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TAXATION

REVIEW
Jisryl H. Raz, CPA
PHILIPPINE TAXATION
SYSTEM
Protection

CONFLICT
GOVERNM
ENT
------------
REMEDIE
PEOPLE
S
- Assessment - File and Paytaxes
- Collection - Protest the assessment
- Enforcement of Taxes: Taxes - Claim for Tax Refund/Credit
1.Summary Proceedings
2. Judicial Proceedings

2
GOVERNMENT

EMINENT
POLICE TAXATION
POWER DOMAIN
POWER
POWER
Comparisons
POLICE TAXATION EMINENT DOMAIN

Power to MAKE and Power to ENFORCE Power to TAKE private


IMPLEMENT laws for contribution to raise property for public use with
the general welfare government funds just compensation

Plenary, comprehensive,
Merely to take private
Broader in application and supreme BUT NOT
property
ABSOLUTE

Property is taken or
Money is taken to support Property is taken for public
destroyed to promote
the government use
general welfare

Cannot be delegated, if
delegated, it should be to
Can be expressly Can be expressly
the legislative department
delegated delegated
of the LGU (e.g. to make
ordinances)
Comparisons
POLICE TAXATION EMINENT DOMAIN
Limited to the cost of Generally, NO limit on No imposition as to
regulation, license amount amount, instead, it is the
and other necessary Government which is to
expense compensate the property
taken.
Relatively FREE from Subject to Superior to and may
Constitutional Constitutional and override Constitutional
limitations Inherent limitations impairment provision
Superior to Non- Inferior to Non-
Impairment Clause Impairment Clause
General Principles
1. Principles or Canons of a Sound Taxation System (FEA)

a. Fiscal Adequacy – sufficiency to meet government


expenditures and other public needs (Government Budget
Balance). This is in consonance of the Lifeblood Theory.
i. Budget Deficit =
Government Revenues < Government Expenditures
ii. Budget Surplus =
Government Revenues > Government Expenditures
General Principles
b. Equality or Theoretical Justice – based on the
taxpayer’s ability to pay; must be progressive

c. Administrative Feasibility – capability of being


effectively enforced. Tax laws should not obstruct
business growth and economic development.
General Principles
2. Purpose
a. Primarily, to raise revenue
b. Regulatory - To regulate (inflation, economic
and social stability, social control, etc.)
c. Compensatory - To compensate the benefits
provided by the government to the people
General Principles
3. Characteristics of Taxation (ILS)
a.Inherent power of the state.
b.Exclusively lodged with the legislative
body
c.Subject to inherent and constitutional
limitations
General Principles
4. Nature
a.Plenary – full and complete in all respect
b.Comprehensive – it covers persons, businesses,
activities, professions, rights and privileges.
c.Supreme – it is supreme ONLY insofar as the
selection of the subject of taxation is concerned
d.Not Absolute – it is subject to limitations
General Principles
5. Limitations in Taxation Power
a. Inherent Limitations (PENTI)
a.1. Public purpose
a.2. Exemption of the Government
a.3. Non-delegability of the power to tax
a.4. Territoriality
a.5. International Comity
General Principles
b. Constitutional Limitations
b.1. Due process clause
b.2. Equal protection clause
b.3. Freedom of speech and of the press
b.4. Non-impairment of contracts
b.5. Rule requiring that appropriations,
revenue and tariff bills shall originate
exclusively from the House of
Represenatatives (Congress)
General Principles
b.6. Uniformity, equality, and progressivity of taxation
b.7. Tax exemption of the properties actually,
directly and exclusively used for religious,
charitable and educational purposes.
b.8. Voting requirement (2/3) in connection with the
legislative grant of tax exemption
b.9. Non-impairment of the jurisdiction of the Supreme
Court in tax cases
General Principles
b.10. Exemption from taxes of the revenues and
assets of educational institutions, including
grants, endowments, donations and
contributions

b.11. Power of the Presidentto veto any particular


item (item veto) or items in an appropriation,
revenue or tariff bill (pocket veto).
General Principles
b.12. Necessity of an appropriation before
money may be paid out of the public
treasury

b.13. Non-appropriation of public money or


property for the use, benefit or support of
any sect, church or system of religion
General Principles
Double Taxation
It is taxing the same property twice when it
should be taxed once.

Kinds of Double Taxation:


1. Direct Duplicate Taxation – double taxation
in the objectionable or prohibited sense; not
allowed in the Philippines. This constitutes a
violation of substantive due process.
General Principles
Elements of Direct Duplicate Taxation:
1.Same property or subject matter is
taxed twice
2.Same purpose
3.Same taxing authority
4.Same taxing period
5.Same kind or character of tax
General Principles
2. Indirect Duplicate Taxation –
legal/permissible. The absence of one or
more of the above-mentioned elements.

This does not necessarily violate the equal


protection of laws.
General Principles
How to avoid Double taxation?

1.Tax Credits
2.Tax Refund
3.Specific provisions of the NIRC which
allows tax minimization like vanishing
deductions, input taxes, etc.
General Principles
Theories of Taxation
1.Necessity Theory (Theory of
Taxation) – the power to tax is an
attribute of sovereignty emanating from
necessity (national defense, health,
education, public facilities, etc.).
General Principles

2.Lifeblood Theory (Importance of


Taxation) – without taxes, the
government would be paralyzed for
lack of the motive power to activate
and operate it.
General Principles

3. Benefits – Protection Theory/


Reciprocal Duties (Basis of Taxation)
– there is a symbiotic relationship
between the State and the citizens
whereby in exchange of the protection
and benefits that the citizens received
from the State, taxes are paid.
General Principles
Aspects of Taxation (shared by both
executive and legislative body)

1.Levy – the imposition or making of tax laws


2.Assessment – similar to audit
3.Collection – enforcement of tax
General Principles
Note:
1.Levy is often called as tax legislation or
tax policy.
2.Assessment and collection are collectively
termed as tax administration.
3.Levy and assessment comprise the impact
of taxation, while tax collection comprises the
incidence of taxation.
General Principles

4. An impact of taxation is a point on


which tax is originally imposed.
5. An incident of taxation is a point on
which the tax burden finally rests or
settles down.
General Principles
Doctrines of Taxation
1. May the court interfere with tax legislation?
Answer: As long as the legislature, in imposing a tax,
does not violate applicable constitutional limitations or
restrictions, it is not within the province of the courts to
inquire into the wisdom or policy of the exaction, the
motives behind it, the amount to be raised or the persons,
property or other privileges to be taxed. The court’s power
is limited only to the application and interpretation of the
law.
General Principles
2. Is the doctrine of equitable recoupment followed in
the Philippines?

Answer: No. A tax presently being assessed against a


taxpayer may not be recouped or set-off against an
overpaid tax, the refund of which is already barred by
prescription.
General Principles
3. May a tax be subject of compensation or
set-off?

Answer: Generally, no. Taxes cannot be the


subject of compensation or set-off. Taxes are
not contractual obligations but one arising out
of duty to the government
General Principles

4. What is a taxpayer suit?

Answer: It is a case fied by a bona fide


taxpayer impugning the validity, legality
or constitutionality of a tax law or its
implementation.
General Principles
5. What is the nature of our tax laws
Answer: Internal revenue laws are not
political in nature. In times of war, they are
deemed to be the laws of the occupied
territory and not of the occupying enemy. Tax
laws are civil and not penal in nature, although
there are penalties provided for their violation.
General Principles
6. A tax statute is construed against the government,
liberally in favor of the taxpayer; while tax
exemptions are construed against the taxpayer and
liberally in favor of the government.
7. Tax laws are special laws which prevail over a general
law.
8. Tax laws operate prospectively unless the purpose of
the legislature is to give a retrospective effect.
Concept of Tax
1. It is an enforced proportional
contribution from the persons and
property levied by the law-making body of
the State.

2. Taxation vs. Tax


a. Taxation is the process or means of imposing
and enforcing contributions.
b. Tax is the enforced contribution, itself, which
generally payable in money.
Concept of Tax
Characteristics of Taxes
1.Forced charge
2.Generally payable in money
3.Exclusively levied by the legislative body
4.Assessed in accordance with some
reasonable rule of apportionment (ability-to-pay
principle)
5.Imposed by the State within its jurisdiction
6.Levied for public purpose
Concept of Tax
Classification of Taxes
1. As to subject matter:
a.Personal tax – imposed upon persons of certain class
with fixed amount (e.g. Community tax or poll tax)
b.Property tax – assessed on property of certain class
(e.g. Real Property tax)
c.Excise tax – imposed on the exercise of privilege (e.g.
income tax, donor’s tax, estate tax, etc.)
d.Custom duties – charged upon the commodities being
imprted into or exported from a country (e.g. tariffs)
Concept of Tax
2. As to burden:
a. Direct tax – both incidence or liability for the
payment of tax as well as the impact or burden of the
tax falls on the same person (e.g. income tax)

b. Indirect tax – the incidence or liability for the


payment of tax falls on one person but the impact
or burden of the tax falls on another person (e.g.
VAT)
Concept of Tax

3. As to purpose
a. General tax – levied for the general or
ordinary purposes of the government

b. Special tax – levied for special purpose


Concept of Tax
4. As to measure of application
a. Specific tax – imposes a specific sum by the head
or number or by some standard of weight or
measurement (e.g. excise tax on cigarettes)

b. Ad Valorem tax – tax upon the value of the article


or thing subject to taxation (e.g. VAT of 12%
regardless of the value of sales)
Concept of Tax
5. As to taxing authority
a. National tax – levied by the National
Government (e.g. income tax, business taxes,
transfer taxes)

b. Local tax – imposed by the Local


Government (e.g. Poll tax, real property taxes)
Concept of Tax
6. As to rate
a. Progressive tax – rate or amount of tax increases as the
amount of income increases (e.g.
normal/tabular/schedular tax of 5% - 32%, tabular tax
for donor’s tax and estate tax)

b. Regressive tax – rate dcreases as the amount of


income to be taxed increases (not applicable in the
Philippines)

c. Proportionate tax – based on fixed proportion or rate of


the value of the property assessed (e.g. VAT of
12%)
Escape from Taxation
1. Tax Avoidance (Tax Planning) – legal and
permissible means
a. Shifting – the process by which the tax burden is
transferred from the statutory taxpayer to another
without violating the law.

b.Transformation – the manufacturer or producer pays


the tax imposed upon him and endeavors to recoup
himself by improving his process of production, thereby
turning out his units of production at a lower cost.
Escape from Taxation
c. Capitalization – a mere increase in the value of the
property is not an income but merely an unrealized
increase in capital.

d. Tax-exemption – a grant of immunity to a particular


persons or corporations from the obligation to pay
taxes

2. Tax Evasion (Tax Dodging) – the use of illegal or


fraudulent means to defeat or lessen the payment of
tax
Tax Laws, BIR Rulings and
Revenue Regulations
1. Tax laws
a. A tax law is a set of rules that provide means for the State
to raise revenues.
b. All revenue bills must originate from the House of
Representatives (Congress). After passing 3 readings
by a majority vote in technical committee, it shall be
elevated to the Senate which needs to pass the same 3
readings. The President’s signature is necessary so that the
bill becomes a law.
c. In case of doubt, tax statutes are construed against the
Government in favor of the taxpayer.
d. In case of doubt, tax exemptions are construed against the
taxpayer in favor of the Government
Tax Laws, BIR Rulings and
Revenue Regulations
2. Revenue Regulations
a. These are interpretations of an administrative body
(BIR) intended to clarify or explain the tax laws and
carry into effect its general provisions by providing
details of administration and procedure.
b. It is promulgated (made) by the Secretary of Finance,
upon the recommendation of the Commissioner
of Internal Revenue (quasi-legislative function).
c. It must be reasonable, within the authority conferred,
not contrary to laws, must be published and
prospective in application.
Tax Laws, BIR Rulings and
Revenue Regulations
3. BIR Rulings

a. The BIR issues a general interpretation of tax


laws usually upon a requrest of a taxpayer to
clarify a provision of law.
INCOME
TAXATION
NATIONAL INTERNAL REVENUE TAXES

Income Transfer Business


Taxes Taxes Taxes

Tabular
(Individual)
Gratuitous Onerous

Mortis
Corporate Causa
VAT

Passive Gifts Percentage


Taxes

CGT
Excise
Documentary Stamp Tax
For INDIVIDUALS whose gross income solely includes
compensation, allowances and other remunerations
arising from the employer-employee relationship, passive
income and capital gains not subjected to final tax and
CGT:

Compensation income xx
Add: Passive Income, not subjected to FT xx
Capital Gains, not subjected to CGT xx
Gross Income xx
Less: Deductions for:
PHHI (xx)
Personal Exemptions (xx)
Taxable Income xx
For INDIVIDUALS with business or professional income:

Gross receipts/sales xx
Less: Cost of service/sale (xx)
Gross income from business or profession xx
Less: Deductions for:
Itemized Deductions or OSD (xx)
NCLCO, if there is any (xx)
NOLCO, if there is any (xx)
Net income from business or profession xx
Less:
PHHI (xx)
Personal Exemptions (xx)
Taxable Income xx
For INDIVIDUALS whose income includes both compensation, business
income and passive incomes not subjected to final tax:

Gross receipts/sales xx
Less: Cost of service/sales (xx)
Gross income from business or profession xx
Add: Passive Income, not subjected to FT xx
Capital Gains, not subjected to CGT xx
Total Gross Income before compensation income xx
Less: Deductions for:
Itemized Deductions or OSD (xx)
NCLCO, if there is any (xx)
NOLCO, if there is any (xx)
Net Income from Business or Profession xx
Add: Compensation Income xx
Total Income xx
Less: PHHI (xx)
Personal Exemptions (xx)
Taxable Income xx
For CORPORATIONS, including business partnerships,
domestic corporations, resident foreign corporations,
joint ventures, and associations, except non-resident
foreign corporations (which is taxable at gross income):

Gross receipts/sales xx
Less: Cost of service/sales (xx)
Gross income from business or profession xx
Add: Passive Incomes, not subjected to final tax xx
Capital Gains, not subjected to CGT xx
Total Gross Income xx
Less: Deductions for:
Itemized Deductions or OSD (xx)
Net Operating Loss Carry-Over (NOLCO) (xx)
Taxable Income xx

*NCLCO is not applicable since the holding period is


also not applicable.
Income Taxation: Gross
Income – Inclusions

4 Broad Types of Returnable Income:


1.Compensation Income
2.Business or Professional Incomes
3.Passive Income
4.Capital Gains
Gross Income:
Compensation Income

All remunerations paid to the employee arising from


an employer-employee relationship which
include, but not limited to:
a. Salaries and wages except wages given to MWE
b. Bonuses and allowances except 13th month pay
and other bonuses not exceeding P 82,000.
c. Holiday pay, Overtime pay, Night shift differential, and
Hazard Pay received by persons other than an MWE.
Gross Income:
Compensation Income
d. De minimis and other fringe benefits not
subjected to fringe benefit tax (given to rank-
and-file), subject to P82,000 limit
e. Separation Pay, Retirement pay, and similar
remunerations which do not meet the
requirements
f. Fees, honoraria, emoluments, commissions, etc.
Remember 

Every income is generally


taxable, unless, specifically
exempted by the law and the
requirements to be exempted
are met.
Example:
D, married with 4 qualified dependent children had the
following:
Compensation Income, (net of P19,000
SSS, PHIC, and HDMF Contributions) P 305,000
13th Month Pay 27,000
Productivity Bonus 27,000
Premiums on Health Insurance 2,400
Personal, family and living expenses 200,000
The taxable income of D:
1. Prior to 2015 _____________
2. 2015 _____________
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Example:
A, resident citizen, single had the following during the year:
Gross compensation income P 4000,000
Deductions from compensation income:
SSS Contributions 3,600
Pag-IBIG Contributions 1,200
PhilHealth Contributions 1,800
Union Dues 2,400
Premium Payments on Health Insurance (P250/month) 3,000
Other Incomes
Prizes and awards received as best athlete in the Palarong Pambansa 10,000
Prizes and awards received for the silver medal in the SEA Games 25,000
Prize won as a Lucky Home Viewer 10,000
Prize won in a Supermarket raffle 20,000
13th Month Pay 14,000
Christmas cash gift 10,000
Midyear Bonus 14,000
Interest on Bank Deposit (net of withholding tax) 16,000
Interest on Foreign Currency Deposit (net of withholding tax) 10,000
IMPORTANT 

Situs of Compensation Income:


place where the services are
rendered regardless of the
residence of payor (Sec. 155, RR
02-40)

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Income Taxation: Individual –
Exclusions from Gross Income
1. Holiday pay, Overtime pay, Night shift
differential, and Hazard pay (HONsHa) earned by
MWE (non-taxable).

