of the payment arrangements)
(iii) not exempt from VAT (NIRC, special law, special agreement)
Real Properties28:
(i) Seller (w/n natural) executes contract to SBE of RP
(ii) RP is in the Phil
(iii) Seller is engaged in sale or exchange of RP or real estate (dealer, developer, lessor)
(iv) 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)
not exempt from VAT (NIRC, special law, special agreement)
(2) S of Services29
(i) for a valuable consideration (actually/constructively received)
(ii) performed ICTB in the Phil.
(iii) not exempt from VAT (NIRC, special law, special agreement)
(iv) person rendering service is VAT-liable
(v) no ee-er relationship
(3) I of Goods
27

Sec 106

28

Casual Sale (Capital Assets)


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

29

Subject to CGT (6%)


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

Residential Lot

If SP > 1,919,500.00 = subject to VAT


IF SP 1,919,500.00 = VAT-exempt

Residential House and Lot

If SP > 3,199,200.00 = subject to VAT


IF SP 3,199,200.00 = VAT-exempt

Sec 108

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TAXATION 2

TAXATION LAW 2

Persons Liable to pay VAT


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

211

UP COLLEGE OF LAW

TAXATION 2

TAXATION LAW 2

Tax Bases of VAT


(1) Gross (Sales) Selling Price: total amount of money paid in consideration of SBEL
excludes: VAT, sales discounts30 and, allowances and returns (2)
includes: Excise tax paid, initial payments31, interests and penalties (if instalment), commission
income (if exported), purchase price, charges for packing, delivery and insurance
o 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,
(i) acquisition cost
(ii) current market price of goods
o If real property,
GSP = amount higher:
i. consideration stated in the sales document
ii. FMV, whichever is higher of
Zonal value: FMV as determined by CIR
NB:
Deferred Payments (initial > 25%
Real Property Tax Value: FMV as determined by provincial & city
GSP)
assessors
Instalment Plan (initial 25% GSP)
o

IF ON INSTALLMENT:
GSP = down payments received + interests + penalties + other charges amount of
mortgage (paid)
NB: If zonal/FMV, tax base =
( )
,
( )
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

(2) Gross Value in money of goods


(3) 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
30

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
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
32 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.
31

212

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TAXATION 2

TAXATION LAW 2

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)
IF DEALER IN SECURITIES: gross selling price cost of securities sold
(4) 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
Landed Cost: invoice amount inc. cost of loading, shipping, unloading, + custom duties +
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

213

UP COLLEGE OF LAW

TAXATION 2

TAXATION LAW 2

Rates of VAT
(A) Output Tax (Sale/Barter/Exchange/Lease)
(1) 12% standard rate: applied directly to TB
(2) 0%: applied directly to TB
(B) Input Tax (Purchase from VAT-registered businesses/Importation of goods)
(1) 12% standard rate: applied directly to TB
(2) 0%: applied directly to TB
(3) 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) 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
(5) 7% FWT (standard input VAT, when government), 5% withholding
Creditable Input VAT Requirements
(1) Proper documentation
(2) No double input tax credit is allowed.
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)
(3) Ignore erroneous VAT rate. The correct rate of input VAT can still be claimed.
(4) Transactions should have been made with VAT-registered persons.
(5) IF MIXED TRANSACTIONS and input VAT cannot be directly attributable::
Formula

Input Tax Treatment

Untraceable Input VAT x

( )

Creditable Input VAT

Untraceable Input VAT x

( )

Input VAT Credit, eligible for tax refund or TCC

Untraceable Input VAT x

( )

Cost of Sales or Operating Expense

Untraceable Input VAT x

( )

Compare to Standard Input VAT (Creditable against


Standard input VAT)

NB: Creditable Input VAT is


(1) increased by any input VAT carried over from the preceding month or quarter
(2) decreased by
(i) amount of the claim for refund or tax credit for VAT filed during the same period
(ii) input tax attributable to exempt sales and unauthorized input tax attributable of depreciable
capital goods
(iii) amount of input VAT wrt uncollected portion of instalment receivable in instalment sales

214

UP COLLEGE OF LAW

TAXATION 2

TAXATION LAW 2

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 (1) Processing, manufacturing, repacking goods to
services (Sec 109 and special laws)
non-resident (5)
(2) Processing, manufacturing, repacking goods to
(1) wrt lease of property =exempt
export-oriented (3)
if advance payment = loan, option (3) Services other than processing, manufacturing,
money, security deposit
repacking (4)
NB: if security deposit is applied to (4) Services to exempted persons (3): effectively 0rate
rental = VAT
(5)
Sale of power/fuel-generated through renewable
(2) wrt persons engaged in milling,
resources (3)
processing, manufacturing or repacking
(6) Services rendered to intl shipping/air transport
goods = exempt
(2)
if palay rice; corn corn grits;
(7) Transport of passengers and cargo by air from Phil
sugar cane raw sugar
to Foreign (3)
(3) wrt franchise grantees of electric utilities,
telephone and telegraph, radio and/or (8) Transactions of VAT-reg person to foreign
embassies (2)
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.
(4) 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 (1) wrt livestock and poultry DOES NOT INCLUDE
products in their original state; livestock
fighting cocks, race horses, zoo animals and pets
and poultry (used/yield for human (2) DOES NOT INCLUDE vehicles, vessels, aircrafts,
consumption); breeding stock and
machineries, and other goods for use in
genetic materials
manufacturing in commercial quantities
(6) import of professional instruments, (3) DOES NOT INCLUDE those under Petroleum
implements, wearing apparel, domestic
Exploration Concessionaires under Petroleum Act
animals, and personal household effects
of 1949
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TAXATION 2

TAXATION LAW 2

(7) Transactions exempt pursuant to special (4) Wrt sale by agricultural coops to non-members, if
laws
seller is the member = VAT
(8) Cooperatives
Wrt sale by non-agri, non-electric and non-credit,
importation of machineries and equipment = VAT
(9) Residential lots 1,919,500 & lot &
(5)
DOES NOT INCLUDE parking lot
dwellings 3,199,200
(6) If any portion of such goods are used for purposes
(10) lease of residential units,
other than those stated = VAT
if 12,800/unit/month (regardless of
aggregate amount);
if 12,800/unit/month (AND
aggregate amount is 1,919,500)
(11) importation of fuels, goods, supplies by
international shipping or air transport
Importation of Services

216

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TAXATION 2

TAXATION LAW 2

SALE OF GOODS

VAT-Exempt
0% VAT
Real Property
Actual Export Sales (3)
(i) Not primarily held ICT/B
(ii) Low-cost or socialized housing
Deemed Export Sales
(iii) Residential lot <= 1,919,500
(i) Internal or constructive export sales
(iv) House and/or other residential dwellings <=
(a) Raw/Packaging materials to non-resident buyer
3,199,200
(5)
(v) Lease
(12,800/unit/year
or
total
(b) Raw/Packaging materials to export-oriented (3)
1,919,500/year)
(c) Phil. Port FOB value of export products (2)33
(vi) Transmission to a trustee
(d) Net selling price of export products (4)34
E: if transmission is deemed sale
(e) sales to bonded manufacturing warehouses (2)35
(vii) Transfer to corporation in exchange of SoS
(f) sales to export processing zones36
(viii)
Advance payments/Security Deposits in
(g) sales to enterprises duly accredited by Subic Bay
lease
Metropolitan Authority (2)
E: if applied to the rent
(h) sales to registered export traders (3)
(i) sales to diplomatic missions etc. (2)
As regards ecozones and PEZA-registered
(j) sale by VAT-supplier to manufacturer/producer
entities
whose products are 100% exported (3)
(i) Made by VAT-exempt supplier from customs (ii) Sale of gold to BSP
territory to any registered enterprise inside (iii) Sale of goods/supplies/equipment/fuel to persons
ecozone
engaged in intl shipping/air transport (4)
(ii) Intra-ecozone enterprise sale of service, if (iv) Docking/Undocking services to foreign vessels
PEZA registered seller is subject to 5%
special tax regime
Foreign currency denominated goods
(iii) Intra-ecozone sales of goods
(i) To a NRC/NRA of goods (5)
(ii) 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)
(i) Made by VAT registered supplier from customs
territory to any registered enterprise inside ecozone
(ii) Intra-ecozone enterprise sale of service, if PEZA
registered seller is subject to NIRC taxes

Under Omnibus Investment Code (EO226)


Ibid
35
RA7227
36
RA 7916
33

34

217

UP COLLEGE OF LAW

Taxable Activity/Property
Actual SBE of Goods or Properties
Goods/ Personal Properties
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 debt
Consignment after 60d
Retirement/Cessation
of
business
Sale of Services
Importation of Goods
In general
When custom duties are based
on quantity or volume

TAXATION 2

TAXATION LAW 2

TR

12%

Tax Base

Tax Payable

Gross Selling Price


= amt. paid to the seller
= consideration/FMV, higher
=

()
VAT Payable paid
by
seller/transferor

12%

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

12 %

12%

Gross receipts derived


Total Value used by BOC
=tariff & custom duties + custom duties + excise tax + charges
= landed cost + excise tax

VAT Payable paid


by performer
VAT
paid
by
importer PRIOR tp
the release of
goods in Customs
custody

(1) Once registered as a VAT person, the taxpayer shall be liable to output tax and be entitled to input
tax credit beginning on the first day of the month following registration.
(2) The cancellation for registration will be effective from the first day of the following month the
cancellation was approved.
(3) What is the treatment for Withholding of VAT on Government Money Payments?
The government or any of its political subdivisions, instrumentalities or agencies, including
government-owned or controlled corporations (GOCCs) shall, before making payment on
account of each purchase of goods and/or services taxed at twelve percent (12%) VAT
pursuant to Sections 106 and 108 of the Tax Code, deduct and withhold a Final VAT due at the
rate of five percent (5%) of the gross payment.
The five percent (5%) final VAT withholding rate shall represent the net VAT payable of the
seller. The remaining seven percent (7%) effectively accounts for the standard input VAT for
sales of goods or services to government or any of its political subdivisions, instrumentalities
or agencies including GOCCs in lieu of the actual input VAT directly attributable or ratably
apportioned to such sales. Should actual input VAT attributable to sales to government
exceeds seven percent (7%) of gross payments, the excess may form part of the sellers'
expense or cost. On the other hand, if actual input VAT attributable to sale to government is
less than seven percent (7%) of gross payment, the difference must be closed to expense or
cost.
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 nonlarge taxpayers, shall withhold twelve percent (12%) VAT with respect to the following
payments:
(i) Lease or use of properties or property rights owned by non-residents; and
(ii) Other services rendered in the Philippines by non-residents.
218

UP COLLEGE OF LAW
VAT-Exempt

Person

(cannot be cancelled w/in


3years;
franchise
of
radios/tv
broadcasting,
irrevocable)

Optional Registration

Before start of business


and
every
year
thereafter (on/before
Jan 31)

Person
Liable for
VAT

TAXATION 2

Before start of business or


within 10d before the
beginning of taxable quarter

Register
to
RDO for every
separate and
distinct
establishment

Did not register:


Still liable for VAT
No input credit

TAXATION LAW 2
VAT-registered
Person
(w/ TIN)

VAT AND NON-VAT REGISTRATION


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:


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.

219

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 COLLEGE OF LAW

TAXATION 2

TAXATION LAW 2

VAT REFUND OR VAT CREDIT CERTIFICATE

Input Tax wrt Zero-rated and


Effectively zero-rated Sales
VAT-registered
Taxpayer
If VAT-exempt
changes
his
status to VATregistered
=
transitional
input tax

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

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TAXATION 2

IV. Tax remedies under


the NIRC

TAXATION LAW
of filing after it was due,
whichever is LATER
(ii)
Return filed was false or
fraudulent 10 years from date
of discovery of fraud or falsity

A. TAXPAYERS REMEDIES

No return filed 10 years from date of discovery


of omission
Criminal offense
o 5 years from date of commission,
and if not known then, from
discovery and the institution of
judicial proceedings for its
investigation and punishment.

(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

Assessment
(1) 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

(i) 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 each taxpayer; to settle
determine or fix the amount of tax to be paid
(84 C.J.S 74-750)
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)

Periods:
Assessment
o Return was filed
(i)
Not false or fraudulent 3
years from date of filing of the
return OR date legally due or
actual date of filing after it wad
due, whichever is LATER
(ii)
False or fraudulent - 10
years from date the fraud or
falsity was discovered
o No return filed 10 years from the
discovery of omission
Collection
o Assessment made 3 years from
date of finality of assessment
o No assessment
(i)
With return filed which is
not false or fraudulent 3
years from date of filing of the
return OR date or actual date

A. 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)
B. Constructive methods of
income
determination
C. Inventory method for income determination
D. Jeopardy assessment
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E. Tax delinquency and tax deficiency

TAXATION LAW

(1) 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
(2) When the taxpayer requests for a
Reinvestigation which is granted by the
Commissioner
(3) When the taxpayer Cannot be located in
the Address given by him in the return filed
upon which a tax is being assessed or
collected, BUT if the taxpayer informs the
Commissioner of any change in address,
the running of the statute of limitations
shall not be suspended
(4) When the warrant of distraint or levy is
duly served upon the taxpayer, his
authorized representative, or a member of
his household with sufficient discretion,
and No Property is located
(5) When the taxpayer is Out of the Philippines

(ii) Power of the Commissioner to make


assessments
and
prescribe
additional
requirements for tax administration and
enforcement
(a) Power of the Commissioner to obtain
information, and to summon/examine,
and take testimony of persons
(b)
(iii) When assessment is made
Prescriptive period for assessment (Sec. 203,
NIRC)
General Rule: 3 years
If the taxpayer filed a return: internal
revenue taxes shall be assessed within
three years after the last day prescribed by
law for the filing of the return.
If a return is filed beyond the period
prescribed by law: the three-year period
shall be counted from the day the return
was filed.

(iv) General provisions on additions to the tax


(a) Civil penalties
(b) Interest
(c) Compromise penalties

Exception: (i) False return, (ii) Fraudulent


return with intent to evade tax, (iii) Failure to
file a return (Sec. 222, NIRC)

(v) Assessment process


(a) Tax audit
(b) Notice of informal conference
(c) Issuance of preliminary assessment
notice
(d) Notice of informal conference
(e) Issuance of preliminary assessment
notice
(f) Exceptions to issuance of
preliminary assessment notice
(g) Reply to preliminary assessment
notice

NB: Waiver
The taxpayer and the Commissioner may agree
in writing, before the expiration of the time
prescribed in Sec. 203, to extend the period of
assessment (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.
(a) Prescriptive period for assessment
(1) False, fraudulent, and non-filing of returns
(b) Suspension of running of statute of
limitations

(h) Issuance of formal letter of demand


and
assessment
notice/final
assessment notice
(i) Disputed assessment
(j) Administrative decision on a
disputed assessment
(vi) Protesting assessment
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TAXATION 2

(a) Protest of assessment by taxpayer


(1) Protested assessment
(2) When to file a protest
(3) Forms of protest
(4) Content and validity of
protest
(b) Submission of documents within 60
days from filing of protest
(c) Effect of failure to protest
(d) Period provided for the protest to
be acted upon

TAXATION LAW
the tax fraud division of the Enforcement
Services, and Policy cases under audit by
the special teams in national offices

(2) Issuance of Preliminary Assessment Notice


(PAN) - The Assessment Division issues
PAN if it determines that there exists
sufficient basis to assess the taxpayer for
any deficiency tax. It shall show in detail
the facts and the law on which the
proposed assessment is based.
(3) Reply to PAN
Taxpayer is given time to respond: 15 days
from date of receipt of PAN
(i) 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
(ii) If he/she responds: a FAN/FLD shall
be issued within 15 days from
filing/submission of the taxpayers
response, calling for payment of the
taxpayers deficiency tax liability,
inclusive of the applicable penalties.

(vii) Rendition of decision by Commissioner


(a) Denial of protest
(1) Commissioners actions equivalent to denial
of protest
(a) Filing of criminal action against taxpayer
(b) Issuing a warrant of distraint and levy
(2) Inaction by Commissioner
(viii) Remedies of taxpayer to action by
Commissioner
(a) In case of denial of protest
(b) In case of inaction by Commissioner within
180 days from submission of documents
(c) Effect of failure to appeal

The notice for informal conference and 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 quarter or

Assessment Process
[Sec. 228, NIRC; RR 12-99; RR 18-13]
(1) Tax Audit - 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.
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: Cases involving civil/criminal tax
fraud which fall under the jurisdiction of
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TAXATION 2

quarters of the succeeding taxable


year; or
(d) The excise tax due on excisable articles
has not been paid; or
(e) An article locally purchased or
imported by an exempt person, such as,
but not limited to, vehicles, capital
equipment, machineries and spare
(2) parts, has been sold, traded or
transferred to a non-exempt person.

TAXATION LAW

(4) Issuance of formal letter of demand and


final assessment notice (FAN/FLD)
A Final Assessment Notice (FAN) is a
declaration of deficiency taxes issued
to a taxpayer who:
o fails to respond to a preassessment notice within the
prescribed period of time, or
o whose reply to the PAN was found
to be without merit.
o 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
o An assessment contains not only a
computation of tax liabilities, but
also a demand for payment within
a prescribed period.

REINVESTIGATION refers to a plea of


re-evaluation of an assessment on the
basis of newly-discovered evidence
that a taxpayer intends to present in
the reinvestigation. It may also involve
a question of fact or law or both.
Failure to file a protest against
FLD/FAN within 30 days, the
assessment shall become final,
executory and demandable

Protesting Assessment
Protest of assessment by taxpayer
Made within thirty (30) days from receipt of
the assessment.
Protest is either a request for
reconsideration or a request for
reinvestigation, or both
The protests shall state: (Failure to state
shall render protest null and void)
(1) Nature
of
protest,
whether
Reconsideration or reinvestigation,
specifying new or additional evidence if
request for reinvestigation
(2) Date of the assessment notice
(3) Applicable law, rules and regulations,
or jurisprudence on which his protest is
based.
In case of request for reinvestigation,
submission of documents within 60 days from
filing of protest
Within sixty (60) days from filing of the
protest, all relevant supporting
documents must be submitted,
otherwise the assessment shall
become final.
Relevant supporting documents
documents necessary to support the
legal and factual bases in disputing a
tax assessment as determined by the
taxpayer
Assessment shall become final
taxpayer is barred from disputing the
correctness of the issue assessment by

(5) 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 date of receipt. The
taxpayer protesting an assessment may
file a written request for reconsideration or
reinvestigation
RECONSIDERATION refers to a plea
of re-evaluation of the assessment on
the basis of existing records without
need of additional evidence. It may
involve both question of fact or of law
or both

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TAXATION 2

TAXATION LAW

introduction of newly discovered or


additional evidence, and the FDDA
shall consequently be denied.
Only
applies
to
request
for
reinvestigation

(6) 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.
Commissioner may either grant the
appeal, deny the appeal or not act
upon the protest.

(a) Appeal to the CTA within 30 days


from the date of receipt of the
decision
(b) Elevate his protest through request
for reconsideration to the
If the Commissioner denies the protest
filed by the taxpayer, the latter may
appeal to the CTA within 30 days from
receipt of the decision denying the
protest. A motion for reconsideration of
the Commissioners denial of the
protests shall not toll the 30 day period
to appeal to the CTA.

(b) Inaction
Remedies of Taxpayer to Action by
Commissioner: In case of inaction within 180
days from submission of documents
If the protest is not acted upon by the
Commissioners
duly
authorized
representative within 180 days from filing
of the protest or from submission of
required documents, the taxpayer may
either:
(a) Appeal to the CTA within 30 days
after the expiration of the 180 days,
(b) Await the final decision of the
Commissioners duly authorized
representative.
If the Commissioner did not act upon the
petition within 180 days from the time the
documents were submitted, the taxpayer
may either:
(a) Appeal to the CTA within thirty days
from the lapse of the 180-day period
OR
(b) Wait until the Commissioner decides
before he elevates the case to the
CTA.

(a) Denial
Rendition of Decision by Commissioner
CIRs actions deemed equivalent to denial of
protest:
Filing of collection suit against
taxpayer (CIR v. Union Shipping)
Issuing a warrant of distraint and levy
(Commissioner v. Algue)
Where there is a request for
reconsideration, final demand letter
from BIR (CIR v. Isabela Cultural Corp)
Notice of delinquency (CIR v. Ayala
Securities)
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.
Remedies of Taxpayer to Action by
Commissioner: In case of denial of protest
If the protest is denied, in whole or in
part, by the Commissioners duly
authorized representative, the taxpayer
may either:

(7) Issuance of a Final Decision on a disputed


assessment (FDDA) The decision of the
Commissioner or his duly authorized
representatives shall state:

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UP COLLEGE OF LAW

TAXATION 2

(a) Facts, the applicable law, rules and


regulations or jurisprudence on which
such decision is based,
(b) That the same is his final decision

TAXATION LAW
In case personal service is not practicable,
the notice shall be served by substituted
service or by mail.