2. 13th Month Pay, productivity incentives,


Christmas bonus and other bonuses and benefits
(de minimis) not exceeding PhP 82,000 (starting
January 2015 pursuant to Revenue Regulation
No. 3-2015)
Income Taxation: Individual –
Exclusions from Gross Income
3. Gifts, bequests and devises (subject to transfer
taxes) are not subject to income tax, but income
derived from the use of such gifts, bequests and
devises are subject to income tax.
4. Income derived by foreign government
5. Income derived by the Philippine government
or its political subdivisions.
Income Taxation: Individual –
Exclusions from Gross Income
6. De Minimis not exceeding their statutory limits.
7. Proceeds of life insurance paid to the heirs upon
death of the insured or whoever the beneficiary is (also
not subject to estate tax if the beneficiary is the third
person irrevocably designated as heir; subject to
estate tax if the beneficiary is the estate, administrator
or executor or if the designation to third persons is
revocable).
Income Taxation: Individual –
Exclusions from Gross Income
8. Retirement benefits under RA 7641
(private benefit plan), provided:
a. The employee is at least 50 years old at
the time of retirement;
b. The employee has rendered 10 years in
the same company
c. The employee availed it for the first time
d. Such private benefit plan is approved by
the BIR.
Income Taxation: Individual –
Exclusions from Gross Income
9. Separation pay paid to the employee for
causes beyond the control of said
employee (involuntary). If the cause of
separation is voluntary, such payment
shall be taxable.

10. Mandated contributions such as SSS,


GSIS, PHIC and HDMF contributions and
union dues.
Income Taxation: Individual –
Exclusions from Gross Income
11. Amounts received as a return of premiums paid.
12. Prizes and awards in recognition of religious,
charitable, scientific, educational, artistic, literary or
civic achievement as well as awards in authorized
sports competitions.
13. Gains from sale of bonds, debentures or other
certificates of indebtedness with a maturity of longer
than five years.
Example:
Dino purchased a life insurance annuity
for P 1,000,000 which will pay him P
100,000 per year. The life expectancy
of Dino is 12 years. How will the
amount be taxed?
Gross Income: Business or
Professional Income
Generally, arising from selling goods or services.
Whether individual or corporate taxpayer, may include:
Sale of goods and properties (real or personal)
Sale of services (professional services, lease of
properties, etc.)

Note: Withholding taxes from professional incomes and


other sale of services which are subject to CWT must be
correctly withheld.

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Example:
A, married to M had the following during the taxable year:
Gross Income
From the Practice of profession P 700,000
Rental Income of their conjugal property 300,000

Allowable Deductions
For the practice of profession 520,000
For the property rented to tenants 140,000

The taxable income of A before personal exemptions is


_________________.
Gross Income: Passive
Income
General Rule: Passive income earned within
the Philippines are taxable unless
specifically exempted by law.

Exception: If the passive income is not


subjected to final tax, such is added to
the gross income subject to normal tax.

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Passive Income:
Individual Taxpayers
a. Interest on currency bank deposits, yield and other
monetary benefit from deposit substitute, trust and
similar arrangement; Royalty from patents and
franchises, prizes exceeding P10,000 and
winnings regardless of the amount: 20% final tax

b. Royalty from books, literary works and musical


compositions, and dividend from domestic
corporation: 10% final tax

a. Interest on FCD under the expanded FCDS: 7.5%,


except non-residents
Example:
Nina, a resident citizen, had the following incidental income
in 2009:
Interest on Philippine currency bank deposit P 30,000
Interest on foreign currency deposit under the
Expanded foreign currency deposit system 50,000
Royalty from invention 150,000
Royalty from musical compositions 80,000
Dividend from domestic corporation 60,000
Share in net income of business partnership 100,000
How much is the total final taxes?
Passive Income:
Corporate Taxpayers
a. Interest on FCD under the expanded FCDS:
7.5%, except non-resident foreign corporation

b. Interest on currency bank deposits, yield and


other monetary benefit from deposit substitute,
trust and similar arrangement; Royalty from
patents and franchises, prizes exceeding
P10,000 and winnings regardless of the amount:
20% final tax.

b. Dividend from domestic corporation: exempt

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Example:
Taxpayer received the following income in
Rent, Philippines P10,000
Rent, Hongkong
2009: 20,000
Interest, peso deposit, PNB 10,000
Interest, US$ deposit, PNB ($1,000 x 56,000
P56)
Interest, deposit in Hongkong 7,000
(HK$1,000 x P7)
Prize (cash) won in a local contest 8,000
Prize (TV) won in a local lottery valued at 15,000
Prize won in contest in US 30,000
Lotto winning in US 10,000
Dividend, domestic company 60,000
Gross Income: Passive
Income
Not Subject to Final Withholding Tax –
those which are not subjected to final tax like
those which are earned abroad, prizes not
exceeding P10,000, and interest from loans,
trade and accounts receivables and those
incomes earned outside the Philippines shall
be included in the computation of gross
income.

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Example:
Maximo received the following income in
Business income, Philippines
2009: P300,000

Business income, United States 250,000


Expenses, Philippines 200,000
Expenses, United States 125,000
Interest on deposit with Metrobank 3,000
Cash prize won in a local contest 6,000
Cash prize won in a contest in U.S. 10,000
Winnings in lotto 20,000
Winnings in lotto in U.S. 50,000
Dividends from SMC, a domestic company 25,000

Interest on deposit in U.S. ($1 = P48) $500


Gross Income: Capital
Gains
Capital gains arising from the sale of capital assets (real or
personal assets) are taxable as follows:
a. If REAL property not used in business, subject to
capital gains tax of 6% of the selling price, or FMV, or
Zonal Value, whichever is the highest.

b. If shares of stocks not traded in the local stock


exchange, subject to 5-10% capital gains tax.

c. All other capital gains, which are not subject to CGT, are
subject to normal tax (5-32%), subject to the pertinent
rules in property.

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Ordinary Assets vs. Capital Assets
a Capital Assets
a. Inventories, stocks in trade held by
dealers, other property or in kind
a. Other than those enumerated as
included in inventory of the
ordinary assets
taxpayer (e.g. work in process
b. All properties not used in business
inventory and finished goods
c. investment whether or not
inventory, stocks)
connected with taxpayers trade are
b. Property held for sale to customers
capital assets (e.g. investment in
in the ordinary course of business
equity securities and investment in
(real estate developer)
subsidiary)
c. Properties used in business which
d. Residential house and lot
is subject to depreciation or
e. Family car
amortization (factory, office
f. Receivables arising from sale of
building, patents)
inventory
d. Real property used in business
(land which the factory stands)
Example:
1. Accounts Receivable
2. Securities Held as an investment
3. Inventories of raw materials, work-in process and
finished goods
4. Office Equipment
5. Land used in Business
6. Land held for investment purposes
7. Land for sale by a real estate dealer
8. Residential House
9. Business of sole proprietorship sold to a corporation
10. Interest of a partner in a partnership
11. Car used partly for business and partly for personal
purposes
Ordinary Assets vs. Capital Assets
Subject to CGT Subject to Normal Tax
a. Sale of stocks not listed and
not traded in local stock a. Other than those listed as
exchange (5%- 10% of capital Major Capital Assets (stocks not
gains) traded and listed, and real
properties subject to 6% CGT),
b. Sale of real capital properties all other capital gains are subject
NOT used in business (6% CGT to normal tax (added in the gross
based on FMV or SP, whichever income)
is higher).
b. HOLDING PERIOD is
c. NO HOLDING PERIOD since
applicable ONLY to individual
the capital gains tax is a final tax
taxpayers
on the date of sale.
c. NO HOLDING period for
d. GAINS or LOSSES are no corporations.
longer reportable since the sale d. Gains are reportable in full
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was already subjected to final subject to holding period clause.
Ordinary Gains and
Losses
Gains and losses derived from sale or exchange
of the ordinary assets are ORDINARY GAINS
and LOSSES which are included in determining
ordinary income subject to tax.

Gains/Losses shall be part of GROSS INCOME


of such seller (as other income) subject to
Normal Tax (5-32% or 30%).
Capital Gains and Losses
Capital gains are taxable, whether at 6%, 5%-
10% or normal tax.

Capital losses are ONLY deducted from


CAPITAL GAINS. No capital losses exceeding
capital gains may be deducted from ordinary
gains nor gross income.
Capital Gains and Losses
HOLDING PERIOD is applicable ONLY to individual
taxpayers.
Capital assets held for more than 12 months, the
taxable gain or deductible loss is 50% of such gain
or loss.
Capital assets held for not exceeding 12 months,
capital gains taxable in full, however, in case of
capital loss deductible in full, but limited only to the
extent of capital gains.
In case of net capital loss, such loss shall be carried
over to the succeeding year.
Example:
A, a resident citizen had the following data for the year 2011 to 2014:
2011 2012 2013 2014
Ordinary Taxable Income P 200,000 P 250,000 P 300,000 P 350,000
Gain from sale of CA
Held for 12 months 20,000 2,000 100,000 57,000
Held for 13 months 8,000 10,000 20,000 28,000
Loss from sale of CA
Held for 19 months 22,000 20,000 60,000 10,000
Status of the taxpayer Single Married Married w/ Married w/
1 QDC 2 QDC

Required: Compute the taxable income of the taxpayer for each year.
Net Capital Loss Carry-Over
(NCLCO)
The net capital loss of one year
may be carried over to the
succeeding year, but not
exceeding the taxable income
of the year when such net
capital loss was sustained.
Example:
Mr. N, a citizen of the Philippines, single had the following
data:

2010 2011
Net income from business P 80,000 P 90,000
Interest from notes of clients 4,000 2,000
Capital gain on shares of foreign
corporation held for 3 years 50,000
Capital gains on jewelry held for
10 months 70,000
Capital loss on bonds, held for
4 months 120,000
Solution:
2010 2011
Net Income from Business P 80,000 P 90,000
Interest income 4,000 2,000
Ordinary net income 84,000 92,000
Capital Gain (50%) P25,000
Capital Gain (100%) P70,000
Capital Loss (100%) (120,000)
Net Capital Loss ( 95,000)
NCLCO (34,000)
Net Capital Gain 36,000
Total 128,000
Less: Basic personal exemption (50,000) (50,000)
Taxable Income 34,000 78,000
Note:

Corporate taxpayers are not


subject to holding period,
thus cannot carry-over its net
capital loss.
Example:
A, a domestic corp., had the following data for the year 2011 to 2014:
2011 2012 2013 2014
Ordinary Taxable Income P 200,000 P 250,000 P 300,000 P 350,000
Gain from sale of CA
Held for 12 months 20,000 2,000 100,000 57,000
Held for 13 months 8,000 10,000 20,000 28,000
Loss from sale of CA
Held for 19 months 22,000 20,000 60,000 10,000

Required: Compute the taxable income of the taxpayer for each year.
CAPITAL GAIN TAX
EXEMPTION: Requirements
To be exempted from Capital Gains Tax, especially in
the sale of residential dwellings (house and lot), the
following shall be observed:
1. The capital asset sold was a principal residence;
2. The taxpayer is a citizen of the Philippines or
resident alien;
3. The proceeds of the sale was invested in acquiring a
new principal residence;
4. Notice to make such utilization was given to the BIR
within 30 days from the date of sale;
CAPITAL GAIN TAX
EXEMPTION: Requirements
5. Utilization of the proceeds of the sale was made
within eighteen (18) months from the date of sale;
6. A cash deposit is made with an accredited bank for
an amount equal to the capital gain tax, and answerable
for the capital gain tax should the conditions for the
exemption be not satisfied;
7. The exemption shall be availed of once only every
ten years.
CAPITAL GAIN TAX
EXEMPTION: Requirements
If the entire proceeds of the sale is
invested, the entire capital gain is
exempt. The cost basis of the new
principal residence will be the basis
of the old residence.
CAPITAL GAIN TAX
EXEMPTION: Requirements
If only a portion of the proceeds of the sale is invested in
the new residence, the cost basis of the new residence
shall be:

Proceeds of the sale invested x what should have been


Entire proceeds of the sale the tax (CGT)
CAPITAL GAIN TAX
EXEMPTION: Requirements

Capital gain tax, if the entire proceeds is not


utilized:

Proceeds of the sale not invested x what should have been


Entire proceeds of the sale the tax (CGT)
CAPITAL GAIN TAX
EXEMPTION: Requirements
If the amount invested is in excess of the
proceeds of the sale, the capital gain is exempt
and the basis for the new principal residence is
equal to the basis of the old residence plus the
additional investment
New Residence = Old residence + additional capital investment
Example:
A sold his principal residence at a selling
price of P5M but with a FMV of 6million.
The property sold was acquired for
P3million. He purchased his new residential
residence at a cost of P7million.
a.The capital gains tax is ______________.
b.The cost of the new principal residence is ________________.
c.If only P4million out of P5million was utilized in acquiring his new
principal residence, the capital gains tax is ____________.
d.Using the same assumption in letter c, the cost basis of the new
residence is _____________
Remember 
Passive incomes not
subjected to final taxes and
Capital Gains not subjected
to capital gains taxes are
added to the Gross Income,
thus, subject to normal
tax.
94
Example:
Oliver, a resident citizen, has the following
transactions of not listed and traded shares
of stocks of a domestic corporation:
Date of Sale Date of Cost Selling
Acquisition Price
February 13, January 18, 2007 P 80,000 P135,000
2009
April 5, 2009 November 30, 256,000 360,000
2008
July 20, 2009 September 3, 2007 175,000 115,000

October 13, 2009 August 7, 2009 144,500 150,000


DEDUCTIONS
FROM FROM
GROSS INCOME
96
GENERAL RULES:

1. A taxpayer seeking a
deduction must point to some
specific provisions of the
statute authorizing the
deduction.
2. Tax exemptions as well as
deductions are generally
disfavored by the law.
(strictissimi juris)
Allowable Deductions:

1. Optional Standard Deduction


2. Itemized Deductions
Optional Standard Deduction
Optional standard deduction may be claimed in lieu of
the itemized deductions.

Individual taxpayers (RC, NRC, RA, taxable estates


and trusts) who are engaged in business or selling of
service may claim OSD, except NRAETB and
NRANETB.

For individual taxpayers, the 40% OSD is multiplied at


his gross sales or gross receipts. For purposes of
computing OSD for individuals, gross sales/receipts
shall mean after deducting sales discounts actually
taken, sales returns and sales allowances.
Optional Standard Deduction
Corporate taxpayers (domestic and resident foreign),
except non-resident foreign corporation, may claim 40%
OSD of its gross income (sales/receipts less cost of
sales/service plus other income not subjected to final tax).

The selection is not presumed; the taxpayer should


signify his election to claim OSD and such would be
irrevocable for the taxable year in which the return is
made.

The failure to indicate the election to avail the OSD shall


be considered as having availed of the itemized
deductions.
Example of Erroneous
Computation 
1st Quarter 2nd Quarter 3rd Quarter Annual

OSD Itemized OSD Itemized


Deduction Deduction

Itemized OSD OSD Itemized


Deduction Deduction
Example of Correct
Computation 
1st Quarter 2nd Quarter 3rd Quarter Annual

OSD OSD OSD OSD

Itemized Itemized Itemized Itemized


Deduction Deduction Deduction Deduction
Itemized Deductions
General Rule: Expenses to be deductible should be
ORDINARY and NECESSARY for the business, and
must be SUBSTANTIATED.