(2) SUBSTITUTED SERVICE substituted


service can be resorted to when the party is
not present at the registered or known
address
under
the
following
circumstances:
May be left at the partys registered
address, with his clerk or with a person
having charge thereof.
May be left in place where business
activities of the party are conducted
with his clerk or person having charge
thereof.
May be left in the place of residence
with a person of legal age residing
therein.
If no person is found, the revenue
officers concerned shall bring a
barangay official and 2 disinterested
witnesses to the address so that they
may personally observe and attest to
such absence. The notice shall then be
given to said barangay official.
Should party be present but refuses to
receive the notice, the revenue officers
shall bring a barangay official and 2
disinterested witnesses in the presence
of the party so that they may
personally observe and attest such act
of refusal. The notice shall then be left
with the barangay official.

(8) Raising the issue to the CTA


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 as amended by RA 9282
[2004])
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])
Modes of Service - The notices to the taxpayer
required may be served by the Commissioner
or his duly authorized representative through
the following modes:
(1) PERSONAL SERVICE the notice shall be
served through personal service by
delivering personally a copy thereof to the
party at his registered or known address or
wherever he may be found. A known
address shall mean a place other than the
registered address where business
activities of the party are conducted or his
place of residence.

(3) SERVICE BY MAIL Service by mail is done


by sending a copy of the notice by
registered mail to the registered or known
address of the party with instruction to the
Postmaster to return the mail to the sender
after 10 days if undelivered. A copy of the
notice may also be sent thorugh reputable
professional courier service. If no registry or
reputable professional courier service is
available, service may be done by ordinary
mail
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TAXATION LAW

Collection

Distraint of Personal Property

When the government may avail of the


remedies of collection
General Rule: When the assessment shall have
become final, executory and demandable.
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)

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)

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. 11, R.A. 1125 as amended by R.A.
9282)

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.

Kinds of Distraint:
(1) Constructive Distraint
(2) Actual Distraint

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
(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)

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)

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

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)

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TAXATION 2

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)
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
Sec. 207, NIRC); involves actual seizure of the
property

TAXATION LAW
Government. (NOTE: distraint of bank
accounts is called GARNISHMENT)

Summary remedy of distraint of personal


property
(1) Purchase by the government at sale upon
distraint
(2) Report of sale to the Bureau of Internal
Revenue (BIR)
(3) Constructive distraint to protect the
interest of the government
Procedure for Actual Distraint
(1) Commencement of Distraint Proceedings
Who issues the warrant of distraint:
(a) Commissioner or his duly authorized
representative where the amount
involved is more than P1M
(b) Revenue District Officer where the
amount involved is P1M or less (Sec.
207(A), NIRC)

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
Distraint of intangible properties (Sec. 208,
NIRC)
(1) Stocks and other securities: by serving a
copy of the warrants of distraint on the
taxpayer, AND upon the president,
manager, treasurer or other responsible
officer of 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

(2) 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,
expenses of distraint and the cost of the
subsequent sale. (Sec. 207(A), NIRC)
(3) Report on the Distraint
A report shall be submitted by the
distraining officer to the Revenue District
Officer, and to the Revenue Regional
Director.
(4) 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

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TAXATION LAW

condition for the cancellation of the


warrant. (Sec. 207(A), NIRC)

proceed with the levy on the taxpayers


real property. (Sec. 207(B), NIRC)

(5) Notice of Sale of Distrained Properties


The Revenue District Officer or his duly
authorized representative (not the
officer who served the warrant), shall
cause a notification of the public sale
to be posted in not less than two (2)
public places in the municipality or city
(one of which is the Office of the
Mayor) where the distraint was made.
The notice shall specify the time and
place of the sale. The time of sale shall
not be less than twenty (20) days after
notice to the owner and the publication
or posting of such notice. (Sec. 209,
NIRC)

(7) 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. 210, NIRC)
(8) 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)

(6) Sale at Public Auction


(a) At the time of the public sale, the
revenue officer shall sell the goods,
chattels, or effects, or other personal
property, including stocks and other
securities so distrained at a PUBLIC
AUCTION, to the HIGHEST BIDDER for
CASH or with the approval of the
Commissioner, through a DULY
LICENSED COMMODITY or STOCK
EXCHANGES.
(b) Any residue over and above what is
required to pay the entire claim,
including expenses of sale and
distraint, shall be RETURNED to the
owner of the property sold. Expenses
shall be limited to actual expenses of
SEIZURE and PRESERVATION of the
property pending the sale, no charge
shall be imposed for the services of the
local internal revenue officer or his
deputy. (Sec. 209, NIRC)
(c) 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,

(9) 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
(1) 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. 210, NIRC)
(2) 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
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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)

TAXATION LAW

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)
(6) Final Deed of Purchaser
After the period of redemption, a final deed of
sale is issued in favor of the purchaser.

(3) 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)

Forfeiture to government for want of bidder


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)

(4) 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 to the
GOVERNMENT in satisfaction of the claim.
(Sec. 215, NIRC)

Instances when forfeiture is appropriate


(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)

(5) Redemption of Property Sold


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)
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
price since the Government did not purchase
the property anyway, it was forfeited)

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
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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)

TAXATION LAW

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.
(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.


22-2002)
(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,

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)

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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)

TAXATION LAW

The Commissioner may compromise the


payment of any internal revenue tax in the
following cases:
(1) A REASONABLE DOUBT as to the validity
of the claim against the taxpayer exists; or
(2) The financial position of the taxpayer
demonstrates a clear inability to pay the
assessed tax. (FINANCIAL INCAPACITY)

Tax lien
Tax liens
(1) When a taxpayer neglects or refuses to pay
his internal revenue tax liability after
demand, the amount so demanded shall
be a lien in favor of the government from
the time the assessment was made by the
CIR until paid with interest, penalties, and
costs that may accrue in addition thereto
upon ALL PROPERTY AND RIGHTS TO
PROPERTY BELONGING to the taxpayer.
(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)

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
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)
Abatement - to cancel the entire amount of tax
payable

Seizure under forfeiture vs. Seizure to enforce a


tax lien
In the former all the proceeds derived from the
sale of the thing forfeited are turned over to
the Collector of Internal Revenue; in the latter,
the residue of such proceeds over and above
what is required to pay the tax sought to be
realized, including expenses, is returned to the
owner of the property. (BPI v. Trinidad)

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
collection are greater than the amount of
tax due)

Compromise
Authority of the Commissioner to compromise
and abate taxes
Compromise to reduce the amount of tax
payable
Grounds for a compromise

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XXX

JUDICIAL REMEDIES
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.
(Sec. 222, NIRC)

A. 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
(2) By filing an answer to the petition for
review filed by the taxpayer with the Court
of Tax Appeals. (Mamalateo, 2008)
B. Criminal Action

False Return v. Fraudulent Return


A false returns is due to mistakes, carelessness
or ignorance and a fraudulent return is filed
with intent to evade taxes.

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)

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 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)
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),
NIRC)

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)

Refund

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.
Pascor Realty, June 29, 1999)

Grounds and requisites for refund


Requirements for refund as laid down by cases
(a) Necessity of written claim for refund
(b) Claim containing a categorical demand
for reimbursement
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(c) Filing of administrative claim for


refund and the suit/proceeding before
the CTA within 2 years from date of
payment regardless of any supervening
cause

XXX

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

Legal basis of tax refunds


Judicial
1. Civil
2. Criminal
3. Statutory offenses and penalties

Statutory basis for tax refund under the tax


code
(a) Scope of claims for refund
(b) Necessity of proof for claim or refund
(c) Burden of proof for claim of refund
(d) Nature
of
erroneously-paid
tax/illegally assessed collected
(e) Tax refund vis--vis tax credit
(f) Essential requisites for claim of refund

Civil Penalties
1. Surcharge
2. Interest
CIVIL PENALTIES
Surcharge

Who may claim/apply for tax refund/tax credit


(a) Taxpayer/withholding agents of nonresident foreign corporation
Prescriptive period for recovery
erroneously or illegally collected

of

Surcharge penalty imposed in addition to the


tax required to be paid (Sec. 248(A), NIRC)

tax

Rates of Surcharge (25% or 50%)


25% of the amount due in the following cases:
(1) Failure to file any return and pay the
tax due on the date prescribed; or
(2) 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
(3) Failure to pay the deficiency tax within
the time prescribed for its payment in
the notice of assessment; or
(4) Failure to pay the full or part of the
amount of tax due on or before the
date prescribed for its payment (Sec.
246 (A), NIRC)

Other consideration affecting tax refunds

A. GOVERNMENT REMEDIES
(1) Administrative remedies
(a) Tax lien
(b) Levy and sale of real property
(c) Forfeiture of real property to the
government for want of bidder
(d) Further distraint and levy
(e) Suspension of business operation
(f) Non-availability of injunction to
restrain collection of tax

50% of the tax or of the deficiency tax in the


following cases:
(1) Willful neglect to file the return within
the period prescribed; or
(2) A false or fraudulent return is willfully
made (Sec. 248(B), NIRC)

(2) Judicial remedies


Administrative
1. Distraint of Personal Property including
garnishment deposit
2. Summary remedy of levy on real property
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XXX

(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 ofdeductions 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

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

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)
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
(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)

Cases which cannot be compromised: (Sec. 2,


R.R. 30-2002)
(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

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:
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TAXATION LAW 2

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
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

XXX

The taxpayer fails to submit the


required
returns,
statements
reports and other documents
There is a reason to believe that
any such report is false, incomplete
or erroneous
(3) Conduct inventory-taking, survaillance
and to prescribe presumptive gross
sales and receipts
Inventory-taking at any time
during the taxable year, for the
purpose of determining the correct
tax liabilities.
Surveillance done if there is
reason to believe that the taxpayer
is not declaring his correct income,
sales or receipts for tax purposes.
Prescribe presumptive gross sales
and receipts if:
o It is found that the
taxpayer has failed to issue
receipts and invoices, or
o 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
Terminating taxable period and
ordering the immediate payment of the
tax for the terminated period and any
remaining tax that is unpaid, when the
taxpayer is:
Retiring from business subject to
tax, or
Intending to leave the Philippines
or to remove his property
therefrom or to hide or conceal his
property;
Performing any act tending to
obstruct the proceedings for the
collection of the tax for the past or
current quarter or year or to render
the same totally or partially

V. Organization and
Function of the Bureau
of Internal Revenue
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
(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
The CIR shall assess the proper tax on
the best evidence obtainable when:

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ineffective unless such proceedings


are begun immediately
(5) Prescribe Real Property Values
Dividing the Philippines into
different zones or areas, and
determining the FMV of real
properties in each zone or area,
upon consultation with competent
appraisers from private and public
sectors.
For the purpose of computing any
internal revenue tax, the value of
the property shall be WHICHEVER
IS HIGHER OF:
o The FMV as determined by
the Commissioner, or
o The FMV as shown in the
schedule of values of the
provincial
and
city
assessors
(6) Inquire into Bank Deposit Accounts
Notwithstanding
any
contrary
provision of R.A. 1405 (Bank Secrecy
Law) and other general or special laws,
the Commissioner is authorized to
inquire into bank deposits of:
A decedent to determine his gross
estate, and
Any taxpayer who has filed an
application for compromise of tax
liability by reason of financial
incapacity: the taxpayer must
waive in writing his privilege under
R.A. 1405 and other relevant laws,
before the Commissioner may
inquire into his bank accounts.
(7) Accredit and register Tax Agents
Accrediting and registering tax agents
(may be individuals or general
professional partnerships) based on
the following criteria:
Professional competence
Integrity
Moral fitness

XXX

(8) Prescribe additional procedural or


documentary requirements
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
Authorizing the examination of any
taxpayer and the assessment of the
correct amount of tax, WON a return
has been filed by such taxpayer.
(2) Access Letter
Obtaining on a regular basis, from
any person other than the person
whose tax liability is subject to
audit or investigation, or from any
office or officer of the national and
local governments, government
agencies or instrumentalities,
including BSP and GOCCs;
Any information such as, but not
limited to, costs and volumes of
production, receipts or sales and
gross incomes of taxpayers, and
the names addresses, and
financial
statements
of
corporations,
mutual
fund
companies, insurance companies
etc.
(C) Interpret Tax Laws and to Decide Tax cases
(1) Shall be under the exclusive and
original
jurisdiction
of
the
Commissioner, subject to review by the
Secretary of Finance.
(2) A ruling by the BIR Commissioner shall
be presumed valid unless modified,
reversed or superseded by the
Secretary of Finance.
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(3) 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.
(4) A reversal or modification of the BIR
ruling shall terminate its effectivity
upon
(9) The receipt by the taxpayer or the BIR
of written notice of reversal or
modification, whichever came earlier.

(c)

(d)

(e)

**The Secretary of Finance may now also


review the rulings MOTU PROPRIO. (DOF
ORDER 7-02)

ORGANIZATION AND FUNCTION OF


THE BIR
RULE-MAKING
AUTHORITY
SECRETARY OF FINANCE

OF

(f)

THE

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.
(g)

SPECIFIC PROVISIONS TO BE CONTAINED IN


RULES AND REGULATIONS (Sec. 245, NIRC)
(a) The time and manner in which Revenue
Regional Director shall canvass their
respective Revenue Regions for the
purpose of discovering persons and
property liable to national internal revenue
taxes, and the manner in which their lists
and records of taxable persons and taxable
objects shall be made and kept;
(b) The forms of labels, brands or marks to be
required on goods subject to an excise tax,
238

XXX

and the manner in which the labelling,


branding or marking shall be effected;
The conditions under which and the
manner in which goods intended for export,
which if not exported would be subject to
an excise tax, shall be labelled, branded or
marked;
The conditions to be observed by revenue
officers respecting the institutions and
conduct of legal actions and proceedings;
The conditions under which goods
intended for storage in
bonded
warehouses shall be conveyed thither, their
manner of storage and the method of
keeping the entries and records in
connection therewith, also the books to be
kept by Revenue Inspectors and the reports
to be made by them in connection with
their supervision of such houses;
The conditions under which denatured
alcohol may be removed and dealt in, the
character and quantity of the denaturing
material to be used, the manner in which
the process of denaturing shall be effected,
so as to render the alcohol suitably
denatured and unfit for oral intake, the
bonds to be given, the books and records
to be kept, the entries to be made therein,
the reports to be made to the
Commissioner, and the signs to be
displayed in the business ort by the person
for whom such denaturing is done or by
whom, such alcohol is dealt in;
The manner in which revenue shall be
collected and paid, the instrument,
document or object to which revenue
stamps shall be affixed, the mode of
cancellation of the same, the manner in
which the proper books, records, invoices
and other papers shall be kept and entries
therein made by the person subject to the
tax, as well as the manner in which
licenses and stamps shall be gathered up
and returned after serving their purposes;

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(h) The conditions to be observed by revenue


officers respecting the enforcement of Title
III imposing a tax on estate of a decedent,
and other transfers mortis causa, as well as
on gifts and such other rules and
regulations which the Commissioner may
consider suitable for the enforcement of
the said Title III;
(i) The manner in which tax returns,
information and reports shall be prepared
and reported and the tax collected and
paid, as well as the conditions under which
evidence of payment shall be furnished the
taxpayer, and the preparation and
publication of tax statistics;
(j) The manner in which internal revenue
taxes, such as income tax, including
withholding tax, estate and donor's taxes,
value-added tax, other percentage taxes,
excise taxes and documentary stamp taxes
shall be paid through the collection officers
of the Bureau of Internal Revenue or
through duly authorized agent banks
which are hereby deputized to receive
payments of such taxes and the returns,
papers and statements that may be filed
by the taxpayers in connection with the
payment of the tax:

XXX

respectively, through collection officers or


through duly authorized agent banks:
Provided, further, That the Commissioner
can exercise this power within six (6) years
from the approval of Republic Act No.
7646 or the completion of its
comprehensive computerization program,
whichever comes earlier:
Provided, finally, That separate venues for
the Luzon, Visayas and Mindanao areas
may be designated for the filing of tax
returns and payment of taxes by said large
taxpayers.
For the purpose of this Section, 'large taxpayer'
means a taxpayer who satisfies any of the
following criteria:
(1) Value-Added Tax (VAT) - Business
establishment with VAT paid or payable of
at least P100,000 for any quarter of the
preceding taxable year;
(2) Excise tax - Business establishment with
excise tax paid or payable of at least
P1,000,000 for the preceding taxable year;
(3) Corporate Income Tax - Business
establishment with annual income tax paid
or payable of at least P1,000,000 for the
preceding taxable year; and
(4) Withholding tax - Business establishment
with withholding tax payment or
remittance of at least P1,000,000 for the
preceding taxable year.

Provided, however, That notwithstanding


the other provisions of this Code
prescribing the place of filing of returns
and payment of taxes, the Commissioner
may, by rules and regulations, require that
the tax returns, papers and statements
that may be filed by the taxpayers in
connection with the payment of the tax.

Provided, however, That the Secretary of


Finance, upon recommendation of the
Commissioner, may modify or add to the above
criteria for determining a large taxpayer after
considering such factors as inflation, volume of
business, wage and employment levels, and
similar economic factors.
The penalties prescribed under Section 248
shall be imposed on any violation of the rules
and regulations issued by the Secretary of

Provided, however, That notwithstanding


the other provisions of this Code
prescribing the place of filing of returns
and payment of taxes, the Commissioner
may, by rules and regulations require that
the tax returns, papers and statements and
taxes of large taxpayers be filed and paid,
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Finance, upon recommendation of the


Commissioner, prescribing the place of filing of
returns and payments of taxes by large
taxpayers.

XXX

prescribed by the Commissioner in the closure


order

VI. Tax Remedies under


the NIRC

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.

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
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
(iii) Filing a claim for refund; and
(iv) Filing a claim for tax credit

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. (i) Failure to issue receipts or invoices;
(ii) Failure to file a value-added tax return
as required under Section 114; or
(iii) Understatement of taxable sales or
receipts by thirty percent (30%) or
more of his correct taxable sales or
receipts for the taxable quarter.
(b) FAILURE OF ANY PERSON TO REGISTER
AS REQUIRED UNDER SECTION 236. -

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
(iv) Filing a criminal complaint against
erring BIR officials and employees
Note: Petition for declaratory Relief is not
under the jurisdiction of the CTA.

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

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Assessment

XXX

(c) 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.
(d) Unit and Value Method: The determination
of gross receipts may be computed by
applying price and profit figures to the
known ascertainable quality of business
done by taxpayer

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
each taxpayer; to settle determine or fix the
amount of tax to be paid (84 C.J.S 74-750)
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)

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.

Requisites for valid assessment:


(1) The taxpayer shall be informed in writing
of the law and the facts on which the
assessment is made (Sec. 228, NIRC)
(2) An assessment contains not only a
computation of tax liabilities, but also a
demand for payment within a prescribed
period (CIR v. PASCOR)
(3) An assessment must be served on and
received by the taxpayer (CIR v. PASCOR)
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
(a) Rely upon circumstantial evidence of
determining the correct income or
transaction of a taxpayer (Indirect Method)
(b) 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.

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
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XXX

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
penalty
Mamalateo: Reviewer on Taxation (2014) p559

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
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.