Exception: Optional Standard deduction may be


claimed without substantiation. Take note:
1.RESIDENTS (RC and RA) and CITIZENS (RC and
NRC) can claim OSD.
2.DOMESTIC and RESIDENT FOREIGN
corporations can claim OSD.
Itemized Deductions:
(Ex InTaLoBa DepDep ChaRD PeT)

a. General Business Expenses (salaries and wages,


supplies and repairs, operating expenses, rentals,
advertising, travelling expense, insurance premiums
against fire, EAR)
b. Interest
c. Taxes
d. Losses
e. Bad Debts
f. Depreciation
g. Depletion
h. Charitable and other contribution
i. Research and Development
j. Pension and Trust
General Business Expenses
Salaries: all remuneration, including wages
and other forms of compensation for services
actually rendered plus the grossed-up
monetary value of fringe benefits granted by
the employer to the employee. Provided, a
withholding tax should be imposed (FBT or
Wtax) so that the salaries may be claimed as a
deduction.
General Business Expenses
Materials and Supplies: cost of these expense
when actually consumed.
Travel Expenses: any expenses incurred for
transportation and allowances provided they are
incurred solely for carrying on the trade,
business or profession.
Rent Expense

LESSEE LESSOR
ACCRUAL Rent is deductible when Rent is taxable when
BASIS INCURRED. RECEIVED.
CASH BASIS Rent is deductible when Rent is taxable when
INCURRED and PAID.* RECEIVED.**

*In cash basis, advance payments are not


deductible unless incurred.
**In cash basis, advance payments constitute a
taxable income the year received, irrespective of the
period earned.
Example:
On January 1, 2011, Marco leased his vacant lot for a
period of 12 years at P 240,000 per year to Isabel, the
lessee. It was agreed that the lessee will pay the following:
Rent of P 480,000 (for 2011 and 2012)
Security deposit of P 240,000
Real property tax at P 20,000 per year until the end of the lease
period
The lease contract provides among others that the lessee
will construct a three-storey building for parking purposes
at a cost of P 3,600,000 which shall belong to the lessor
upon expiration or termination of the lease. The building
was completed on July 1, 2011, and was readily available
for use. The estimated life of the building is 15 years.
Marco shall report for the year 2011, using the spread-out
method, a total income from lease of ____________
Example:

The rent expense of the lessee if he


is using accrual basis for income
tax purposes. _____________

The rent expense of the lessee if he


is using cash basis for income tax
purposes. _____________

109
Representation: entertainment, amusement and
recreation (EAR)
Subject to a limit of ½% of net sales if the taxpayer is
engaged in selling of goods; and 1% of the net
revenue if the taxpayer is engaged in selling services.

If the taxpayer is engaged in both selling of goods


and services, the total actual EAR shall be allocated
using the net sales or net revenue times the total of
net sales and net revenue subject to the limits
provided above.
Example:
A Corporation had a net sales of P1M. The actual
entertainment, amusement and recreation
expense amounted to P20,000. The deductible
EAR expense is _____________.

C Corporation is engaged in the sale of goods and


services with net sales and net revenue of P2M
and P1M respectively. The actual, amusement
and recreation expense amounted to P18,000.
The deductible EAR expense is
________________.
Interest: must meet the requisites for
deductibility before can be claimed as
deduction
1. Subject to a limit, that is total interest less 33% of total
interest income (grossed-up) subjected to final tax.

2. The interest shall be deductible in full only if


a. there is no interest income subjected to final
tax (20%); or
b. Interest expense on tax delinquency or deficiency,
provided the tax is related to trade or business or
practice of profession, shall be 100% deductible.
The following interests are non-deductible:
a. Interests paid to persons classified as related
taxpayers

b. If the indebtedness is incurred to finance petroleum


exploration

c. Interest on preferred stocks.


Example:
A Corporation is engaged in trading business. The reported income and
expenses for taxable year 2014 are as follows:
Sales P 10,000,000
Cost of Sales 6,000,000
General Business Expenses 1,000,000
Interest on Time Deposit 100,000
Interest from Installment Receivables 120,000
Interest Expenses Claimed:
On loans payable 180,000
On Deficiency Taxes 30,000
On a loan from B Corp., a parent
company 10,000

The net taxable income is _______________________.


Example:
In the taxable year 2012, Mrs. Gemma Clarin-
Mendoza had an interest expense on notes
payable of 40,000 and on delinquency taxes of
P100,000. The taxpayer had an interest
income on bank deposits of P20,000 and
dividend from resident corporations of
P30,000. How much is her deduction for
interest expense?
Taxes: may be claimed as deduction if they are
not national Internal revenue taxes such as:
Income
transfer taxes
claimed as tax credit
percentage tax other than the 3% PT
VAT
Taxes not related to trade
Special assessment tax, surcharges and compromise
penalty

116
Example:
Taxes paid by a corporation within a year were:
National Income Taxes:
Normal tax P 500,000
Improperly Accumulated Profit Tax 300,000
Capital Gain Tax 740,000
Final tax 50,000
Community Tax 10,500
Value-Added Tax 89,000
Local taxes and licenses 10,000
Interest for late payment of national and
local taxes 40,000
Surcharges for late payment of national
and local taxes 60,000
The deduction for taxes is:
Losses
The following losses may be claimed as
deduction:
Casualty losses
Net Operating Loss Carry-Over (NOLCO)
Capital losses and securities becoming
worthless
Special losses:
Losses from wash sales of stock or securities
Wagering losses
Abandonment losses
118
Requisites:
1.The loss arises from fires, storms,
shipwreck, or other casualties, or from
robbery, theft or embezzlement;
2.The property lost is connected with the
trade business or practice of profession.
3.Actually sustained during the taxable
year;
4.Not compensated for by insurance or
other forms of idemnity;
Requisites:
5. Incurred in trade, profession or
business;
6. Reported with the BIR within forty-
five days from the time of loss; and
7. Not claimed as deduction for estate
tax purposes.
Example: (if Capital
Asset)
Cost or adjusted basis P 18,000
Value of property before casualty 15,000
Value of property after casualty 10,000
Insurance recovered 3,000
Example: (if Ordinary
Asset – Total
Destruction)
Acquisition Cost P 10,000
Accumulated Depreciation 4,000
Insurance Recovered 2,500

122
Example: (if Ordinary Asset
– Partial Destruction)
Acquisition Cost P 100,000
Accumulated Depreciation 90,000
Replacement Cost to restore the
property back to its operating condition 20,000
Insurance Recovered 5,000
Estimated remaining useful life 5 years

123
Example:
A taxpayer engaged in business incurred a partial loss of property as
follows:
Asset 1 Asset 2
Book Value of the asset at the time of loss P 200,000 P 200,000
Cost to restore the property back
to its normal operating condition 120,000 300,000
Insurance recovery 50,000
None
Salvage None 40,000

Compute the deductible loss for asset 1 ________________


Compute the deductible loss for asset 2 ________________

124
NOLCO
Net operating loss means the excess of allowable
deductions over gross income of the business in a
taxable year.

The net operating loss of the business or enterprise for


any taxable year shall be carried over as a deduction
from gross income for the next three (3) consecutive
years immediately following the year of such loss.

Provided, that at the time of incurring net loss, the


taxpayer must not be exempted from income tax.

125
NOLCO
Provided, that for mines other than oil and
gas wells, any net operating loss incurred in
any of the first ten (10) years may be carried
over as deduction from taxable income for the
next five (5) years immediately following such
year when the loss is incurred.
NOLCO vs. NCLCO
1. NOLCO occurs when the deductions claimed
exceeds the gross income, while NCLCO
occurs when, in case of individual taxpayers,
capital loss exceeds capital gains.
2. NOLCO is available to both individual and
corporate taxpayers, whereas, NCLCO is
available only to individual taxpayers.
Example:
A Corporation taxpayer had the following:

Y5 Y6 Y7 Y8 Y9
Gross Income 900,000 900,000 880,000 840,000 980,000
Allowable
Deductions 980,000 880,000 900,000 830,000 900,000

Compute the income to be in every year.


Compute the income tax due per year assuming the company is in its fifth
year of operation.
Losses from wash sales of stocks or securities:
In case of any loss claimed to have been sustained
from any sale or other disposition of shares of stocks or
securities shall not be deductible if:
The seller is not a dealer in securities (shrinkage) –
the loss should be ACTUAL.
Within a period of 30 days before the sale or 30
days after the sale, the seller either:
Acquired (by purchase or exchange) stock or
securities identical to the stock or securities sold;
or
Has entered into a contract or option to acquire
stock or securities identical to the stock or
securities sold.
In case of wagering transactions, the loss shall be allowed
only to the extent of the gains from such transactions.
Example:
A sold, not a dealer in securities, has the following
transactions during the year:
1/15/2016 Purchased 5,000 shares at P12 each from
ABC Corp.
2/1/2016 Purchased 1,000 shares at P13 each month
from ABC Corp. (identical stocks).
2/28/2016 Sold 1,800 shares from the first purchase at
P10 each.
3/17/2016 Purchased 500 identical shares from ABC
Corp. at P11 each.
Bad Debts: must be ascertained worthless (actual
not estimated) and the corresponding receivable
should have been written off within the taxable year.
Amount deductible should be the actual amount
EXCLUSIVE of interest.

If the amount claimed as bad debt exceeds the current


income, the excess loss shall be carried over for the
next three years (as NOLCO).

If the amount is recovered or received subsequently, the


amount recovered shall be taxable in full in the year it
was recovered.
Depreciation: must be based on a reasonable
allocation of the cost of capital asset using the
methods recommended by the CIR.
1. If the asset is used in PETROLEUM Operations,
properties DIRECTLY used in the production of
petroleum shall be depreciated over 10 years or
shorter as provided by the CIR. All properties not
directly used in the production of petroleum
shall be depreciated under straight-line method
over 5 years.
2. If the asset is used in MINING Operations, ALL
properties shall be depreciated:
a. At a normal rate if the expected life is not more than
10 years.
b. Over years between 5 and the expected life if the
expected life is more than 10.
Exception:

Capital Expenses of a Private Educational


Institution: maybe capitalized subject to
depreciation or deducted at full.
Example:
The following information are from the record of Central Mindanao University Inc., a
proprietary educational institution, for fiscal year ended March 31, 2012:
Income: Tuition fees P 5,000,000
Miscellaneous fees 2,500,000
Income from rental 150,000
Net Income, canteen 350,000
Intercorporate dividends 750,000
Interest on time deposit 100,000
Expenses: General & Administrative expenses 1, 500,000
Interest expenses, bank loan 50,000
Depreciation, for the year of new bldg. costing
1M Completed of 6 mos. ago (est. useful life of 20 yrs.) 50,000

The income tax due of the corporation for the fiscal year is if it opts to claim
depreciation expense from the new building is:
Exploration and Development Expenditures:
INTANGIBLE exploration, drilling and development
allowed as deduction in computing taxable income
during the year shall not be considered in computing
the adjusted cost basis.
Exploration and development costs, OTHER than the
intangible exploration, drilling and development may
be:
Computed as part of the adjusted basis for depletion (COST
OF GOODS SOLD); or
Deduction to compute taxable income from mining
operations (OPERATING EXPENSE)

135
If the taxpayer choose the second option, it shall
be subject to the following limits:
Amount claimed as deduction for the year shall NOT
exceed 25% of the net income from mining operations
without the benefit of any tax incentives under existing
laws.
The total actual amount of exploration and
development costs less the 25% limit above shall be
carried through succeeding years until fully deducted.
Contributions: Maybe subjected to limitations or deducted at full:
Charitable contributions made by an individual shall be subject
to a limit of 10% of his taxable income before deducting the
contributions.
Charitable contributions made by a corporation shall be
subject to a limit of 5% of its taxable income before deducting
the contributions.
Charitable contributions made by either of the two taxpayers
above to the government for the use of its priority program
shall be deductible at full. Priority programs are: education,
health, youth and sports development, human
settlements, science and culture and economic
development.
Example:
Pio, married, with five minor children and Pia, single, with 2 legally adopted children
are partners, sharing profits and losses into 4:6. The following data pertain to the
partnership account and the accounts of the individual partners in their own business.
Partnership Pio Pia
Gross Income P 570,000 P 280,000 P 190,000
Allowable Deductions 250,000 150,000 70,000
Drawing Accounts 30,000 20,000 10,000
Other Income 20,000 10,000
Charitable partnership contribution: (not included above)
To: UP P 20,000
To: Malate Church 50,000

a.If the partnership is a GPP, the taxable income of Pio is:


b.If the partnership is an ordinary partnership, the taxable income of the partnership is:
Pension Trust
Actual contribution to the
extent of pension xx
Amortization of Past Service Cost* xx
Total xx

Past Service Cost is the excess of actual


contributions over the Normal Cost. It shall be
amortized over ten (10) years.

139
Example:
ABC put up a qualified retirement plan approved by the
BIR. It appointed B Corporation to administer the plan
which called for the payment of P200,000 to cover for the
retirement of employees for past services rendered and a
yearly contribution. The following amounts were paid for
the first three years of the plan’s operation:
Contribution for Services
Past Years Current Years
First Year P 100,000 P 50,000
Second Year 60,000 50,000
Third Year 40,000 50,000
The pension expense each year is ______________.
CLASSIFICATIONS
OF TAXPAYERS
AND PERSONAL
EXEMPTIONS
141
Classification of
Individual Taxpayers
1. Resident Citizen
2. Non-Resident Citizen
3. Resident Alien
4. Non-Resident Alien Engaged in Trade or
Business
5. Non-Resident Alien Engaged in Trade or
Business
6. Special Taxpayers
Classification of
Individual Taxpayers
1. Resident Citizen (RC) – taxable globally (within and
outside)
2. Non-resident Citizen (NRC) – taxable for incomes
derived within the Philippines only
Who establishes to the satisfaction of the CIR the fact of their
physical presence abroad with a definite intention to reside
therein;
Who leaves the Philippines during the taxable year to reside
abroad, either as an immigrant or for employment on a
permanent basis;
Who stays outside the Philippines for more than 183 days
Classification of
Individual Taxpayers
A citizen who has been previously considered as non-
resident citizen and who arrives in the Philippines shall
likewise be treated as a nonresident citizen for the taxable
year in which he arrives in the Philippines with respect to
his income derived from sources abroad until the date of
his arrival in the Philippines.
Overseas Contract Workers (OCWs). They are Filipino
citizens employed in foreign countries who are physically
present in a foreign country as a consequence of their
employment thereat. To be considered as an OCW or
OFW, he or she must be duly registered as such with
the Philippine Overseas Employment Administration
(POEA) with a valid Overseas Employment Certificate
(OEC).
Classification of
Individual Taxpayers
3. Resident Alien (RA) – taxable for incomes derived within the
Philippines only
We generally consider as residents those whose length of assignments
are indefinite or exceeding two (2) years (BIR Rulings Nos. 051-81 and
052-81).
4. Non-resident Alien Engaged in Trade or Business (NRAETB) –
taxable for incomes derived within the Philippines only.
The term trade or business shall not include performance of services
by the taxpayer as an employee.
A nonresident alien individual who shall come in the Philippines and
stay herein for an aggregate period of more than 180 days during any
calendar year shall be deemed as doing business in the Philippines
Classification of
Individual Taxpayers
5. Non-resident Alien Not Engaged in Trade or Business
(NRANETB) – taxable for incomes derived within the Philippines
only

6. Special Taxpayer – Taxed at their gross income at 15% when:


Any Filipino or Foreign individual employed, either holding a
managerial or supervisory position, or a rank-and-file, in any of
the following:
a. Offshore Banking Units (OBUs)
b. Regional Area Headquarter or Regional Operating Headquarter
of a multinational company
c. Petroleum contractor or subcontractor
Classification of
Individual Taxpayers
A special taxpayer, generally, shall be taxed at 15% of
his total GROSS COMPENSATION INCOME. Thus, he
cannot claim personal exemptions. However:
If a special taxpayer is a Filipino, he may opt to be taxed
at 15% final tax or using the tabular tax if his gross
compensation income is at least P 975,000.
Aliens are only taxed at 15%.
All other income shall be taxed according to pertinent
provisions of NIRC.
Example:
A, married, had the following data for the year:
Gross Income, Philippines P 400,000
Gross Income, USA 300,000
Expenses, Philippines 200,000
Expenses, USA 150,000

a.If the taxpayer is a resident citizen, his taxable


income is:
Example:
A, married, had the following data for the year:
Gross Income, Philippines P 400,000
Gross Income, USA 300,000
Expenses, Philippines 200,000
Expenses, USA 150,000

a.If the taxpayer is an NRC, married his taxable


income is:
Example:
A, married, had the following data for the year:
Gross Income, Philippines P 400,000
Gross Income, USA 300,000
Expenses, Philippines 200,000
Expenses, USA 150,000

a.If the taxpayer is an RA, married with two


qualified children, his taxable income is:
Example:
A, married, had the following data for the year:
Gross Income, Philippines P 400,000
Gross Income, USA 300,000
Expenses, Philippines 200,000
Expenses, USA 150,000

a.If the taxpayer is a NRAETB, and his country


allows reciprocity of P30,000, as personal
exemption his taxable income is:
Example:
A, married, had the following data for the year:
Gross Income, Philippines P 400,000
Gross Income, USA 300,000
Expenses, Philippines 200,000
Expenses, USA 150,000

a.If the taxpayer is a NRANETB and his country


allows reciprocity of P35,000, as personal
exemption his taxable income is:
Individual –
Personal Exemptions
Personal exemptions are only given to individuals
whether RC, NRC, RA and NRAETB subject to
reciprocity rule.
RC, NRC and RA may claim a basic personal
exemption of PhP 50,000 regardless of the status
(single, married, legally separated or head of the
family).
NRAETB can only claim basic personal exemption if
there is a reciprocity between Philippine laws and the
laws of his country where he resides. However, the BPE
cannot exceed Php 50,000, but may be lower instead.
Individual –
Personal Exemptions
RC, NRC and RA may claim an additional personal
exemption of Php 25,000 for every qualified dependent
CHILD, but not exceeding four children, PROVIDED that
the child is:
Not more than 21 years old
Living with the taxpayer
Depending upon the taxpayer at least ½ plus 1 for his
living.
Legitimate, illegitimate (recognized) or legally adopted
Unmarried and not gainfully employed
Individual –
Personal Exemptions
Provided that, the taxpayer may also
claim an additional exemption even if
the child reaches above 21 years old
when such child is incapable of self-
support because of mental defect.
NRAETB shall be entitled to personal exemption
in an amount equal to the exemption allowed by
the income tax law of the country of which he/she
is a subject or citizen but not to exceed the
amount fixed in the NIRC as the exemption for
citizens or residents of the Philippines. (Sec. 35
D)

*Take note: The law specifies that a resident or


citizen can claim personal and additional
exemptions.
Rules on determining the status of
the taxpayer who claim personal
exemptions:
Whether single, married, head of the family or legally
separated, the taxpayer can claim only to the maximum
amount of P 50,000 basic personal exemption.
If the taxpayer should marry or should have additional
dependents during the taxable year, he may claim the
corresponding exemption in full for such year.
Rules on determining the status of
the taxpayer who claim personal
exemptions:
If the taxpayer should die during the taxable year, his
estate may claim his corresponding exemptions (both
personal and additional) as if he died at the end of such year.
If the spouse or any of the qualified dependent should marry
or become twenty-one years old during the year, or should
become gainfully employed, the taxpayer may still claim the
exemption as if the spouse or dependent died or as if such
dependent married, became twenty-one years old or became
gainfully employed at the close of such taxable year.
Income Taxation: Individual –
SSS, PhilHealth, Pag-IBIG & PHHI
Aside from the allowable deductions and personal
exemptions, an individual taxpayer may also deduct
from his gross income
1. SSS contributions
2. PhilHealth (PHIC) contributions
3. Pag-IBIG (HDMF) contributions
4. PHHI contributions
Provided, that in the case of PHHI, the total family
income shall not exceed PhP 250,000 per year and
the total claimable amount shall not exceed PhP 2,400
per year.
Example:
Taxpayer married his girlfriend on December 30, 2013. The
following occured afterwards:
a.His wife gave birth to a baby girl on December 31, 2013
b.His wife gave birth to twins, both boys on November 1,
2014
c.His wife gave birth to triplets on October 1, 2015
d.His wife had a miscarriage on December 31, 2015
resulting to her death.
Required: Determine the personal and additional exemption
of the taxpayer in 2013, 2014, 2015.
Example:
A taxpayer, married, with five minor children, three of them are gainfully employed,
provided the following data:
Compensation Income P 150,000
(gross of 10% SSS, Union dues, Pag -IBIG &
Philhealth, net of P45t 13 th mo. Pay and
gross of P10t x’mas bonus)
Gross sales 500,000
Cost of Sales 320,000
Other income, (80% represents income from bank deposits, Phils.) 20,000
Expenses (15% represents personal expenses
and health insurance of P2,000 included
in the 15%) 50,000
Income treasury bills 40,000
Additional information: ¼ of business income and deductible business expenses is from
outside the Philippines.

If the taxpayer is a resident citizen, the taxable income is:


FRINGE
BENEFITS
162
Definition
Managerial Employee
Those who are vested with powers or prerogatives to lay
down and execute management policies and/or to hire,
transfer, suspend, lay-off, recall, discharge, assign or
discipline employees. (Labor Code of The Philippines)

Supervisory Employee
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 require use of independent judgment. (Labor Code of
The Philippines)

Rank-and-File
Those who are not managerial and supervisory employees.
De Minimis Benefits
Whether rank-and-file or managerial/supervisory employee,
the following de minimis benefits shall be non-taxable:
1.Monetized unused vacation leave credits of private
employees not exceeding 10 days during the year;
2.Monetized value of vacation and sick leave credits paid
to government officials and employees;
3.Medical cash allowance to dependents of employees not
exceeding P750 per employee per semester or P 125 per
month;
4.Rice subsidy of P 1,500 or one (1) sack of 50-kg. rice per
month amounting to not more than P 1,500;
5.Uniform and clothing allowance not exceeding P 5,000
per annum;
6.Actual yearly medical benefits not exceeding P 10,000
per annum;
De Minimis Benefits
7. Laundry allowance not exceeding P 300 per month;
8. Employees achievement awards which must be in the
form of a tangible personal property other than cash or gift
certificate, with an annual monetary value not exceeding P
10,000 received by the employee under an established
written plan which does not discriminate in favor of highly
paid employees;
9. Gifts given during Christmas and major anniversary
celebrations not exceeding P 5,000 per employee per
annum;
10. Daily meal allowance for overtime work not exceeding
twenty-five percent (25%) of the basic minimum wage.
De Minimis Benefits
All other benefits given by the employers which
are not included in the above enumeration
shall not be considered as “de minimis”
benefits, and hence, shall be subject to
income tax as well as withholding tax on
compensation.
Example:
A, during the 2015, received the following benefits:
Medical benefits P 25,000 per year
Monetized leave credits:
Vacation (13 days) 13,000
Sick Leave (15 days) 15,000
Rice Subsidy, Sinandomeng 2,300 per month
Laundry Allowance 270 per month
Christmas cash gift 12,000
Performance-Based Bonus 20,000
Employee Achievement Awards, cash 12, 000
Uniform Allowance 6,000
13th Month Pay 50,000
Fringe Benefits
If given to rank-and-file employee, fringe benefits shall
constitute gross income subject to tabular tax rate (5-
32%) and PhP 82,000 limit. Moreover, it shall be claimed
as a deductible expense INCLUDED in the salaries
expense on the part of the employer.
Entry:
Fringe Benefits Expense xx
Cash (or fair value of property) xx

168
Fringe Benefits
If given to an employee holding a managerial or
supervisory position, it shall be subject to fringe benefit
tax, as follows:
1.RC, NRC, RA, NRAETB 32%
2.NRANETB 25%
3.Special Taxpayer
a. OBUs 15%
b. ROH and RAH of a 15%
multinational company
c. Petroleum contractors and 15%
subcontractors
Fringe Benefit Tax
If given to managerial or supervisory employee, such fringe
benefits will be subject to fringe benefit tax, computed as
follows:
Gross Monetary Value = Monetary Value
(100% - Applicable rate)

Fringe Benefit Tax = Gross Monetary Value x Applicable %


Gross Monetary Value
It includes:
1.Monetary Value = actually give
2.Fringe Benefit Tax

*The gross monetary value is an EXPENSE of an


employer.
*The fringe benefit tax is a FINAL TAX on the income of the
managerial/ supervisory employee, withheld by the
employer.
Monetary Value:
Real Property
1. If the ownership is transferred to the employee

The total FMV or cost exclusive of interest,


whichever is applicable.

2. If the ownership is retained by the employer, and the


usufruct is only given to the employee:

FMV or cost, whichever is applicable, divided by 20


years divided by 2
Monetary Value:
Personal Property
1. If the ownership is transferred to the employee:

The total FMV or cost exclusive of interest,


whichever is applicable.

2. If the ownership is maintained by the employer and


only the usufruct is given to the employee:

FMV or cost, whichever is applicable, divided by 5


years divided by 2
Monetary Value:
Real or Personal Property

Where the purchase price is partially shouldered


by the employer

The actual (partial amount) cash given


by the employer.
Monetary Value:
Cash and Interest
If Cash

Actual Cash Given

If an interest of an indebtedness is free of


interest

The monetary value shall be the interest forgone


Example:
JHR Company gave the following to B during 2015, his very competitive
manager:
House in Cebu, construction costs
shouldered by JHR P 3,000,000
Lot where the house was erected,
where usufruct of 30 years is given 4,500,000
Car, where only the use of the car is given 700,000
Macbook 90,000
Cash 100,000
Grocery allowance of P 5,000 per month 70,000

Also during the year, JHR granted a loan to B amounted to P 100,000 on


June 1, 2015 where it was agreed that the interest of 10% will be
forgiven.
Tax Treatment and
Rank-and-File Managerial and Supervisory
Computation
De Minimis Subject to their De Minimis Subject to their
Statutory limits, Statutory limits,
any excess any excess
thereof shall be thereof shall be
aggregated aggregated
together with together with
other fringe other bonuses
benefits and subject to
bonuses subject P82,000 limit.
to P82,000 limit.

Fringe Benefits Subject to Fringe Benefits Subject to Fringe


other than Fringe P82,000 limit, other than Fringe benefit tax (32%,
Benefits any excess Benefits 25% or 15%)
thereof shall be
subject to normal
tax
Example:
The following information are presented to you in connection with the
determination of the tax on the fringe benefits given to Earl, Vice-President
of the Pabebe Corporation:
Paid by the company with official receipts in the name of Pabebe
Corporation:
a.Laptop computer for Earl’s office use, P 80,000.
b.Air-conditioning unit for Earl’s office use, P 30,000.
c.Groceries for consumption of Earl’s family, P 10,000.
d.Plumbing materials for use in the repair of Earl’s residential house, P 5,000.
Paid by Earl and reimbursed by the company with official receipts in the
name of Pabebe Corporation:
a.Clothes and shoes for Earl’s daughter, P 15,000.
b.Samples of merchandise sold in the competitor’s store for marketing study, P
12,000.
How much is the fringe benefit tax due?
Example:
Ninja Corp. a regional operating headquarters of a multinational
Corporation, established in the Philippines provided its employees
cash and non-cash fringe benefits in 2010 as follow:
Total Fringe Benefits P1,000,000
60% of said amount was given to rank and file employees
40% of said amount was given to corporate officers as follow:
To resident citizens 45%
To non-resident aliens not engaged
in business in the Philippines 35%
To special aliens and Filipino employees 20%

The fringe benefits tax due is

179
INCOME TAXATION
ON CORPORATE
TAXPAYERS

180
Overview:
The term ‘corporation’ includes partnerships, no
matter how created or organized, joint-stock
companies, joint accounts (cuentas en participacion),
associations, or insurance companies, but does not
include
1. general professional partnerships (GPPs) and
2. joint venture or consortium formed for the purpose of
undertaking construction projects or engaging in
petroleum operation, coal, geothermal and other energy
operations pursuant to an operating or consortium
agreement under a service contract with the Government.
Pro-Forma Computation
Gross receipts/sales xx
Less: Cost of service/sales (xx)
Gross income from business or profession xx
Add: Passive Incomes, not subjected to final tax xx
Capital Gains, not subjected to CGT xx
Total Gross Income xx
Less: Deductions for:
Itemized Deductions or OSD (xx)
Net Operating Loss Carry-Over (NOLCO) (xx)
Taxable Income xx
*NCLCO is not applicable since the holding period is also not
applicable.
Note:
In the computation of GROSS INCOME, the same rule
shall be observed as in the case of an individual
taxpayer, except that a corporation has no compensation
income and does not have winnings and prizes.
In the computation of ALLOWABLE DEDUCTIONS, the
same ruling shall be observed as in the case of an
individual, except those specific items which has a
different statutory ceilings such as the charitable
contributions (5%).
No Personal exemptions.
Example: NIRC vs. GAAP
ABC is a domestic corporation engaged in merchandising business. For the
calendar year 2014, it had a net income per books of P500,000, after
considering among others, the following:
a.Dividend received from a domestic corporation P 30,000
b.Provision of doubtful accounts 10,000
c.Dividend received from foreign corporation 20,000
d.Portion of P150,000 advance rental already earned 100,000
e.Recovery of receivables previously written off (included
As part of the net income above):
Allowed by the BIR as deduction 10,000
Disallowed by the BIR as deduction 30,000
g. Refund of taxes (included as part of net income above):
Allowed by the BIR as deduction 25,000
Disallowed by the BIR as deduction 15,000
h. Bank interest income
a. Philippine Bank 80,000
b. USA Bank 100,000
Classification of Corporate
Taxpayers
1. Domestic corporations are taxed on worldwide income, at
30% of the taxable income.
2. Resident foreign corporations are taxed on incomes from the
Philippines only, at 30% of the taxable income.
3. Non- Resident foreign corporations are taxed on incomes
from the Philippines only, at 30% of the gross income.
Note:
GPPs are partnerships formed by persons for the sole purpose
of exercising their common profession, no part of the income
of which is derived from engaging in any trade or business

185
Corporate Taxes
1. Gross Income Tax (GIT)
2. Normal Corporate Income Tax (NCIT)
3. Minimum Corporate Income Tax
(MCIT)
4. Improperly Accumulated Earnings
Tax (IAET)
1. Gross Income Tax
(GIT)
It is an optional income tax given to corporate
earners equivalent to 15% of its gross income
instead of the 30% net income tax.
Only domestic corporations and resident
foreign corporations may avail such GIT.
Requirements:
A tax ratio of 20% of Gross National Products
A ratio of 40% income tax collection of total tax
revenues
1. Gross Income Tax
(GIT)
A VAT tax effort of 4% of GNP
A 0.9% ratio of consolidated public sector financial
position to GNP
Available only to firms whose ratio of cost of sales to
gross sales or receipts from all sources is 55%.
The election shall be irrevocable for three (3)
consecutive year
Recommendation from the Secretary of Finance
Subject to approval of the Office of the President
2. Normal Corporate Income
Tax (NCIT)
1998 34%
1999 33%
January 1 , 2000 to October 31, 2005 32%
November 1, 2005 to December 31, 2008 35%
January 1, 2009 and onwards 30%
Example:
ABC Corp. a domestic corporation, in its fifth year of operation in 2014, which
had a tax refundable of P10,000 for the preceding year for which there is a
certificate of tax credit, had the following cumulative data:
Q1 Q2 Q3 Q4
Gross profit from sale P800,000 P1,600,000 P2,400,000 P3,100,000
Capital gain on sale
Directly to buyer of shares
Of a domestic Corporation 50,000 50,000 50,000 50,000
Dividend from Domestic
corporation 10,000 10,000 20,000 20,000
Interest on Peso Deposit 5,000 10,000 15,000 20,000
Business Expenses 600,000 1,200,000 1,700,000 2,100,000
Income tax withheld 15,000 35,000 65,000 115,000

Compute the income tax due for each quarter.