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)

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
Tax Delinquency
Tax Deficiency
It is when:
It is when:
Self-assessed
The amount of tax
taxpayer filed his tax imposed by law is
return but did not pay greater than the
or only partially paid amount shown in the
the tax
tax return
Deficiency
Tax If no amount is shown
assessed by the BIR in the return, or if
became final and there is no return,
executory
amount 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

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.
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
(b) After a return has been filed, the
CIR may authorize the examination
of any taxpayer and the
assessment of the correct amount
of tax.
(c) Failure to file a return shall not
prevent the CIR from authorizing
the examination.
(2) Best evidence obtainable
The CIR shall assess the proper tax on
the best evidence obtainable when:
The taxpayer fails to submit the
required
returns,
statements
reports and other documents
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XXX

There is a reason to believe that


any such report is false, incomplete
or erroneous
(3) Conduct inventory-taking, survaillance
and to prescribe presumptive gross
sales and receipts
Inventory-taking at any time
during the taxable year, for the
purpose of determining the correct
tax liabilities.
Surveillance done if there is
reason to believe that the taxpayer
is not declaring his correct income,
sales or receipts for tax purposes.
Prescribe presumptive gross sales
and receipts if:
o It is found that the
taxpayer has failed to issue
receipts and invoices, or
o 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
Terminating taxable period and
ordering the immediate payment of the
tax for the terminated period and any
remaining tax that is unpaid, when the
taxpayer is:
Retiring from business subject to
tax, or
Intending to leave the Philippines
or to remove his property
therefrom or to hide or conceal his
property;
Performing any act tending to
obstruct the proceedings for the
collection of the tax for the past or
current quarter or year or to render
the same totally or partially
ineffective unless such proceedings
are begun immediately
(5) Prescribe Real Property Values

Dividing the Philippines into


different zones or areas, and
determining the FMV of real
properties in each zone or area,
upon consultation with competent
appraisers from private and public
sectors.
For the purpose of computing any
internal revenue tax, the value of
the property shall be WHICHEVER
IS HIGHER OF:
o The FMV as determined by
the Commissioner, or
o The FMV as shown in the
schedule of values of the
provincial
and
city
assessors
(6) Inquire into Bank Deposit Accounts
Notwithstanding
any
contrary
provision of R.A. 1405 (Bank Secrecy
Law) and other general or special laws,
the Commissioner is authorized to
inquire into bank deposits of:
A decedent to determine his gross
estate, and
Any taxpayer who has filed an
application for compromise of tax
liability by reason of financial
incapacity: the taxpayer must
waive in writing his privilege under
R.A. 1405 and other relevant laws,
before the Commissioner may
inquire into his bank accounts.
(7) Accredit and register Tax Agents
Accrediting and registering tax agents
(may be individuals or general
professional partnerships) based on
the following criteria:
Professional competence
Integrity
Moral fitness
(8) Prescribe additional procedural or
documentary requirements (Sec. 6(H),
NIRC)
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In relation to the manner of


compliance of any requirement in
connection with the submission or
preparation of financial statements
accompanying the tax returns.

XXX

(C) Interpret Tax Laws and to Decide Tax cases


(Sec. 4, NIRC; RMC 44-01)
(1) Shall be under the exclusive and
original
jurisdiction
of
the
Commissioner, subject to review by
the Secretary of Finance.
(2) A ruling by the BIR Commissioner
shall be presumed valid unless
modified, reversed or superseded by
the Secretary of Finance.
(3) 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.
(4) A reversal or modification of the BIR
ruling shall terminate its effectivity
upon
(5) The receipt by the taxpayer or the BIR
of written notice of reversal or
modification, whichever came earlier.

(B) To obtain information and to summon,


examine, and take testimony of persons
(Sec. 5, NIRC)
(a) Authorizing the examination of any
taxpayer and the assessment of
the correct amount of tax, WON a
return has been filed by such
taxpayer.
Note: Any return filed with the Commissioner
shall not be withdrawn, BUT the taxpayer may
MODIFY, CHANGE or AMEND such return
within three (3) years from the date of filing,
provided that no notice for audit or
investigation of such return has been actually
served on the taxpayer.
(b) Access Letter (Sec. 5(B), NIRC)
Obtaining on a regular basis, from
any person other than the person
whose tax liability is subject to
audit or investigation, or from any
office or officer of the national and
local governments, government
agencies or instrumentalities,
including BSP and GOCCs;
Any information such as, but not
limited to, costs and volumes of
production, receipts or sales and
gross incomes of taxpayers, and
the names addresses, and
financial
statements
of
corporations,
mutual
fund
companies, insurance companies
etc.
Note: This is known as the Third
Party Information Rule.

Note: DOF Order 7-02 added that the


Secretary of Finance may review the rulings
MOTU PROPRIO.

When Assessment is Made


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.
Exception:
(1) False return;
(2) Fraudulent return with intent to evade tax;
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XXX

(3) 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.

newly-discovered evidence that a taxpayer


intends to present in the reinvestigation. It
may also involve a question of fact or 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)

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)
When the taxpayer cannot be located in the
address given by him in the return filed upon
which a tax is being assessed or collected, BUT
if the taxpayer informs the Commissioner of
any change in address, the running of the
statute of limitations shall not be suspended.

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)
Requirements for a valid waiver under RMO 2090:
(1) definite agreed date,
(2) date of acceptance indicated, and
(3) taxpayer must be furnished with a copy of
the waiver.

When the warrant of distraint or levy is duly


served upon the taxpayer, his authorized
representative, or a member of his household
with sufficient discretion, and No Property is
located.
When the taxpayer is Out of the Philippines

Suspension of running of statute of limitations


(Sec. 223, NIRC) (P-CORN)
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.

General Provisions on Additions to the Tax


(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.

When the taxpayer requests for a


Reinvestigation which is granted by the
Commissioner
RR 12-85 (Difference between Reconsideration
&Reinvestigation)
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

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

Reinvestigation refers to a plea of reevaluation of an assessment on the basis of


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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.

XXX

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:
(1) the amount of tax due on any return
required to be filed, or
(2) amount of tax due for which no return is
required, or
(3) 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
(3) Prima-facie evidence of false or fraudulent
return:
(i) substantial under declaration of
taxable sales, receipts or income
(failure to report sales, receipts or
income in an amount exceeding 30%
of that declared per return) or
(ii) ii)substantial
overstatement
of
deductions (a claim of deduction in an
amount exceeding 30% of actual
deductions)

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.
(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.

(B) Interest (Sec 249, NIRC)

Compromise an amount of money paid by the


taxpayer to settle his civil liability for tax
assessed by the government. The basis of the

In General

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XXX

amount paid is the basic tax assessed.


(Mamalateo, 2008)

issue to the taxpayer the PAN for the proposed


assessment.

Assessment Process[Sec. 228, NIRC; RR 12-99]


(1) 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.

The PAN shall show in detail the facts and the


law, rules and regulations, or jurisprudence on
which the proposed assessment is based.

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.

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

(3) Third Step: Reply to PAN


Taxpayer is given time to respond: 15 days from
date of receipt of PAN

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.

Cases which need not be covered by a valid LA:


(a) Cases involving civil/criminal tax fraud
which fall under the jurisdiction of the tax
fraud division of the Enforcement Services,
and
(b) 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
quarter or quarters of the succeeding
taxable year; or
(d) The EXCISE TAX due on excisable articles
has not been paid; or

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.

(2) Second Step: Issuance of Preliminary


Assessment Notice (PAN) (Sec. 228, NIRC;
RR18-2013)
If after review and evaluation by the
Commissioner or his duly authorized
representative, it is determined that there
exists sufficient basis to assess the taxpayer for
any deficiency tax or taxes, the said Office shall

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(e) An article locally purchased or imported by


an exempt person, such as, but not limited
to,
vehicles,
capital
equipment,
machineries and spare parts, has been sold,
traded or transferred to a non-exempt
person. (Sec. 228, NIRC)

XXX

against the formal letter of demand and


assessment notice within thirty days (30) from
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.

In the above-cited cases, a FLD/FAN shall be


issued outright.

Protesting Assessment [Sec 228, NIRC; RR 1299]

(4) Fourth Step: Issuance of formal letter of


demand and final assessment notice

(a) Protest of assessment by taxpayer


Made within thirty (30) days from receipt of the
assessment.

A Final Assessment Notice (FAN) is a


declaration of deficiency taxes issued to a
taxpayer who:
fails to respond to a pre-assessment notice
within the prescribed period of time, or
whose reply to the PAN was found to be
without merit.

Protest is either a request for reconsideration


or a request for reinvestigation, or both
A protest is considered validly made if it
satisfies the following conditions:
(1) it is made in writing, and addressed to the
Commissioner of Internal Revenue,
(2) it contains the information required by the
rule,
(3) It states the FACTS, applicable LAW,
RULES
and
REGULATIONS
or
JURISPRUDENCE on which his protest is
based, otherwise the protest shall be
considered void and without force and
effect and
(4) It is filed within the period prescribed by
law

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
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)

(b) In case of a request for reinvestigation,


submission of documents within 60 days
from filing of protest
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.

(5) Fifth Step: Disputed Assessment


The taxpayer or his duly authorized
representative may protest administratively
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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)

XXX

the inaction by the Commissioner is


considered as a denial of protest.
(f) Referral of case for collection.
Remedies of
Commissioner

(c) Effect of failure to protest: the assessment


shall become final, executory and
demandable.

Taxpayer

to

Action

by

(a) In case of denial of protest


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

(d) Period provided for protest to be acted


upon: Protest should be acted upon within
180 days from submission of documents.
(6) 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.
Rendition of Decision by Commissioner
CIRs actions deemed equivalent to denial of
protest:
(a) Filing of collection suit against taxpayer
(CIR v. Union Shipping)
(b) Issuing a warrant of distraint and levy
(Commissioner v. Algue)
(c) Where
there
is
a
request
for
reconsideration, final demand letter from
BIR (CIR v. Isabela Cultural Corp)
(d) Notice of delinquency (CIR v. Ayala
Securities)
(e) Inaction by Commissioner - If the protest is
not acted upon within one hundred eighty
(180) days from submission of documents,

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)
Note: A Division of the CTA shall hear the
appeal. (Sec. 11, RA 1125 as amended by RA
9282 [2004])
(b) In case of inaction by Commissioner within
180 days from submission of documents
If the Commissioner or his duly authorized
representative did NOT ACT UPON THE
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PROTEST within 180 days from the time the


documents were submitted, the taxpayer may
either:
(a) Appeal to the CTA within (30) thirty days
from the lapse of the 180-day period OR
(b) Wait until the Commissioner or his duly
authorized representative decides before
he elevates the case to the CTA.

XXX

Rules of Court. (Sec. 19, RA 1125 as amended


by RA 9282 [2004])
(c) Effect of failure to appeal
If the taxpayer fails to file an appeal, the
assessment shall become final, executory and
demandable.
Collection

RCBC v. CIR (2007): In case the Commissioner


failed to act on the disputed assessment within
the 180-day period from date of submission of
documents, a taxpayer can either:
(a) file a petition for review with the Court of
Tax Appeals within 30 days after the
expiration of the 180-day period; OR
(b) 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.