3. Minimum Corporate Income
Tax
The following are liable to MCIT beginning the 4th
taxable year in which such corporation commenced its
business operations:
Domestic Corporations
Resident foreign corporations

The 2% of gross income is imposed whenever a


company:
Has no taxable inocome; or
Has taxable income but the amount of MCIT is
greater than the NCIT (30%)

191
3. Minimum Corporate Income
Tax
The MCIT shall be carried over and credited against
the normal tax for the next three (3) years following
the taxable year where the corporation is taxed at MCIT.
Provided, that if the corporation is still taxed at MCIT
following such year, the previous MCIT shall be
DEFERRED and cannot be credited against the
year’s MCIT.
The three-year carry-over provision shall be counted
continually regardless whether the corporation pays
MCIT or NCIT.
Example: Annual Filing
A domestic corporation organized in 1998 provided the following information:
2006 2007 2008 2009 2010
Net Sales P4,000,000 P5,000,000 P6,000,000 P7,000,000 P9,000,000
Cost of Sales 2,000,000 3,500,000 4,200,000 5,000,000 5,200,000
Business
Expenses 1,900,000 1,550,000 1,820,000 2,100,000 2,300,000

Compute the income tax due for each year.


Solution:
A domestic corporation organized in 1998 provided the following information:
2006 2007 2008 2009 2010
Net Sales P4,000,000 P5,000,000 P6,000,000 P7,000,000 P 9,000,000
Cost of Sales 2,000,000 3,500,000 4,200,000 5,000,000 5,200,000
Gross Income 2,000,000 1,500,000 1,800,000 2,000,000 3,800,000
Business
Expenses 1,900,000 1,550,000 1,820,000 2,100,000 2,300,000
Operating
Income (loss) 100,000 (50,000) (20,000) (100,000) 1,500,000
NOLCO (170,000)
Taxable Income 100,000 0 0 0 1,330,000

Normal Tax 35,000 0 0 0 399,000


MCIT 40,000 30,000 36,000 40,000 76,000
Solution:
2006 2007 2008 2009 2010
Normal Tax 35,000 0 0 0 399,000
MCIT 40,000 30,000 36,000 40,000 76,000

Tax Due 40,000 30,000 36,000 40,000 399,000


Less: Excess
MCIT 2007 (30,000)
2008 (36,000)
2009 (40,000)
293,000
The excess MCIT in 2006 of 5,000 can no longer be credited.
Example: Quarterly Filing
A domestic corporation has the following non-cumulative data for 2012:
NCIT 2011 - 30,000
MCIT 2011 - 40,000
Q1 Q2 Q3 Q4
Income, net of 1%
withholding tax 495,000 792,000 594,000 940,500
Deductions 480,000 700,000 450,000 770,000
Solution: Non-cumulative
A domestic corporation has the following non-cumulative data for 2012:
Excess MCIT in 2011 – P 10,000
Q1 Q2 Q3 Q4
Income, 500,000 800,000 600,000 950,000
Deductions 480,000 700,000 450,000 770,000
Net Taxable Income 20,000 100,000 150,000 180,000
NCIT (30%) 6,000 30,000 45,000 54,000
MCIT (2%) 10,000 16,000 12,000 19,000
Tax Due 10,000 30,000 45,000 54,000
Less: Tax Withheld ( 5,000) (8,000) (6,000) (9,500)
MCIT last year (10,000)
MCIT Last quarter ( 4,000)___________ _________
Tax still payable 5,000 8,000 39,000 44,500
Solution: Cumulative
A domestic corporation has the following non-cumulative data for 2012:
Excess MCIT in 2011 – P 10,000
Q1 Q2 Q3 Q4
Income, 500,000 1,300,000 1,900,000 2,850,000
Deductions 480,000 1,180,000 1,630,000 2,400,000
Net Taxable Income 20,000 120,000 270,000 450,000
NCIT (30%) 6,000 36,000 81,000 135,000
MCIT (2%) 10,000 26,000 38,000 57,000
Tax Due 10,000 36,000 81,000 135,000
Less: Tax Withheld ( 5,000) (13,000) (19,000) (28,500)
MCIT last year (10,000) (10,000) (10,000)
Tax paid last Qtr _ ( 5,000)___ (13,000)__ (52,000)
Tax still payable 5,000 8,000 39,000 44,500
Improperly Accumulated
Earnings Tax
It is a tax imposed on improper accumulation of
earnings. “Improperly accumulated earnings
(IAE)” are the profits of a corporation that are
permitted to accumulate instead of being
distributed by a corporation to its shareholders
for the purpose of avoiding the income tax with
respect to its shareholders or the shareholders
of another corporation.
The rate of 10% of the Improperly Accumulated Taxable
Income, computed as follows:

Taxable Income for the Year xx


Add:
Income exempt from tax xx
Income excluded from gross income xx
Income subject to final tax, net xx
NOLCO xx
Less:
Income tax paid for the taxable year (xx)
Dividends actually or constructively paid/issued
from the applicable year’s taxable income (xx)
Amount reserved for the reasonable needs (xx)
Tax Base for IAET xx
Note: Earnings for the reasonable needs are enumerated
as follows [Revenue Regulation No. 2-2001]:
Allowance for the increase in the accumulation of earnings up to 100% of
the paid-up capital of the corporation as of the balance sheet date,
inclusive of accumulation taken from other years;
Earnings reserved for definite corporate expansion or projects as
approved by the board;
Earnings reserved for building, plants or equipment acquisition as
approved by the board;
Earnings reserved for compliance with any loan covenant or pre-existing
obligation established under a legitimate business agreement;
Earnings required by law or applicable regulations to be retained by the
corporation;
In case of subsidiaries of foreign corporations in the Philippines, all
undistributed earnings intended or reserved investments within the
Philippines as can be proven by corporate records.
Applicability of IAET
Shall apply to every corporation formed or
availed for the purpose of avoiding the income
tax with respect to its shareholders or
shareholders of any other corporation, by
permitting earnings and profits to accumulate
instead of being divided or distributed. These
are:
Domestic corporations
Closely-held corporations
Exceptions from IAET
Publicly-held corporations
Banks and other non-banks financial intermediaries
Insurance companies
Taxable (business) partnerships (deemed to have actually
or constructively received the taxable income under Sec.
73D)
General professional partnerships
Non-taxable joint ventures
Enterprises duly registered with the Philippine Economic
Zone Authority under R.A. 7916 and enterprises
registered pursuant to the Bases, Conversion and
Development Act of 1992 under R.A. 7227
Example:
The records of a closely-held domestic corporation show the following
data for 2014:
Gross Income 1,500,000
Business Expenses 600,000
Gain on Sale of Business Assets 60,000
Interest on deposits with Metrobank, net of tax 5,000
Sale of Shares of stocks, not listed and traded
Selling Price 150,000
Cost 115,000
Dividends from Victory Corporation, domestic 35,000
Dividends paid during the year 120,000
Reserved for Building acquisition 300,000

In 2013, the corporation suffered an operating loss of 130,000. this


amount was carried forward and claimed as deduction from gross
income in 2014.
The income tax due is ________________
The improperly accumulated earnings tax is _______________
INCOME TAX
RETURN FILING
AND PAYMENT OF
INCOME TAX
205
Income Tax Return (BIR Form) Deadline for Filing and Payment

Annual Income Tax Return – On or before the 15th day of the


Corporate 4th month of the following the
(BIR Form 1702) close of the taxable year

Quarterly Income Tax Return Within 60 days after the end of


(BIR Form 1702Q) each first 3 quarters of the taxable
year

Annual Income Tax Return – April 15 of the succeeding year, an


Self-Employed Individual (BIR individual can only use calendar
Form 1701) year

Quarterly Income Tax Return - every 15th day on April, August,


Self-Employed Individuals and November and April of the
Mixed Income Earners (BIR succeeding year.
Form 1701 Q)
BIR Issuances and
Court Decisions Related
to Income Tax
1. Valuation of Contributions or Gifts Actually
Paid or Made in Computing Taxable Income
Revenue Memorandum Circular (RMC) No. 86-2014 dated December
5, 2014
This circular is issued to clarify the valuation of contributions or
gifts actually paid or made in computing taxable income as part of the
substantiation requirement under Revenue Regulations No. 13-98:

Information Required in  Actual receipt by the accredited NSNP/


Certificate of Donation (BIR NGO of the donation or contribution
Form No. 2322)  Date of the receipt of donation, and
 Amount of donation
a. Amount of donation or contribution –if
cash
b. Acquisition cost – if real or personal
property
Allowable income tax Net book value of the property donated as
deduction (on the part of the reflected in the financial statements of the
donor) donor.
2. Requirements for Deductibility of
Certain Income Tax Payments
Revenue Regulation No. 12- 2013 dated July 12, 2013
Requirements for deductibility: Any income payment
which is otherwise deductible under the Code shall be
allowed as a deduction from the payor’s gross income
only if it is shown that the income tax required to be
withheld has been paid to the Bureau in accordance
with Sections 57 and 58 of the Code.
No deduction will also be allowed notwithstanding
payments of withholding tax at the time of audit
investigation or reinvestigation/reconsideration in cases
where no withholding of tax was made in accordance with
Sections 57 and 58 of the Code.
3. Validity of Principal and
Supplementary Receipts/Invoices

Revenue Regulations No. 18- 2012 dated October 22, 2012


All taxpayers are mandated by the BIR to make new sets of
ORs and Sales invoices wuth special security marking
features printed by BIR – Accredited printers only.
All ORs and Sales invoices shall be valid only until full
usage of the approved serial numbers or five years from its
issuance whichever comes first.
This should be effective starting January 18, 2013
4. Taxability of Associations Dues, Membership Fees
Received by Condominium Corporations

Revenue Memorandum Circular (RMC) No. 65-2012


dated October 31, 2012
Amounts paid in as dues or fees by members or tenants
of a condominium corporation form part of the gross
income of such corporation subject to income tax. This
is because the condominium corporation furnishes its
members and tenants with benefits, advantages, and
privileges in return for such payments.
4. Taxability of Associations Dues, Membership Fees
Received by Condominium Corporations

For tax purposes, the following constitute income tax payment or


compensation which are subject to income tax:
Association dues
Membership fees
Other assessments/charges
The previous interpretation that the assessment dues are funds
which are merely held in trust by a condominium corporation
lacks legal basis and is hereby abandoned.
Note: The same rule applies to homeowner’s association per
RMC No. 9-2013 dated January 9, 2013
5. Rules on Deductibility of Depreciation
Expenses on Vehicles
Revenue Regulation No. 12 – 2012 dated October 12, 2012
Limitations on deductions:
Only one (1) vehicle for land transportation is allowed for the use of an
official or employee, the value of which should not exceed P2.4 million
No depreciation shall be allowed for yachts, helicopters, airplanes
and/or aircrafts, and land vehicles which exceed the said threshold.
All related maintenance expenses on account of a non-depreciable
vehicle for taxation purposes are also disallowed in its entirety.
Loss to be incurred from sale of non-depreciable vehicle shall not be allowed
as deduction from gross income [Revenue Memorandum Circular (RMC)
No. 2 -2013 dated December 8, 2012]
5. Rules on Deductibility of Depreciation
Expenses on Vehicles

Exception:
Unless the taxpayer’s mainline of business is
transport operations or lease of transportation
equipment and the vehicles purchased are used
in the said operations.
This regulation shall take effect immediately.
(Published in October 17, 2012)
6. Clarifying the Taxability of Clubs Organized and Operated
Exclusively for Pleasure, Recreation and Other Non-Profit
Purposes

Revenue Memorandum Circular (RMC) No. 35 – 2012 dated


August 3, 2012
Clubs which are organized and operated exclusively for
pleasure, recreation and other non-profit purposes are
subject to income tax under the Tax Code, as amended.
Background:
The provision in the NIRC of 1977 which granted income tax
exemption to such recreational clubs were omitted in the current of
tax exempt corporations under NIRC of 1997, as amended.

HENCE, the income of recreational clubs from whatever


source, including but not limited to membership fees,
assessment dues, rental income, and service fees are
subject to income tax.
ESTATE TAX
216
Transfer Taxation:
Gratuitous
A transfer may be gratuitous (without
consideration) or onerous (with consideration).
Donacion mortis causa and donacion inter
vivos are gratuitous transfer.
CONCEPT OF TRANSFER TAXATION
Gratuitous Onerous (Business Taxes)
1. Donacion inter vivos 1. Value-added Tax
(death) 2. Other Percentage Taxes
2. Donacion mortis causa 3. Excise Taxes
(during lifetime)

with applicable Documentary Stamp Tax


An estate tax is a tax on the right to transfer certain
property at death and on certain transfers which are
made by law equivalent to testamentary disposition (in
contemplation of death).
It is an excise tax (a tax impose upon the right or
privilege), the object of which is the shifting of
economic benefits and the enjoyment of the property
from the deceased to the living.
It accrues as of the time of death of the deceased.
The taxpayer in estate taxation is the estate of the
decedent represented by the administrator, executor
or legal heirs.
Concept of Succession
– a mode of acquisition by virtue of
which the property, rights and
obligations to the extent of the value of
the inheritance, of a person are
transmitted through his death to
another or others by will or by
operation of law.
Concept of Will
Will – is an act whereby a person is
permitted with the formalities prescribed by
law, to control to a certain degree the
disposition of his estate, to take effect after
his death. From the moment of death of the
decedent, the rights to the succession are
transmitted, and the possession of the
hereditary property is deemed transmitted to
the heir.
Kinds of Will
1. Notarial or Ordinary Will – one which is executed in accordance with
the formalities prescribed by Art. 804 to 808 of the New Civil Code. It is
the will that is created for the testator by a third party, usually his
lawyer, follows proper form, signed and dated in front of the required
bumber of witnesses and acknowledged by the presence of a notary
public.

2. Holographic Will – is a written will which must be entirely written ,


dated and signed by the hand of the testator himself, without the
necessity of any witnesses.

3. Codicil – A supplement or addition to a will, made after the


execution of a will and annexed to be taken as part thereof, by which
any disposition made in the original will is explained, added or altered.
Elements of Succession
1. Decedent – the person whose property is
transmitted through succession, whether
testamentary, intestate, or mixed.

2. Heir – the person called to the succession


either by the provision of a will or by operation of
law.

3. Estate – refers to all property, rights and


obligations of a person which are not
extinguished upon his death.
Types of Succession

1. Testamentary Succession
2. Intestate Succession
3. Mixed Succession
Testamentary Succession
It results from the designation of an heir,
made in a will executed in the form prescribed
by the law.

The descedent may dispose his properties in


his last will and testament in the manner he
wants, however, he must reserve some for
certain persons who are called by the law as
compulsory heirs.
Definition
Legitimate Child
Born within marriage
Includes legally adopted child; the share of the legally
adopted child is equal to the share of the legitimate child.
Includes legitimated child (that who is originally a natural
child but subsequently legitimated by virtue of actual
marriage)

Illegitimate child
Born outside marriage (spurious, bastard)
Natural child (child before born before actual marriage)
Testamentary Succession
Compulsory heirs are:
1.Legitimate children and their descendants, which
include legally adopted children
2.In the absence of legitimate children and their
descendants, the legitimate parents or ascendants.
3.Surviving spouse
4.Illegitimate child, both natural and spurious
Testamentary Succession
In the absence of compulsory heirs, the
successors would be:
Relatives up to 5th degree of consanguinity
If there were no relatives, the government shall
inherit the whole estate.
If there is a will, the decedent may name other
persons to inherit the free portion of the net
distributable estate
Example:
A died leaving the following surviving relatives:
B Wife L Sister
C Only Son M L’s granddaughter
D Only Daughter N M’s Son
E Mother O E’s Mother
F Father
G C’s daughter
H D’s son
I Brother
J Nephew (I’s Son)
K J’s son
Testamentary Succession
Under testamentary succession, properties left by the
decedent are classified into:

Legitime – portion of the testator’s property which could


not be disposed freely because the law has reserved it for
the compulsory heirs.
Free portion – part of the whole estate which the testator
could dispose of freely through a written will irrespective of
his relationship to the recepient

230
General Rules:
If there is a legitimate child, his share is usually one-half
of the total distributable estate.
If there are legitimate children, their share (in aggregate)
will equal to one-half of the total distributable estate.
The share of the surviving spouse if there is a legitimate
child is one-fourth, while if there several legitimate
children, the share of the surviving spouse is normally
equal to the share of one legitimate child.
General Rules:
No share shall be given to the parents
or their ascendants, if there is a
legitimate child, unless the will of the
testator provides that the free portion
shall be given to the parents or their
ascendants.
Illegitimate children has a share but only
to the extent of one-half of the share of
legitimate child.
Example:
If the hereditary estate of the testator is P
12,000,000 and the surviving heirs or relatives
are: mother, spouse, four legitimate children, one
legally adopted son, one illegitimate child, and a
brother and in his will, the testator is giving all
free portion equally to the surviving heirs. The
share of the surviving spouse, four legitimate
children and one illegitimate child shall be:
________, _________ and ________.
Intestate Succession
It transmission of properties where there is no will, or if
there is a will, such is void or lost its validity, or nobody
succeeds the will.
In the intestate succession, the entire estate of the decedent is
distributed to the heirs. The compulsory heirs in testamentary
succession are also the heirs in intestate succession. However,
intestate heirs include brothers and sisters, collateral relatives
within the fifth degree of consanguinity and the state.
Administrator (administratrix) is the person
appointed by the court, in accordance with the
governing statute, to administer and settle intestate
estate and such testate estate as no competent
executor designated by the testator.
Intestate Succession
1. No free portion under intestate succession, hence
the 100% shall be given to the child, the surviving
spouse and illegitimate child (if there is any).
2. f child only, 100%
3. If there are several children, 100% divided equally by
them.
4. If children and spouse, the share of the spouse is
equivalent to the share of one child (unit).
5. If there is a child, no share for parents.
6. The share of illegitimate child is equal to one half of
the share of the legitimate child.
Example:
The net distributable estate of Mr.
Geronimo who died intestate is P
5,000,000. The surviving relatives are
the spouse and the 4 children, and the
mother of the deceased. How much
would be the inheritance of the
spouse? ____________
Mixed Succession
It is a transmission of properties,
which is effected partly by will
and partly by operation of law

237
Example:
The hereditary estate is P3,000,000.
The surviving relatives are the parents,
the spouse and the 4 children. The
testator is giving 20% of the free
portion to his sister-in-law. How much
could be designated to the sister-in-
law? _____________
Example:
If the hereditary estate is P 15, 000, 000 and
the surviving heirs are three legitimate
children, a surviving spouse, and a brother, the
share of the surviving spouse shall be :

The free portion that can be distributed as a


legacy or devise, and the share of the brother
shall be :

239
Gratuitous Transfer
The classification of taxpayers as to
situs in estate tax and donor’s tax is
the SAME. (Residents and
Citizens are taxable globally; Non-
resident aliens are taxable within
the Philippines only)

240
Computation of Estate Tax
For single decedents

Gross estate xx
Less: Ordinary Deductions (xx)
Special Deductions (xx)
Net Taxable Estate xx

Estate Tax Due xx


Less: Estate Tax Credit (xx)
Estate Tax Payable xx
Exclusive Conjugal/Communi Total
Properties ty Properties

Gross Estate xx xx xx
Less: Allowable Deductions
1. Ordinary (ELITE) (xx) (xx) (xx)
Net Estate before Special xx xx xx
Deductions
1. Special Deductions
 Family Home (xx)
 Medical Expenses (xx)
 Standard deduction (xx)
 Benefits received under RA (xx)
4917
 Share of the Surviving Spouse (xx)
(1/2 of the net
conjugal/community estate
before special deductions)
Net Taxable Estate xx
Estate Tax Due xx
Less: Estate Tax Credit (xx)
Estate Tax Payable xx
Remember 
As a general rule, obligations contracted during
the marriage are presumed to have benefited
the marriage, and are charges againts the
community/conjugal property (e.g. funeral
expenses, judicial expenses, claims against the
estate).
Vanishing deduction may be a dedcution against
exclusive or community/conjugal property,
depending on the classification of the property
to which it is related, if exclusive or
community/conjugal.
Remember 
A deduction, whether against exclusive or
community/conjugal estate follows the
classification of the property in the gross
estate. If the property to which the deductioon
is related is exclusive property in the gross
estate, the deduction is against the exclusive
gross estate. If the property to which the
deductioon is related is community/conjugal
property in the gross estate, the deduction is
against the community/conjugal gross estate.
Gross Estate Valuation
Residents and Citizens Non-Resident Aliens
1. ALL real properties 1. Real properties located
wherever situated. ONLY in the Philippines

2. ALL personal properties 2. Personal properties


wherever situated: located ONLY in the
a. Tangible Philippines:
b. Intangible a. Tangible
b. Intangible properties
situated only in the
Philippines, UNLESS
exempted on the basis of
reciprocity
Gross Estate Valuation:
Real Properties
General Rule: The gross estate shall be valued at its
fair market value at the time of death of the decedent.

Real Properties are valued (at the time of death) at:


a.Assessed Value (per City Assessor); or
b.Zonal Value (per BIR Commissioner), whichever is
higher

Either of the two will approximate the fair market


value.
Gross Estate Valuation:
Personal Properties
1. Current Market Price (for recently acquired properties)
2. Second-hand market price (for previously acquired properties)
3. Grossed-up loan value (for loaned or pawned properties)
4. Fair Value plus accrued interest (for interest-bearing
receivables and bank deposits)
5. Discounted value (for non-interest bearing notes receivables
6. Face Value (for Philippine Currency)
7. Converted Philippine Peso Value (for foreign currencies)
Gross Estate Valuation:
Usufruct
Usufruct is the legal right to use and enjoy the benefits and
profits of property belonging to another.
To determine the value of the right of usufruct, use of
habitation, as well as that of annuity, there shall be taken
into account the probable life of the beneficiary in
accordance with the latest Basic Standard Mortality Table
(BSMT), to be approved by the Secretary of Finance, upon
the recommendation of the Insurance Commission. [Sec.
88(A), NIRC]
Gross Estate Valuation:
Usufruct
Example:
A, a Filipino, inherited a usufructuary right over a
family apartment building with an annual rent
income of P 300,000. The property is registered in
the name of A’s sister, B (owner of naked title).
After 7 years of enjoying the usufruct, A died at the
age of 70 and his son, C, who is 39 years old, will
inherit the usufruct.
Gross Estate Valuation:
Usufruct
Continuation...
Additional Information:
Zonal Value of the apartment at A’s death P 5M
Assessed Value of the apartment 3M
Prevailing effective interest rate per year 10%
BSMT life expectancy of male with 40 age
(C’s next birthday) 37.36 years
PV of P1 over 3 years at 10% 2.487
PV of P1 over 37 years at 10% 9.706
Gross Estate Valuation:
Usufruct
Continuation...
Required: Compute for the reportable usufruct value
in the gross estate of A and bare dominium value of
B assuming that the right to use the apartment
(usufructuary) is:
1.Within 10 years
2.Life-long, without term limit
Gross Estate Valuation:
Usufruct
Solution: IF within 10 years
Annual Value (5M x 10%) P 500,000
Times PV of P1 over 3 years 2.487
Usufruct Value in the gross estateP 1,243,500

FMV of property (higher) P 5,000,000


Less: Usufruct Value ( 1,243,500)
Bare Dominium Value of B P 3,756,000
Gross Estate Valuation:
Usufruct
Solution: IF life-long, without limit
Annual Value (5M x 10%) P 500,000
Times PV of P1 over 37 years 9.706
Usufruct Value in the gross estate P 4,853,000

FMV of property (higher) P 5,000,000


Less: Usufruct Value ( 4,853,000)
Bare Dominium Value of B P 147,000
Gross Estate Valuation:
Usufruct
1. When A, died, under the first assumption, C, the
son, has still 3 years to enjoy the usufruct until
tenth year. It is only until such time that the
property shall revert to the owner of the naked
title (B).
2. A bare dominium value means that a property is
merely registered in that person’s name.
Gross Estate Valuation:
Shares of Stocks
In case of shares of stocks:
1. If traded in the local stock exchange,
a. The closing price on the date of death
b. Trading price at the date nearest to the date of death (Rev.
Reg. 6-2008)
2. If not traded in the local stock exchange:
Ordinary shares – Adjusted Net Asset Method
Preferred shares – Adjusted Net Asset Method
Gross Estate Valuation:
Shares of Stocks
The old ruling Revenue Regulation No.
2-2003 was abandoned.
Under the old ruling:
1. If traded, the mean of the highest and
lowest quotation
2. If not traded,
a. For ordinary stocks, book value
b. For preferred stocks, par value
Gross Estate Valuation:
Shares of Stocks
Traded
Example:
On September 10, 2015, Nata Yen died leaving to her husband 10,000 equity
share investments in Jollibee Corporation. The FMVs of the Jollibee equity shares
by Philippine Stock Exchange (PSE) on September 10, 2015 are reported as
follows:
Par Market Prices as of September 10, 2015
Stocks of Value Open High Low Close
Jollibee P 1.00 P 188.00 P 188.40 P 186.50P 187.10

10,000 shares times P187.10 = P 1,871,000 gross value to be included in the


gross estate
Gross Estate Valuation:
Shares of Stocks
If not traded
Example:
The executor of Mr. Ernesto, who died on November 1,
2015, determined that the decedent has the following
investments in the stocks of XYZ Corporation:
Classification Number of Shares Acquisition
Common Shares 20,000 shares P 500,000
Preferred Shares 1,000 shares P 300,000
XYZ Corporation reported the following information:
Gross Estate Valuation:
Shares of Stocks
Continuation...

Per Book
Total Assets P 90,000,000
Total Liabilities 36,000,000
Shareholders’ Equity 54,000,000
Common shares (par value of P10;
1,000,000 shares outstanding)
Preferred shares (par value of P20;
100,000 shares outstanding)
Gross Estate Valuation:
Shares of Stocks
Continuation...
All of XYZ’s assets and liabilities are stated as fair market value with the exception
of its land and building stated at P30,000,000 book value. The following are the fair
market values of the real property of XYZ Corporation:
BV AV ZV Independent
Land P 10 M P 15 M P 20 M P 18 M
Building 20 M 12 M 15 M 16 M
P 30 M P 27 M P 35 M P 34 M

There was an increase of 6M in the total assets from P30 M to P 36M.


Gross Estate Valuation:
Shares of Stocks
Continuation...
Total Assets P90,000,000
Increase in FV 6,000,000 P 96,000,000
Less: Fair Value of Liabilities 36,000,000
Adjusted net asset values P 60,000,000
Gross Estate Valuation:
Shares of Stocks
Continuation...

Preferred Common
Adjusted net asset values P 60,000,000 P 60,000,000
Allocation using par value ____2/12 10/12___
Adjusted net asset values
per class of stocks P 10,000,000 P 50,000,000
Divided by number of shares
outstanding 100,000 1,000,000
Adjusted Net Asset value
per Share P 100 P 50
Gross Estate Valuation:
Shares of Stocks
Lastly,

Adjusted net value of


Common shares (20,000 x P 50) P 1,000,000
Adjusted net value of
Preferred shares (1,000 x P100) 100,000
Total Gross Value of the Estate P 1,100,000
Of Ernesto
Gross Estate
What intangible properties are considered as situated
within the Philippines?
1.Franchise which must be exercisable in the Philippines;
2.Shares, obligations or bonds issued by domestic
corporations;
3.Shares, obligations or bonds issued by any foreign
corporation, 85% of business of which is in the
Philippines;
4.Shares, obligations or bonds issued by any foreign
corporation, if such shares, obligations or bonds have
acquired business in the Philippines;
5.Shares or rights in any partnership, business or industry
established in the Philippines.
Additions to Gross Estate
1. Taxable Transfers (during the lifetime)
1. Transfer in Contemplation of death
2. Revocable Transfers
3. Transfer passing under General Power of Appointment
4. Transfers for insufficient consideration
5. Proceeds of life insurance with revocable beneficiary

2. Others
1. Decedent’s interest accrued at the date of death
2. Usufruct right transferrable to the decedent’s heirs
3. Claims against insolvent person
4. Amount received by the heirs under RA 4917 (DISCUSSED
EXHAUSTIVELY UNDER DEDUCTIONS)
Additions to Gross Estate:
In Contemplation of Death
Death must be contemplated and the thought of
death must be the impelling cause of transfer
1. Where a donation was made concurrently with the
execution of the will
2. Where donation was made due to the decedent’s
age and/or the decedent’s known serious illness at
the time of gift
3. Where the time between the making of a gift and the
death of the donor was relatively close
Example:
On November 10, 2015, due to severe
prostate cancer (terminal stage), C donated
his land to X, his paramour. A week after, C
died. The land, although already in the
hands of X, shall be included in the
computation of gross estate of C.
Additions to Gross
Estate:
Revocable Transfers
Transfer of property with retention or reservation
of rights over the property by the donor
(decedent) while he still lives
By gift where the donor has reserved the power to
alter, amend and revoke donation.
The donor retains the option to relinquish such power
in contemplation of death
Conditional transfers where attached conditions are
not completed by the donee prior to the donor’s death
Example:
On June 1, 2015, B gave his car to D,
younger brother who’s going to take the
CPA board exam on October 2015, with a
condition that when B should fail to become
a CPA within two years, the car shall be
taken back by him (D). D, however, died
on September 30, 2015. The transfer is
revocable, thus included in the gross estate
of D.
Additions to Gross
Estate:
Transfer
“General under
Power GPA means that
of Appointment”
the decedent must have a power
exercisable in favor of himself, his estate or
creditors of his estate.
A power is “special” if it is expressly not
exercisable in favor of the decedent, his
estate or creditors of his estate.
Example:
P died leaving his residential house to his
only son (M), with a will, giving the latter a
condition that should he die (son), he can
only choose from J, H and R as the next
successor of the residential house. In this
case, the power is special, thus, the
residential shall not be included in the
computation of gross estate of the son.
Additions to Gross Estate:
Sale or Transfer for Inadequate Consideration

1. If it is a bona fide or valid sale made


during the lifetime of the decedent
with full and adequate consideration,
NO AMOUNT shall be included in
the gross estate.
Additions to Gross Estate:
Sale or Transfer for Inadequate Consideration

2. If it is a sale during the lifetime of the


decedent but the consideration received
is less than adequate, the amount to
included in the gross estate is the
difference between the FMV at the
time of death less the consideration
received.
Additions to Gross Estate:
Sale or Transfer for Inadequate Consideration

3. If the transfer made during the


lifetime of the decedent is without
consideration, as in the case of in
contemplation of death, revocable
transfers and transfer under the
general power of appointment, the
amount to be included is the FMV at
the time of death.
Example:
G, in contemplation of death, sold his
properties to H for P 250,000 on
November 26, 2015. G died on
December 10, 2015.

If the fair market value at the time of sale was P


200,000 and the fair market value at the time of
death is P 400,000, how much would be included
in the gross estate?
Example:
G, in contemplation of death, sold his
properties to H for P 250,000 on
November 26, 2015. G died on
December 10, 2015.