Requisites
When the government may avail of the
remedies of collection:
General Rule: When the assessment shall have
become final, executory and demandable.
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:
(a) 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
(b) In the opinion of the Court of Tax Appeals,
the collection may jeopardize the interest
of the Government and/or the taxpayer.
(Sec. 11, R.A. 1125 as amended by R.A.
9282)

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
as amended by RA 9282 [2004])
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

Requisite before availing of injunction


(a) Taxpayer has to deposit the amount
claimed; OR
(b) File an injunction bond with the Court for
not more double the amount (R.A. 1125)
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XXX

Prescriptive periods

Collection
assessment

Collection
assessment

with

without

Where return filed was NOT


false or fraudulent:
prior should be made within 5 years
from 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:
should be made within 5 years
from the date of assessment
(based on Sec. 222(c), NIRC)

by distraint or levy, or by
judicial proceedings
prior should be made within 3 years
from the date of filing of return
or date return is due, whichever
is LATER (based on Sec. 203,
NIRC)

by distraint or levy, or by judicial


proceedings
should be made within ten years
after the discovery of the falsity,
fraud or omission to file a return.
by judicial proceedings

by judicial proceedings
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)

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

Remedies of the Government in Collection


Administrative
Distraint of Personal Property including
garnishment deposit
Summary remedy of levy on real property
Forfeiture to the government for want of
bidder
Further Distraint or Levy
Tax Lien
Compromise and Abatement
Penalties and Fines

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.
Grounds for Constructive Distraint:
When in the opinion of the Commissioner,
(a) the taxpayer is retiring from any business
subject to tax; or
(b) the taxpayer is intending to leave the
Philippines; or
(c) the taxpayer is intending to remove his
property from the Philippines or to hide or
conceal his property; or
(d) the taxpayer is planning to perform any act
tending to obstruct the proceedings for

Judicial
Civil
Distraint
of Personal Property
Criminal
Distraint remedy enforced on the goods,
chattels, or effects, and other personal
property of whatever character including
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collecting the tax due or which may be due


from him (Sec. 206, NIRC)

XXX

company or association which issued the


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

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:
Commissioner or his duly authorized
representative where the amount involved is
more than P1M
Revenue District Officer where the amount
involved is P1M or less (Sec. 207(A), NIRC)

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
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,
expenses of distraint and the cost of the
subsequent sale. (Sec. 207(A), NIRC)

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
Distraint of intangible properties (Sec. 208,
NIRC)
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,

(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.

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(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),
NIRC)

XXX

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. 207(B), 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.
210, NIRC)

(E) Notice of Sale of Distrained Properties


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.

(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)

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 Action
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 distrainedat a PUBLIC
AUCTION, to the HIGHEST BIDDER for CASH
or with the approval of the Commissioner,
through a DULY LICENSED COMMODITY or
STOCK EXCHANGES.

(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)

Any residue over and above what is required to


pay the entire claim, including expenses of sale
and distraint, shall be RETURNED to the
owner of the property sold. Expenses shall be
limited to actual expenses of SEIZURE and
PRESERVATION of the property pending the
sale, no charge shall be imposed for the
services of the local internal revenue officer or
his deputy. (Sec. 209, 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
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.
When levy may be effected: after the expiration
of time required to pay the delinquent tax, real
property may be levied upon, before,
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simultaneously or after the distraint of


personal property belonging to the delinquent.
(Sec. 207(B), NIRC)

XXX

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.

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

CONTENTS of notice: statement of amount of


taxes, and penalties due, time and place of
sale, name of taxpayer, short description of
property. (Sec. 213, NIRC)

(A) Issuance of Warrant of Levy


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.

(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)

This certificate shall operate with the force of


LEGAL EXECUTION throughout the Philippines.
The certificate shall contain a description of
the property upon which levy is made. (Sec.
207(B), NIRC)

(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
to the GOVERNMENT in satisfaction of the
claim. (Sec. 215, NIRC)

(B) Service of the Warrant


Levy shall be effected by writing upon said
certificate a description of the property upon
which levy is made.
At the same time, written notice of the levy
shall be mailed to or served upon the Register
of Deeds of the province or city where the
property is located and upon the taxpayer (If he
is absent from the Philippines: to his agent or
manager of business in respect to which the
liability arose or to the occupant of the
property in question). (Sec. 207(B), NIRC)

(F) Redemption of Property Sold


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)
Within one (1) year from the date of sale, the
taxpayer or anyone for him, may pay to the

(C) Advertisement of the Sale


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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)

XXX

Remedy of enforcement of forfeitures


Forfeiture of chattels and removable fixtures:
enforced by the seizure, sale or destruction of
the specific forfeited property.
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
price since the Government did not purchase
the property anyway, it was forfeited)

When property to be sold or destroyed


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 nonpayment of taxes

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)

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

(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)

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

Instances when forfeiture is appropriate


(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)

Forfeited property shall not be destroyed until


at least 20 days after seizure. (Sec. 225, NIRC)
Resale of real estate taken for taxes(RR No. 222002)
All acquired/forfeited properties transferred in
the name of the Republic of the Philippines,
having passed the one-year redemption period,
shall be converted into cash from the date of
acquisition or forfeiture.
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XXX

and/or occupants, if any, of the auctioned


property.

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.

Negotiated or private sale shall be resorted to


as a consequence of failed public bidding for
two consecutive times.

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.

Negotiated or private sale shall in all cases be


approved by the Secretary of Finance.
Public auction sale shall be approved by the
Commissioner or his authorized representative.

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.

The Government reserves the right to reject or


cancel any or all bids.
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)

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.

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)

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.

Tax lien
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.

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.

All taxes and expenses relative to the issuance


of title shall be borne by the winning bidder.

When a taxpayer neglects or refuses to pay his


internal revenue tax liability after demand, the
amount so demanded shall be a lien in favor of
the government from the time the assessment
was made by the CIR until paid with interest,

The winning bidder shall be responsible at his


own expense for the ejectment of squatters

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penalties, and costs that may accrue in


addition thereto upon ALL PROPERTY AND
RIGHTS TO PROPERTY BELONGING to the
taxpayer.

XXX

(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)

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)

Limits of the
compromise:

Commissioners

power

to

For cases of financial incapacity: a minimum


compromise rate equivalent to ten percent
(10%) of the basic assessed tax

Seizure under forfeiture vs. Seizure to enforce a


tax lien
In the former all the proceeds derived from the
sale of the thing forfeited are turned over to
the Collector of Internal Revenue; in the latter,
the residue of such proceeds over and above
what is required to pay the tax sought to be
realized, including expenses, is returned to the
owner of the property. (BPI v. Trinidad)

For other cases: a minimum compromise rate


equivalent to forty percent (40%) of the basic
assessed tax
Note: When the basic tax involved exceeds
One Million Pesos (P1,000,000), or where the
settlement offered is less than the prescribed
minimum rates, the compromise must be
approved by the Evaluation Board (composed
of the Commissioner and 4 deputy
commissioners)

Compromise
Authority of the Commissioner to compromise
and abate taxes

All criminal cases may be compromised


except:
(a) those already filed in court and
(b) those involving fraud.

Compromise to reduce the amount of tax


payable (This should not be taken similarly
with compromise penalty.)
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.

The taxpayers offer to compromise shall not be


considered until (RR 9 2013)
(a) He waives in writing his privilege under RA
1405 or other special laws
(b) He gave authority to CIR to inquire into his
bank accounts
(c) There is payment of compromise offer.

It should be noted that there should be


consent of BOTH the taxpayer and the CIR,
otherwise it will be void.

Abatement to cancel the entire amount of tax


payable

Grounds for a compromise:


The Commissioner may compromise the
payment of any internal revenue tax in the
following cases:
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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
collection are greater than the amount of
tax due)

XXX

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.
(Sec. 222, NIRC)

False Return v. Fraudulent Return


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


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:
(a) shall be BROUGHT IN THE NAME OF THE
GOVERNMENT of the Philippines; and
(b) shall be CONDUCTED BY LEGAL
OFFICERS OF THE BIR
(c) shall be filed in court with the approval of
the Commissioner. (Sec. 220, NIRC)

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)
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)

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)

Grounds for Refund:


(1) Tax erroneously or illegally assessed or
collected (Sec. 229, NIRC)
(2) Penalty claimed to have collected without
authority (Sec. 229, NIRC)
(3) Any sum alleged to have been excessively
or in any manner wrongfully collected (Sec.
229, NIRC)
(4) Value of internal revenue Stamps when
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)

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.
Pascor Realty, June 29, 1999)
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
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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 years from date of payment
regardless of any supervening cause

XXX

Note: Under Sec. 229, there is no exception to


the 2-year prescriptive period.

Legal Basis of Tax Refunds


Tax refunds are based on the principle of
quasi-contract or solutio indebiti and the
pertinent laws governing this principle are
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.

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)

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.
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:


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)
A return filed showing an overpayment shall be
considered as a written claim for credit or
refund. (Sec. 204(C), NIRC)
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Necessity of Proof for Claim or Refund


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, NIRC)

XXX

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
of the falsity, fraud or omission in the false or
fraudulent return involved.

A return filed showing an overpayment shall be


considered as a written claim for credit or
refund.(Sec. 204, NIRC)
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,
Inc. v. CIR, G.R. No. 178788, Sept. 29, 2010)

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.

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
Erroneously or Illegally Collected

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.

Tax

Two-year period when counted:


From the date that tax was paid.
How date of payment determined:
If the income tax is withheld at source
payment is at the end of the taxable year.
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

CIR vs. TMX Sales (January 16, 1992): When a


tax is paid in installments, the prescriptive
period should be counted from the date of final
payment or the last installment. This rule
proceeds from the theory that there is no
payment until the entire tax liability is
completely paid. Installments should be
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TAXATION LAW 2

treated as advances or portions of the annual


tax due.

XXX

GOVERNMENT REMEDIES
Administrative remedies

Other Consideration Affecting Tax Refunds

Tax lien
Levy and sale of real property
Forfeiture of real property to the
government for want of bidder
Further distraint and levy
Suspension of business operation
Non-availability of injunction to restrain
collection of tax

Remedy of the taxpayer upon denial or inaction


on the claim for refund:
(a) 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.
(b) CIR does not act on the claim and the 2year 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 2-year period. (Revised Rules
of the CTA, as amended)

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:
In the case of a VAT-registered Person(a) Failure to issue receipts or invoices; or
(b) Failure to file a value-added tax return as
required under Section 114; or
(c) Understatement of taxable sales or
receipts by thirty percent (30%) or more of
his correct taxable sales or receipts for the
taxable quarter.