If the fair market value at the time of sale was P


370,000 and the fair market value at the time of
death is P 300,000, how much would be
included in the gross estate?
Example:
G, in contemplation of death, sold his
properties to H for P 250,000 on
November 26, 2015. G died on
December 10, 2015.

If the fair market value at the time of sale was P


370,000 and the fair market value at the time of
death is P 150,000, how much would be
included in the gross estate?
Example:
Ben died on October 20, 2014. During his
lifetime, upon knowing that he had Stage 4
cancer, sold his Lamborghini car to his son for P
4, 000, 000. The fair market value of the car at
the time of sale is P 3, 000,000 while it is already
valued at P 5,000,000 at the time of death. The
amount will be added to gross estate is :

278
Additions to Gross Estate:
Proceeds of Life Insurance
1. If the beneficiary is any third person other than
the estate, executor or administrator and the
designation is REVOCABLE, included in the
gross estate.
2. If the beneficiary is any third person other than
the estate, executor or administrator and the
designation is IRREVOCABLE, excluded in
the gross estate.

279
Additions to Gross Estate:
Proceeds of Life Insurance
If the beneficiary is the estate, executor
or administrator, regardless whether
the designation is revocable or
irrevocable, included in the gross
estate.
Exclusions from Gross Estate
What are excluded from gross estate?
1.Proceeds of life insurance taken by the decedent
on his own life if the beneficiary is any third person
and the designation is irrevocable. If the
beneficiary is the estate, administrator or executor,
the proceeds of life insurance is included in the
gross estate, whether revocable or irrevocable. If
the beneficiary is any third person but the
designation is revocable, the same shall be
included in the gross estate.
Exclusions from Gross Estate
Under Section 85 and 86 of NIRC
a. Capital or exclusive property of the
surviving spouse
b. Properties outside the Philippines of a
non-resident alien decedent
c. Intangible personal property of a non-
resident alien in the Philippines when the
rule of reciprocity applies.
Exclusions from Gross Estate
Under Section 87 of NIRC
a. Merger of usufruct in the owner of the
naked title
b. Transmission or delivery of the
inheritance or legacy of the fiduciary heir
or legatee to the fideicommissary
c. Transmission from the first heir, legatee
or donee in favor of another beneficiary,
in accordance with the will of the
predecessor
Example: Merger of
Usufruct in the Naked Title
Jojo died in 2015 leaving his only
property, house and lot, to Nancy and
Mar, his daughter and son, with the
stipulation that Nancy shall inherit the title
of ownership while Mar will benefit the
use of property (usufruct).
Example: Merger of
Usufruct in the Naked Title
If Nancy died after the father (Jojo) and there
was no heir other than her brother Mar, there
would a merger of usufruct in the owner of the
naked title (Mar), hence, non-taxable.
Example: Merger of
Usufruct in the Naked Title
If Mar died before Nancy and there
was no heir other than Nancy, the
latter will inherit the property.
However, this time it would be
subject to estate tax.
Exclusions from Gross Estate
All bequests, devices, legacies or transfers to
social welfare , cultural and charitable
institutions, provided:
a. No part of the net income of said institution
inure to the benefit of any individual;
b. Not more than 30% of such transfers shall be
used for administration purposes.
Exclusions from Gross
Estate
Under Special Laws
a. Proceeds of life insurance and benefits received by
members of the GSIS (RA 728)
b. Benefits received by members from SSS by reason of
death (RA 1792)
c. Amounts received from Philippine and United States
governments for war damages
d. Amounts received from United States Veterans
Administration
Exclusions from Gross Estate
Retirement benefits of officials/employees of a
private firm (RA 4917), provided they are
included in the gross estate.
Payments from the Philippines and US
governments to the legal heirs of deceased of
World War II Veterans and deceased civilian for
supplies/services furnished to the US and
Philippine Army (RA 136)
Example:
Ben, a non resident alien, died on September 21, 2008,
leaving the following properties to his heirs.
Shares of stocks, Meralco P 250, 000
Shares of stock, foreign Corp. 85 % of its
business conducted in Phils. 400, 000
Dollar deposit accnt. – HSBC. Phil. 800, 000
Car – Manila 550, 000
Assuming the “ rule of reciprocity “ is applicable to Ben,
the taxable gross estate shall be :
Rules in determining the property of
relationship

Agreement on marriage settlement


If there was no prenuptial agreement and:
1. The date of marriage took place before August 3,
1988, conjugal partnership of gains.
2. The date of marriage took place on or after August
3, 1988, absolute community of property.

291
Property Relations
Conjugal Absolute
Partnership Community
I. Property acquired BEFORE Marriage
a. Gratuitous Exclusive Communal
b. Onerous Exclusive Communal
c. Where the spouse has a legitimate descendant Exclusive Exclusive
from a previous marriage
II. Property acquired DURING marriage
a. Gratuitous title Exclusive Exclusive
b. Onerous Title Conjugal Communal
c. In exchange of EXCLUSIVE property Exclusive Exclusive
d. In exchange of conjugal/ communal property Conjugal Communal

e. Fruits or income from EXCLUSIVE property Conjugal Exclusive

f. Fruits or income from conjugal/ communal Conjugal Communal


property
General Assumptions:
In the absence of any contract or marriage settlement
executed before marriage, the property relations shall be
either conjugal (before August 3, 1988) or communal (on
or after August 3, 1988).
Property for personal and exclusive use of either the
spouse shall be exclusive, however, jewelry shall form
part of the communal property.
Property acquired in exchange of exclusive property
shall be exclusive.
Any property acquired during marriage are presumed to be
communal, unless proven otherwise.
Example:
Mr. Jose, Filipino, married died leaving the following estate:
Car acquired before marriage by Mr. Jose P 400,000
Car acquired before marriage by Mrs. Jose 350,000
House and lot acquired during marriage 1,500,000
Jewelries of Mrs. Jose, acquired before marriage
200,000
Personal properties inherited by Mr. Jose before marriage 550,000
Land inherited by wife during marriage 1,000,000
Funeral expenses 405,000
Medical Expenses incurred 2 years ago 550,000

1. How much is the gross estate under Conjugal Partnership of Gains?


Example:
Mr. Jose, Filipino, married died leaving the following estate:
Car acquired before marriage by Mr. Jose P 400,000
Car acquired before marriage by Mrs. Jose 350,000
House and lot acquired during marriage 1,500,000
Jewelries of Mrs. Jose, acquired before marriage
200,000
Personal properties inherited by Mr. Jose before marriage 550,000
Land inherited by wife during marriage 1,000,000
Funeral expenses 405,000
Medical Expenses incurred 2 years ago 550,000

2. Under the same problem, how much is the gross estate under Absolute
Community of Property?

295
Example:
A decedent left the following properties:
Land in Italy (with P 750,000 unpaid mortgage) P 2,000,000
Land in Laguna, Philippines 500,000
Franchise in USA 100,000
Receivable from debtor in Philippines 70,000
Receivable from debtor in USA 100,000
Bank deposits in USA 80,000
Shares of Stocks of PLDT, Philippines 75,000
Shares of stock of ABC, foreign corporation 75%
of the business in the Philippines 125,000
Other personal properties in the Philippines 300,000
Zonal value of the Land in Laguna 750,000
If the decedent is a nonresident citizen, his gross estate is
296
Example:
A citizen of Malaysia residing in Vietnam, with properties in the Malaysia
and the Philippines, had the following data on properties and rights at
the time of death and values.
Real estate, Malaysia P 1, 000, 000
Real estate, Philippines 2, 000, 000
Shares of stock of a domestic corporation 200, 000
Shares of stock of a Malaysian corporation 300, 000
Shares of stock of an Indonesian corporation
Doing business in the Philippines only 100, 000
Philippine peso deposit in BDO bank 500, 000
Receivable under a life insurance with an insurance
Company doing business in Malaysia 250, 000
The gross estate that should be reported in the Philippines is
297
ALLOWABLE
DEDUCTIONS
298
Allowable Deductions
ALLOWABLE DEDUCTIONS Residents NRA
or Citizens

O
R 1. ELITE
a. Funeral expenses Yes Yes
D (PGE/WE)
b. Judicial expenses Yes Yes
I c. Claims against the estate Yes Yes X
N d. Claims against insolvent Yes Yes WORLD
A person Yes Yes ELITE
R e. Unpaid mortgages and Yes
Y indebtedness Yes Yes
f. Taxes Yes Yes
g. Losses

2. Transfer for Public Use Yes Yes


3. Vanishing Deduction Yes Yes
Allowable Deductions
ALLOWABLE DEDUCTIONS Residents or NRA
Citizens

S 4. Family Home Yes No


P
5. Medical Expenses Yes No
E
C 6. Amounts received by heirs Yes No
I under RA 4917 (Retirement
A Benefits Act)
L
7. Standard Deduction Yes No

8. Share of Surviving Spouse Yes Yes


Remember 
1. Deductions are only classified as either
Ordinary or Special.
2. Ordinary deductions are ELITE, Transfer for
Public Use and Vanishing Deduction.
3. Special Deductions are Standard Deduction,
Family Home, Medical Expenses and RA
4917.
4. There shall also be a deduction for the Share
of the Surviving Spouse in the Net Taxable
Estate of the decedent.
Remember 
1. Deductions whether Ordinary or Special,
generally, FOLLOW the classification of the
property (exclusive or conjugal).
2. Deductions which are non-accountable
whether exclusive or conjugal are generally
deductible from conjugal property (e.g.
Funeral expenses, Judicial Expenses)
Remember 
1. Deductions like vanishing deduction,
transfer for public use, losses,
indebtedness and others which can be
attributed to either exclusive or conjugal
property are classified accordingly.
Allowable Deductions
Deductions from gross estate
1. Residents and Citizens:
ELITE + PP + VD + FH + STD + R + M +
Share of the Surviving Spouse

2. Nonresident Aliens:
ELITE + PP + VD + Share of the Surviving
Spouse
Allowable Deductions
Expenses, losses, indebtedness and taxes (please see discussions
below).
If decedent was a citizen or resident alien, deduct all ELITE.
If decedent was a non-resident alien, prorate ELITE as follows:

Phil. Gross Estate x Total ELITE


World Estate

Transfers for PUBLIC PURPOSE. These are bequests, legacies,


devises or transfers for the use of the government of the Phil. or any
political subdivision thereof, exclusively for public purpose.
Deduction for property previously taxed (VANISHING DEDUCTION).
Allowable Deductions
The family home not exceeding P1,000,000.
Standard deduction for citizen or resident alien decedent
only of P1,000,000.
Retirement benefits received by employees of private firms
from private pension plan approved by the BIR under R.A.
4917.
Medical expenses paid or incurred within 1 year prior to
decedent’s death duly substantiated with receipts but not to
exceed P500,000 for citizen or resident decedent.
Net share of the surviving spouse in the conjugal
partnership property or community property as diminished
by the expenses properly chargeable to such property shall
be deducted from the estate.
Allowable Deductions
General Rule: All items claimed as
deductions against the gross estate
shall be duly substantiated.
Exception: Standard deduction
Ordinary Deductions
1. ELITE: Expenses, Losses, Indebtedness,
Taxes, Etc.
a. Funeral expenses: Limited to the lowest of
the actual, 5% of the gross estate and P
200,000. Excess funeral expense incurred
but not yet paid cannot be claimed as
indebtedness. Any funeral expense defrayed
by relatives or other parties cannot be
claimed as expense.
Example:
The gross estate of JR, who was a married
decedent, was P 3, 500, 000, wherein P 820, 000
was inherited from his mother who died four years
ago. The inherited property has an unpaid
mortgage of p 200, 000, whereby 60 % of it was
paid during the lifetime of JR. The total allowed
expenses amounted to P 1, 505, 000 including the
actual funeral expenses of P 180, 000 but
excluding the share of the surviving spouse and
the vanishing deduction. The allowed funeral
expenses shall be :
Example:
Properties in the Philippines - P500,000;
Properties outside the Philippines -
P300,000; Actual funeral expenses in the
Philippines - P20,000; Actual funeral
expenses outside the Philippines -
P10,000.
If the decedent was a citizen or resident of
the Philippines, the deductible funeral
expenses is:
310
Example:
Properties in the Philippines - P500,000;
Properties outside the Philippines - P300,000;
Actual funeral expenses in the Philippines -
P20,000; Actual funeral expenses outside the
Philippines - P10,000.
If the decedent was a non-resident, not citizen of
the Philippines, the deductible funeral expenses is:

311
Ordinary Deductions
b. Judicial Expense: No limit as to amount,
however, the expense must only be relating to
settlement of the estate. Any expense incurred by
the heir to establish his claim cannot be claimed
as judicial expense. Expenses allowed in this
category are:
Expenses incurred in inventory-taking of assets
comprising the gross estate
Administration
Expenses incurred in the distribution of the estate.

312
Ordinary Deductions
c. Claims against the Estate: Personal
obligation of the deceased existing at the
time of death, contracted in good faith and
for full and adequate consideration, which is
valid and enforceable in court and that must
not have been condoned by the creditor or
the action to collect must not have been
prescribed.
Ordinary Deductions
d. Claims against Insolvent Person: the
amount thereof must have been initially
included as part of the estate and the
incapacity of the debtor to pay his
obligation must have been proven. If only a
portion is uncollectible, then only such
portion may be claimed as deductible.
Ordinary Deductions
e. Unpaid Mortgages: a verification as to the beneficiary
of proceeds must be made. In case of accommodation
only, the amount must also be claimed as receivable
included in the gross estate.

f. Taxes: must have accrued but not paid as of the time of


death. The following are non-deductible:
Income tax for income received after death
Property tax not accrued prior to death
Estate tax
Example:
Mr. B died on June 30, 2013 leaving among
others, the following charges and obligations :
Real property tax for the calendar year 2013 – P
20, 000. On an interest – bearing promissory
note ( notarized ) face value of the note – P 10,
000, accrued interest on the note at the time of
death – P 600 and interest to accrue on the note
from the date of death to the date of maturity –
P 400. The deduction from the gross estate is
Ordinary Deductions
g. Losses: arising from storm, fire, shipwreck, or
other casualty, robbery, theft or embezzlement.
Losses must not be compensated by insurance
and not claimed as deduction in income tax
return. If compensated by insurance, the amount
deductible against the gross estate shall only be
limited to the amount not compensated. The loss
must have occurred after death but not later than
the last day of filing for estate tax return (6
months after death).