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,
NIRC)

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. 115, NIRC)
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)

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Judicial remedies
(a) Civil Action
(b) Criminal Action

XXX

Offender

Penalty

A public officer or the maximum penalty


employee
prescribed
for
the
offense shall be imposed
on him
shall be dismissed from
public
office,
and
perpetually disqualified
from holding any public
office, to vote, and to
participate
in
any
election
CPA
his license shall be
automatically revoked or
cancelled once he is
convicted
Corporations,
imposed on the partner,
associations,
president,
general
partnerships etc.
manager,
branch
manager,
treasurer,
officer-in-charge
and
employees responsible
for the violation (Sec.
253, NIRC)

Form and Mode of Proceeding (supra)


Civil Action
Two ways by which civil liability is enforced:
by filing a civil case for the collection of sum of
money with the proper regular court; and
by filing an answer to the petition for review
filed by the taxpayer with the Court of Tax
Appeals.(Mamalateo, 2008)
Criminal Action
Any person convicted of a crime under the
Code shall:
(a) be liable for the payment of the tax, and
(b) be subject to the penalties imposed under
the Code. (Sec. 253(A), NIRC)
Payment of tax not defense:
Payment of the tax due after a case has been
filed shall not constitute a valid defense in any
prosecution for violation of the provisions
under the Code. (Sec. 253(A), NIRC)
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),
NIRC)

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)

Offender

Penalty

Not a citizen of he shall be deported


the Philippines
immediately
after
serving the sentence

Criminal Offenses

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Offense

XXX

Who is liable

Penalty

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.

Fine:
P30,000
P100,000
AND
Imprisonment: 2-4 years
Plus other penalties
Any person required to pay any Fine: P10,000 or more
tax, make a return, keep any AND
record, or supply correct and Imprisonment:1-10 years
accurate information
Plus other penalties

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 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
Making false entries, records, Any
financial
officer
or
or reports, or using falsified or Independent CPA engaged to
fake accountable forms (Sec. examine and audit books of
257)
accounts of taxpayers under
Sec.232 (A) and any person
under his direction.
Unlawful pursuit of business Any person who carries on any
(Sec. 258)
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.
Illegal Collection of Foreign Any person who knowingly
Payments (Sec. 259)
undertakes the collection of
foreign payments under Sec. 67
without a license or without
complying
with
the
implementing
rules
and
regulations.
Unlawful
Possession
of Any person, manufacturer or
263

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

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Offense

Who is liable

Cigarette Paper in Bobbins or importer of cigar or cigarettes


Rolls, Etc. (Sec. 260)
Unlawful Use of Denatured Any person who for the purpose
Alcohol (Sec. 261)
of manufacturing any beverage,
uses denatured alcohol or
alcohol specially denatured to
be used for motive power or
withdrawn under bond for
industrial uses or alcohol
knowingly misrepresented to be
denatured to be unfit for oral
intake or who knowingly sells or
offers for sale such preparations
containing as an ingredient
such alcohol.

XXX

Penalty
P100,000; AND
Imprisonment - 6 years 1
day - 12 years
Fine:
P20,000
P100,000; AND
Imprisonment - 6 years 1
day - 12 years

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
Value of goods < P1,000
AND
Imprisonment:
60-100
days
Value of goods < P50,000 but Fine: P10,000-P20,000
>P1000
AND
Imprisonment: 2-4 years
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Offense

Who is liable

Value of goods
but >P50,000

XXX

Penalty

< P150,000, Fine: P30,000 - P60,000


AND
Imprisonment: 4-6 years

Value of goods > P150,000

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
AND
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 used
dies 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
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Offense
Goods (Sec. 268)

Who is liable

XXX

Penalty

who fails to store the goods in


proper place, or removes goods
without payment of excise tax

Penalty for Second and


Subsequent Offenses (Sec.
274)
Violation of Other Provisions of
the Tax Code or Rules or
Regulations in General (Sec.
275)

Maximum of the penalty


prescribed for the offense

Any person who violates any


provision of this Code or any
rule or regulation promulgated
by the Department of Finance
for which no specific penalty is
provided by law
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)

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
of Trade Secrets (Sec. 278)
or employee of the BIR to
divulge
any
confidential
information
regarding the
business, income or inheritance
of any taxpayer, knowledge of
which was acquired by him in
the discharge of his official
duties, and which it is unlawful
for him to reveal, and any
person who publishes or prints
in any manner whatever, not
provided by law, any income,
profit, loss or expenditure
appearing in any income tax
266

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

Fine: not more than P


2,000
OR
Imprisonment: 6 months 5 years
OR Both

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TAXATION LAW 2

Offense

Who is liable

XXX

Penalty

return
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.

Penalties Imposed on Public Officers(Sec. 269,


NIRC)
The law imposes a fine of not less than
P50,000 nor more than P100,000 or
imprisonment for not less than 10 years nor
more than fifteen years on every official, agent
or employee of the BIR or of any agency or
employee of the Government charged with the
enforcement of the Tax Code, who shall:
(CONED- FRAP)
(a) Extort or willfully oppress under color of
law;
(b) knowingly Demand other or greater sums
than are authorized by law or receive any
fee, compensation or reward, except as by
law prescribed, for the performance of any
duty;
(c) willfully Neglect to give receipts, as by law
required, for any sums collected in the
performance of duty, or who willfully

(d)

(e)

(f)
(g)

(h)

Informers Reward[Sec. 282, NIRC]


To whom given:
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.

neglect to perform any of the duties


enjoined by law;
Conspire or collude with another or others
to defraud the revenues or otherwise
violate the law;
willfully make Opportunity for any person
to defraud the revenues, or who do or omit
to do any act with intent to enable any
other person to defraud the revenues;
negligently or by design Permit the
violation of the law by any other person;
make or sign any False certificate or return
in any case where the law requires the
making by them of such entry, certificate or
return;
having knowledge or information of a
violation of any provision of the Code or of
any fraud committed on the revenues
collectible by the BIR, fail to Report such

The same amount shall be given if the offender


offered to compromise and such offer has been
accepted and collected by the Commissioner.
If no revenue, surcharge or fees be actually
collected, such person is not entitled to a
reward.
For discovery and seizure of SMUGGLED
GOODS: The cash reward is 10% of the FMV of
the smuggled and confiscated goods, or
P1,000,000, whichever is LOWER.

STATUTORY OFFENSES AND PENALTIES

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Civil Penalties
(a) Surcharge
(b) Interest

XXX

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)

Surcharge
Surcharge - penalty imposed in addition to the
tax required to be paid (Sec. 248(A), NIRC)

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)

Rates of Surcharge (25% or 50%)


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 amount
of tax due on or before the date prescribed
for its payment (Sec. 246 (A), 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
(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)

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

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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

XXX

(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
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

Cases which cannot be compromised: (Sec. 2,


R.R. 30-2002)
(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

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XXX

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

270

Assessment
becomes Final,
Warrant of Distraint
& Levy Issued

END

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TAXATION LAW 2

XXX

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)

271

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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VI. Organization and


Function of the BIR
RULE-MAKING
AUTHORITY
SECRETARY OF FINANCE

OF

XXX

manner of storage and the method of


keeping the entries and records in
connection therewith, also the books to be
kept by Revenue Inspectors and the reports
to be made by them in connection with
their supervision of such houses;

THE

(f) The conditions under which denatured


alcohol may be removed and dealt in, the
character and quantity of the denaturing
material to be used, the manner in which
the process of denaturing shall be effected,
so as to render the alcohol suitably
denatured and unfit for oral intake, the
bonds to be given, the books and records
to be kept, the entries to be made therein,
the reports to be made to the
Commissioner, and the signs to be
displayed in the business ort by the person
for whom such denaturing is done or by
whom, such alcohol is dealt in;

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.
Specific provisions to be contained in rules and
regulations(Sec. 245, NIRC)
(a) The time and manner in which Revenue
Regional Director shall canvass their
respective Revenue Regions for the
purpose of discovering persons and
property liable to national internal revenue
taxes, and the manner in which their lists
and records of taxable persons and taxable
objects shall be made and kept;

(g) The manner in which revenue shall be


collected and paid, the instrument,
document or object to which revenue
stamps shall be affixed, the mode of
cancellation of the same, the manner in
which the proper books, records, invoices
and other papers shall be kept and entries
therein made by the person subject to the
tax, as well as the manner in which
licenses and stamps shall be gathered up
and returned after serving their purposes;

(b) The forms of labels, brands or marks to be


required on goods subject to an excise tax,
and the manner in which the labelling,
branding or marking shall be effected;
(c) The conditions under which and the
manner in which goods intended for export,
which if not exported would be subject to
an excise tax, shall be labelled, branded or
marked;

(h) The conditions to be observed by revenue


officers respecting the enforcement of Title
III imposing a tax on estate of a decedent,
and other transfers mortis causa, as well as
on gifts and such other rules and
regulations which the Commissioner may
consider suitable for the enforcement of
the said Title III;

(d) The conditions to be observed by revenue


officers respecting the institutions and
conduct of legal actions and proceedings;
(e) The conditions under which goods
intended for storage in
bonded
warehouses shall be conveyed thither, their
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XXX

(i) The manner in which tax returns,


information and reports shall be prepared
and reported and the tax collected and
paid, as well as the conditions under which
evidence of payment shall be furnished the
taxpayer, and the preparation and
publication of tax statistics;

computerization program, whichever comes


earlier:

(j) The manner in which internal revenue


taxes, such as income tax, including
withholding tax, estate and donor's taxes,
value-added tax, other percentage taxes,
excise taxes and documentary stamp taxes
shall be paid through the collection officers
of the Bureau of Internal Revenue or
through duly authorized agent banks
which are hereby deputized to receive
payments of such taxes and the returns,
papers and statements that may be filed
by the taxpayers in connection with the
payment of the tax:

For the purpose of this Section, 'large taxpayer'


means a taxpayer who satisfies any of the
following criteria:
(a) Value-Added Tax (VAT) - Business
establishment with VAT paid or payable of
at least P100,000 for any quarter of the
preceding taxable year;
(b) Excise tax - Business establishment with
excise tax paid or payable of at least
P1,000,000 for the preceding taxable year;
(c) Corporate Income Tax - Business
establishment with annual income tax paid
or payable of at least P1,000,000 for the
preceding taxable year; and
(d) Withholding tax - Business establishment
with withholding tax payment or
remittance of at least P1,000,000 for the
preceding taxable year.

Provided, finally, That separate venues for the


Luzon, Visayas and Mindanao areas may be
designated for the filing of tax returns and
payment of taxes by said large taxpayers.

Provided, however, That notwithstanding the


other provisions of this Code prescribing the
place of filing of returns and payment of taxes,
the Commissioner may, by rules and
regulations, require that the tax returns,
papers and statements that may be filed by the
taxpayers in connection with the payment of
the tax.

Provided, however, That the Secretary of


Finance, upon recommendation of the
Commissioner, may modify or add to the above
criteria for determining a large taxpayer after
considering such factors as inflation, volume of
business, wage and employment levels, and
similar economic factors.

Provided, however, That notwithstanding the


other provisions of this Code prescribing the
place of filing of returns and payment of taxes,
the Commissioner may, by rules and
regulations require that the tax returns, papers
and statements and taxes of large taxpayers
be filed and paid, respectively, through
collection officers or through duly authorized
agent banks:

The penalties prescribed under Section 248


shall be imposed on any violation of the rules
and regulations issued by the Secretary of
Finance, upon recommendation of the
Commissioner, prescribing the place of filing of
returns and payments of taxes by large
taxpayers.

Provided, further, That the Commissioner can


exercise this power within six (6) years from the
approval of Republic Act No. 7646 or the
completion
of
its
comprehensive
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Non-retroactivity of rulings (Sec. 246, NIRC)

XXX

business operations and temporarily close the


business establishment of any person for any
of the following violations:

General Rule:No retroactive application if the


revocation, modification or reversal of rules
and regulations, rulings or circulars will be
prejudicial to the taxpayers

In the case of a vat-registered person (a) Failure to issue receipts or invoices;


(b) Failure to file a value-added tax return as
required under Section 114; or
(c) Understatement of taxable sales or
receipts by thirty percent (30%) or more of
his correct taxable sales or receipts for the
taxable quarter.

Exceptions:
Where the taxpayer deliberately misstates or
omits material facts from his return or any
document required of him by the BIR;
Where the facts subsequently gathered by the
BIR are materially different from the facts on
which the ruling is based; or
Where the taxpayer acted in bad faith.

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.

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

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275

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VIII. LOCAL
GOVERNMENT CODE
OF 1991, AS AMENDED

XXX

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)

LOCAL GOVERNMENT TAXATION


Fundamental principles (UEPIP)
Taxation shall be uniform in each local
government unit;
Taxes, fees, charges and other impositions
shall: (EPUC)
(1) be equitable and based as far as
practicable on the taxpayer's ability to pay;
(2) be levied and collected only for public
purposes;
(3) not be unjust, excessive, oppressive, or
confiscatory;
(4) not be contrary to law, public policy,
national economic policy, or in the restraint
of trade;
The collection of local taxes, fees, charges and
other impositions shall not be let to any private
person;
The revenue collected shall inure solely to the
benefit of, the local government unit levying
the tax, fee, charge or other imposition unless
otherwise specifically provided herein; and,

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, LGC)
Withdrawal of exemptions
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)

Each local government unit shall, as far as


practicable, evolve a Progressive system of
taxation. (SEC. 130, LGC)

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)

Nature and Source of Taxing Power


Grant of local taxing power under the Local
Government Code
Each LGU shall exercise its power to
create its own sources of revenue levy taxes,
fees, and charges.
Both are subject to the provisions in
the LGC and consistent with local autonomy
Taxes, fees and charges levied accrue
exclusively to the local government units. (Sec.
129, LGC)

Residual taxing power of local governments


LGU may exercise the power to levy taxes or
charges on ANY base or subject

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Required:
Not otherwise specifically enumerated in the
LGC or taxed under NIRC or other applicable
laws

XXX

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)

Not unjust, excessive, oppressive, confiscatory


or contrary to declared national policy

Scope of Taxing Power

Pursuant to an ordinance enacted with public


hearing conducted for the purpose. (Sec. 186,
LGC)

LGU

Scope of Taxing Power

Provinces
May levy only:
(Sec.
134, Transfer of Real Property
LGC)
Ownership
Business of Printing and
Publication
Franchise Tax
Tax on Sand, Gravel and Other
Quarry Resources
Professional Tax
Amusement Tax
Annual Fixed Tax for every
delivery truck or van
Municipalitie May levy taxes, fees and
s
charges not otherwise levied
by provinces (Sec. 142, LGC)
Cities
May levy taxes, fees and
charges which the province or
municipality may impose (Sec.
151, LGC)
Barangays
May levy only:
Taxes on stores or retailers
Service fees or charges
Barangay clearance
Other fees and charges (Sec.
152, LGC)

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)
Local Taxing Authority
Power to create revenues exercised thru LGUs
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)
Exercised by the Sanggunian concerned
through an appropriate ordinance. (Sec. 132,
LGC)
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)
Procedure for approval and effectivity of tax
ordinances
A public hearing must be conducted prior to
the enactment of a tax ordinance. (Sec. 187,
LGC)

But all LGUs may also impose reasonable


service fees, rates for operation of public
utilities, andtoll fees and charges. (See letter e
below) (Sec. 153-155, LGC)

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
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XXX

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 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 Barangayowned 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

Province

Municipality

City

(135)

(151)

(136)

(137)

(138)

(139)
(140)

(141)

(143)

(147)

(148)

(149)

Barangay

(152a)
(152b)
(152c)

(152d)

(within Metro Manila)

Taxing powers of provinces

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Tax Imposed

Rate/Amount

Tax on Transfer of Not


more
Real
Property. than 50% of
Imposed on the sale, 1%
donation, barter, or
any other mode of
transfer of ownership
or title to real
property (Sec 135m
LGC)

XXX

Base

Exemptions

Others

Total acquisition
price or fair
market value,
whichever
is
higher

Sale, transfer, or
other disposition of
real
property
pursuant to R.A.
6657
(Comprehensive
Agrarian Reform
Law)

Evidence of payment of
tax is to be required by
Register of Deeds as a
requisite to registration;
and by the provincial
assessor as a condition
for cancellation of old
tax declaration.
Tax must be paid 60
days from the date of
execution of deed or
from the date of
decedent's death.

Tax on Business of Not


Printing
and exceeding
Publication (Sec 136, 50% of 1%
LGC)
Imposed
on
the
business of persons
engaged in printing,
and/or publication of
books, cards, posters,
leaflets,
handbills,
certificates, receipts,
pamphlets,
and
others of similar
nature
Newly
business

started Not
exceeding
1/20 of 1%

Gross
annual
receipts for the
preceding
calendar year

Capital
investment

279

Receipts
from
printing
and/or
publishing
of
books and other
reading materials
prescribed by the
DECS as school
texts or references

In
the
succeeding
calendar
year,
regardless of when
business
started
operating, tax shall be
based on gross receipts
for preceding calendar
year, or any fraction
thereof.

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Tax Imposed

TAXATION LAW 2

Rate/Amount

Franchise Tax (Sec


137, LGC)
Not
Notwithstanding any exceeding
exemption granted by 50% of 1%
any law or any other
special law, tax may
be
imposed
on
business enjoying a
franchise

Newly-started
business

Base

XXX

Exemptions

Gross
annual
receipts for the
preceding
calendar
year
based on the
incoming
receipt,
or
realized, within
its
territorial
jurisdiction
In
the
succeeding
calendar
year,
regardless of when
business
started
operating, tax shall be
based on gross receipts
for preceding calendar
year, or any fraction
thereof.
Permit to extract sand,
gravel and other quarry
resources to be issued
exclusively
by
the
provincial
governor
pursuant
to
an
Ordinance
by
the
Sangguniang
Panlalawigan

Not
more
than 1/20 of Capital
1%
investment

Tax on Sand, Gravel Not


more
and Other Quarry than 10%
Resources. Levied on
ordinary
stones,
gravel, earth and
other
quarry
resources as defined
in the NIRC, extracted
from public lands or
from the beds of seas,
lakes, rivers, streams,
creeks, and other
public waters within
its
territorial
jurisdiction (Sec 138,
LGC)

Others

Fair
market
value in the
locality
per
cubic meter of
resources
referred to in
Column 1

Distribution of proceeds:
Province - 30%
Component
City/
Municipality
where
resources
were
extracted - 30%
Barangay
where
resources
were
extracted - 40%

Professional
Tax. Such amount Such
Provinces may levy as
the reasonable
280

Professionals
exclusively

To be paid to
province where

the
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Tax Imposed

Rate/Amount

annual professional
tax on each person
engaged
in
the
exercise
of
a
profession requiring
government
examination (Sec 139,
LGC)

Sangguniang
Panlalawiga
n
may
determine, in
no case to
exceed
P300.00

Base

XXX

Exemptions

Others

classification by employed by the profession is practiced,


the
government
or where a principal
Sangguniang
office is maintained.
Panlalawigan
A person who pays for
professional tax may
practice his profession
anywhere in the country
without being subjected
to similar taxes.
Employers shall require
payment of professional
tax as a condition for
employment.

Amusement
Tax.
Collected
from
proprietors, lessees,
or
operators
of
theaters,
cinemas,
concert
halls,
circuses,
boxing
stadia, and other
places of amusement
(Sec 140, LGC)

Payable annually, on or
before Jan 31.
In case of theaters or
cinemas, tax shall first
be
deducted
and
withheld
by
their
proprietors, lessees and
operators

Not
more Gross receipts Holding of operas,
than
10% from admission concerts, dramas,
(amended by fees
recitals, painting,
RA
9640,
and art exhibitions,
2009)
flower
shows,
musical programs,
literary
and
oratorical
presentations
Proceeds to be shared
equally by the province
Exception
to and municipality where
exemption:
Pop, amusement places are
rock, or similar located.
concerts

Annual Fixed Tax For Amount not Every truck, van,


Every Delivery Truck exceeding
vehicle
or
Van
of P500
Manufacturers
or
Producers,
Wholesalers
of,
Dealers, or Retailers
in, Certain Products.
Imposed on vehicles
281

Manufacturers,
producers, wholesalers,
dealers and retailers
referred to in column 1
shall be exempt from tax
on peddlers

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TAXATION LAW 2

Rate/Amount

Base

XXX

Exemptions

Others

used for the delivery


of distilled spirits,
fermented
liquors,
soft drinks, cigars and
cigarettes, and other
products as may be
determined by the
sanggunian, to sales
outlets, or consumers
in
the
province,
whether directly or
indirectly (Sec 141,
LGC)
Taxing powers of cities