317
Ordinary Deductions
2. Transfer for Public Use: the disposition must
be in the last will and testament which shall take
effect after death in favor of the Philippine
Government and for exclusive public purpose.
Bequest, legacies and other charitable disposition
of the estate in favor of social, cultural, and other
charitable institutions can be claimed as transfer
for public use, provided, that not more than 30%
of the said bequest or legacies is used for
administrative purpose.
Ordinary Deductions
Transfer for Public Use:
- are donations and contributions, by virtue of
death, to:
1.Government or its political subdivisions;
2.Non-government organizations (accredited)
3.Charitable and religious institutions

- are actually exemptions from estate tax provided


that not more than 30% are used for administrative
purposes and the income of such institutions does not
inure to the benefit of private individuals (such as
distribution of profits through dividends).
Ordinary Deductions
Transfer for Public Use
-However, to be exempted, the executor or
administrator should also add the amount donated
or contributed to the gross estate.
-Likewise, the deduction is also allowed as
ordinary deduction.
Example:
Mr. B died on June 30, 2010, leaving among other,
the following charges and obligations: real
property tax for the calendar year 2010 P20,000;
on an interest-bearing promissory note (notarized)
face amount of the note P20,000; accrued interest
on the note at the time of death P600; and the
interest to accrue on the note until maturity, P400.
The total deduction form the gross estate is
______________________
Example:
Compute the allowable deduction from the
gross estate of a deceased nonresident
alien having properties situated in the
Philippines which valued for P2 million and
properties situated abroad valued at P10
million, and the deductions claimed for
expenses, losses, indebtedness and taxes
amounted to P1800,000.
____________________
Example:
Alicia died with a receivable from Bertol.
Bertol has properties worth P220,000 and
obligations of P320,000. Included in the
obligations are P20,000 owed to the
Government of the Republic of the
Philippines for unpaid taxes and P60,000
owed to Alicia. The estate of Alicia has a
deduction for claim against insolvent person
of ___________________
Ordinary Deductions
3. Vanishing Deductions: only
allowed for properties included in the
gross estate which have been
previously taxed (donor’s or estate
taxes. To be allowed for vanishing
deduction, the present death must
be within 5 years from the prior
transfer.
Ordinary Deductions
Purpose - to minimize the effects of a double tax on
the same property within a short period of time.
Conditions for allowance:
There is a property forming a part of the gross
estate of the present decedent situated in the
Philippines;
The present decedent acquired the property by
inheritance or donation within 5 years prior to
his death;
Ordinary Deductions
The property subject to vanishing deduction can be
identified as the one received from the prior decedent, or
from the donor, or can be identified as having been
acquired in exchange for the property so received;
The property acquired formed part of the gross estate of
the prior decedent, or of the taxable gift of the donor;
The estate tax on the prior transfer or the gift tax on the gift
must have been paid; and
The estate of the prior decedent has not previously availed
of the vanishing deduction.
Ordinary Deductions
Percentage of vanishing deduction - the rate
depends on the interval between the death of
present decedent and death of prior decedent
(if the property was acquired by inheritance) or
death of present decedent and date of gift (if
the property was acquired by donation), as
follows:
Percentages for
Vanishing Deductions
More than Not more Percentage
than
xxx 1 years 100%
1 years 2 years 80%
2 years 3 years 60%
3 years 4 years
40%
4 years 5 years 20%
5 years Xxx Xxx
Procedures in computing
vanishing deductions
Determine the initial value by comparing the FMV of the
property used in computing the first transfer tax paid with
the FMV of the property in the present decedent. The lower
of the two is the initial value.
From the initial value taken, deduct any mortgage or lien on
the property previously taxed which was paid by the present
decedent prior to his death, where such mortgage or lien
was a deduction from the gross estate of the prior decedent
or gross gift of the donor. This is the initial basis.
Procedures in computing
vanishing deductions
The initial value taken, as reduced by Step (b),
shall be further reduced by prorated deductions for
expenses, losses, indebtedness, taxes (ELIT) and
transfers for public purpose (PP) only, allocable to
the property previously taxed as follows:
Initial Basis x (ELIT + TPP)
Gross Estate
Procedures in computing
vanishing deductions
Determine the time interval between the death of
present decedent and death of prior decedent (if the
property was acquired by inheritance) or death of
present decedent and date of gift (if the property
was acquired by donation) to find the applicable
percentage of vanishing deduction.
Multiply the final basis by the percentage of
vanishing deduction to arrive at the VANISHING
DEDUCTION
Computing Vanishing Deduction:
INITIAL VALUE lower of FV at death or at transfer
Less:

MORTGAGE
if the property is mortgaged.
PAID

NEW INITIAL
VALUE
XELITE plus Transfer
= deductible
for Public Use
Divide: amount from NIV
TOTAL GROSS
ESTATE

NEW INITIAL
- =
Deductible NEW INITIAL
VALUE amount from NIV VALUE
The following information is provided by the
executor of a married decedent:
a. Exclusive property (fair market value of P145,000 when
inherited 3 ½ years ago and was subjected to a
mortgage of P45,600 at that time) P130,000.
b. Conjugal properties of the decedent husband and
surviving wife, P170,000
c. Unpaid mortgage on inherited property, P15,600
d. Judicial expenses incurred after the death in connection
with the estate settlement, P12,000
e. Other obligations, P17,500

The amount of vanishing deduction is ______________


Example:
Property inherited four and one – half years ago
(FMV P 5, 000, 000 when inherited and subject to a
Mortgage of P 1, 200, 000 ) P 7, 000, 000
Property received as gift 3 and ½ years ago
(FMV when of P 5, 000, 000 when inherited ) 3, 000, 000
Unpaid mortgage on inherited property 200, 000
Funeral expenses 300, 000
Judicial expenses 500, 000
Claims against the estate
( not including mortgage) 1, 100, 000
Vanishing deduction ?
334
Special Deductions
4. 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. Allowable deduction
must be an amount equivalent to the fair value declared in
the gross estate, to the extent of the decedent’s interest but
not to exceed P 1,000,000

5. Standard Deduction: there shall be a standard


deduction of P 1,000,000 without the need of
substantiation.

335
Example:
B died leaving his only property, residential house and lot,
to his wife, S. The following information were given:
Lot acquired by B during marriage
thru gift from Father of B P 500,000
House constructed using conjugal funds
Construction Cost (10 years ago) 1,500,000
Assessed Value per tax declaration 1,200,000
Solution:
Lot (EXCLUSIVE) P 500,000
House (CONJUGAL)
Assessed Value:
1,200,000/2 600,000
P 1,100,000
LIMIT P 1,000,000
Special Deductions
6. Medical Expense: must be incurred within one year
prior to the death of the decedent and shall not exceed
P500,000. Any amount in excess of the ceiling shall not
be allowed as creditable as indebtedness.

7. RA 4917 (Retirement Benefits Act): Any amount


received by the heir under this act shall be allowed as
deduction from gross estate, provided that the same
must also have been included in the gross estate.
Special Discussion: RA 4917
The following are not subject to any tax under RA 4917:
1. Retirement Benefits received by officials and employees of
private firms, whether individual or corporate, provided that
the employee has rendered service to the same employee
for 10 years and has been 50 years old at the time of
retirement and has availed this benefit for once;
2. Benefits granted in case of separation of any official or
employee from the service of the employer due to death,
sickness or other physical disability or for any cause beyond
the control of the said official or employee.
Special Discussion: RA 4917
Treatment:
1. Exemption and exclusion: Not added to the
gross estate, consequently, no deduction is also
allowed.
2. Deduction from gross estate: Under Sec. 86 (A)
(7) of the NIRC, said amount is to be treated as
“deduction from the gross estate” of the decedent
provided that the same was included in the gross
estate of the deceased.
Special Discussion: RA 4917
If added in the gross estate, the deduction
may be treated as follow:

1. Ordinary Deduction Method

2. Exclusive Special Deduction Method


Special Discussion: RA 4917
ORDINARY DEDUCTION METHOD

1.The amount of benefits received under RA 4917 is


added in the gross estate and classified as conjugal or
community property.
2.At the same time, before dividing the net estate in the
computation of the share of the surviving spouse, the
same amount of RA 4917 is deducted as an ORDINARY
deduction.
Example:
Assume that Juanito, a married Filipino citizen, died
leaving the following properties and obligations:

Residential House and Lot (family home) P 4,000,000


Personal Properties (exclusive) 3,000,000
Amount Received under RA 4917 2,000,000
ELITE Deductions 500,000
Solution:
Under the first treatment, RA 4917 is excluded in the gross estate, thus:
Exclusive Conjugal Total
Family Home P 4,000,000
Personal Properties P 3,000,000 P 7,000,000
Gross Estate 3,000,000 4,000,000 7,000,000
ELITE Deductions ( 500,000) (500,000)
Net estate after Ordinary 3,000,000 3,500,000 6,500,000
Less: Special Deductions
Family Home (1,000,000)
Standard deduction (1,000,000)
Share of the Surviving Spouse (3.5 M/2) (1,750,000)
Net taxable Estate 2,750,000
Solution: Ordinary Deduction
Under the second treatment, RA 4917 is classified as conjugal propert in the gross estate,
thus:
Exclusive Conjugal Total
Family Home P 4,000,000
Personal Properties P 3,000,000
RA 4917 2,000,000 P 9,000,000
Gross Estate 3,000,000 6,000,000 9,000,000
ELITE Deductions ( 500,000)
RA 4917 (2,000,000) (2,500,000)
Net estate after Ordinary 3,000,000 3,500,000 6,500,000
Less: Special Deductions
Family Home (1,000,000)
Standard deduction (1,000,000)
Share of the Surviving Spouse (3.5 M/2) (1,750,000)
Net taxable Estate 2,750,000
Solution: Exclusive – Special
Under the second treatment, RA 4917 is classified as exclusive property in the gross estate,
thus:
Exclusive Conjugal Total
Family Home P 4,000,000
Personal Properties P 3,000,000
RA 4917 2,000,000 P 9,000,000
Gross Estate 5,000,000 4,000,000 9,000,000
ELITE Deductions ( 500,000) ( 500,000)
Net estate after Ordinary 5,000,000 3,500,000 8,500,000
Less: Special Deductions
Family Home (1,000,000)
Standard deduction (1,000,000)
RA 4917 ( 2,000,000) (2,000,000)
Net estate after Special 4,500,000
Share of the Surviving Spouse (3.5 M/2) (1,750,000)
Net taxable Estate 2,750,000
Allowable Deductions
8. Share of the Surviving Spouse: the
share of the surviving spouse from the
conjugal or communal property is also
allowed as deduction from total gross
estate to arrive at net taxable estate.
Example:
Mr. A, non-resident Japanese, died leaving the following:
Exclusive Properties, Philippines P 560,000
Conjugal Properties, Philippines 420,000
Conjugal Properties, Japan 1,820,000
Deductions claimed:
Funeral expenses 100,000
Judicial expenses 100,000
Unpaid expenses 150,000
Losses, occurring 3 months after death
Due to fire 50,000
Donation mortis causa to Makati City 180,000
Family Home (included above) 2,000,000
Standard Deduction 1,000,000
The taxable net estate is: _________________
Example:
A citizen of the Philippines, single, died a resident of the United States, leaving the
following properties:
Real property in the United States, inherited
from the father one and one-half years ago P 2,000,000
Personal property in the Philippines inherited from the father 1,600,000
Family home in the United States 1,400,000
and only the following expenses and obligations:
Actual funeral expenses paid in the United States 100,000
Other obligations contracted within the last two years 250,000

1. The gross estate subject to Philippine estate tax is:


2. The deduction for family home is:
3. The vanishing deduction is:
4. The taxable net estate is:
5. The estate tax due is:

349
COMPLIANCE
REQUIREMENTS
350
Compliance Requirements
Notice of death shall be given when the value of
the gross estate exceeds P 20,000

The executor, administrator or any of the legal


heirs shall file the notice of death:
a. within 2 months after the decedent’s death
(EXTRAJUDICIAL SETTLEMENT); or
b. within 2 months after the executor or
administrator has qualified (JUDICIAL
SETTLEMENT).
Compliance Requirements
The estate tax return shall be filed within 6 months after
the decedent’s death, but may be extended to not
exceeding 30 days if authorized by the BIR Commissioner.
When the estate tax return shows a gross value
exceeding P 2,000,000, it shall be supported with a
statement duly certified by a CPA.
The payment of estate tax shall be made at the time the
return is filed. However, the CIR may allow an extension
of until 5 years if settled judicially or 2 years if settled
extra-judicially.
Example:
A died on January 31, 2010 leaving a house
and lot, which have a gross value of P
800,000, to B. When shall be the last day to
notify the CIR?
Example:

A died on January 31, 2010 leaving a


house and lot, which have a gross
value of P3,800,000, to B. When
shall be the last day to file the estate
tax return?

354
Example:
A died on January 31, 2010 leaving a
house and lot, which have a gross value
of P3,800,000, to B. When shall be the
last day to file the estate tax return if the
Commissioner grants an extension of
filing due to hardship in valuation the
estate?

355
Example:
A died on January 31, 2010 leaving a house
and lot, which have a gross value of
P3,800,000, to B. The executor of A filed the
estate tax return on June 30, 2010. However,
he failed to pay the estate tax due to liquidity
problems. If the estate is settled judicially,
when shall be the last day for the BIR to
collect the estate tax?

356
Example:
A died on January 31, 2010 leaving a house
and lot, which have a gross value of
P3,800,000, to B. The executor of A filed
the estate tax return on June 30, 2010.
However, he failed to pay the estate tax due
to liquidity problems. If the estate is settled
extra-judicially, when shall be the last day
for the BIR to collect the estate tax?

357
Example:
Taxpayer died February 2, 2010. No
judicial proceedings were instituted for the
settlement of his estate. Return was filed
and tax of P 20,000 was paid November 2,
2010. The estate tax due, including
increments, as of November 2, 2010 is:
________________

358
Example:
Mr. Joacquin Gamboa died on April 23, 2009 leaving a
total net taxable estate of P 1,250,000. The executor filed
the estate tax return on August 8, 2009. However, due to
undue hardship, the executor asked for the extension of
payment of estate tax which was granted by the
Commissioner of Internal Revenue. When will the last day
of payment of estate tax if the CIR grants the maximum
period and the estate is settled judicially?

359
Example:

Assuming that the executor filed the


estate tax return on January 23,
2010 for a fraudulent reason, how
much would be the total amount
payable on January 23, 2010?

360
Example:
Ms. Laureen McDonald, a citizen and resident of Brisbane, Australia,
died leaving properties and obligations in Australia and in the
Philippines:
Properties in Australia (inherited within
the year of which P1000,000 is family home) P 3,000,000
Properties in the Philippines 1,000,000
Investment in stocks of San Miguel Beer, Inc. 550,000
Investment in Foreign Corporation 400,000
Funeral Expenses in Australia 250,000
Unpaid obligations in Australia, duly notarized 700,000
Medical expenses in the Philippines 200,000

The net taxable estate in the Philippines is:

361
Question: If the decedent is a
Filipino, how much would be the
estate tax payable?
_____________________

362
ESTATE TAX TABLE
0 - 200,000 Exempt
200,000 - 500,000 0 + 5%
500,000 - 2,000,000 15,000 + 8%
2,000,000 - 5,000,000 135,000 + 11%
5,000,000 - 10,000,000 465,000 + 15%
10,000,000 - above 1,215,000 + 20%
DONOR’S TAX
Overview
Nature of Donor’s Tax – a tax on the privilege of
the donor to give; it is not a property tax but is a
tax imposed on the transfer of property by way of
gift during the life time of the donor. The donor’s
tax shall not apply unless and until there is a
completed gift.
It is an excise tax imposed upon the right of a
person to transfer property gratuitously during his
lifetime.
Overview
Donation takes place only when there is a concurrence of
the following:
1.Capacity of the donor
2.Donative intent
3.Delivery of the gift - completed
4.Acceptance by the donee - perfected

Note:
The composition and valuation of gross gift is the same as
the composition and valuation of gross estate.
Elements of Donation:
Capacity of the Donor
• The donor must be capacitated at the
time of the donation:
– he has the right to transfer or dispose the
property (ownership)
– he is mentally capable of entering into
donation, being a real contract (COCD)
– he does not deprive his legal heirs.

It is not necessary that the donee is capacitated


at the time of the donation as long as the
guardian, in favor of the donee, is capacitated.
Elements of Donation:
Donative Intent
• The donation must be construed strictly and is
not presumed.
• The donative intent is evidenced by complying
certain legal requirements:
– Donation of Real Properties must be in public
instrument (notarized and registered)
– Donation of Personal Properties:
• if the amount is not more than P 5,000.00, may be done
orally, but a concurrent delivery of the thing should be made.
• if the amount is more than P 5,000.00 must be in writing,
whether in public or private instrument.
Elements of Donation:
Donative Intent
• Donative intent is only necessary for direct
gifts:
– casual donations (A to B)
• It is not necessary for indirect gifts:
– creation of a trust ( A to B for the benefit of C)
– inadequate consideration in a sale transaction
Illustration:
Real Property not Sale is subject to 6%, no
used in Business amount will be included as Gift

Personal Property not If the sale is inadequate:


used in Business 1. If in contemplation of death, revocable
transfer and the donor died, part of the
Gross Estate.
2. If the donor did not die, part of the
Gross Gift

1. All sales of ordinary assets are subject


Real Property
to business taxes (VAT) based on
used in Business Gross Sales (FMV, ZV, AV, or SP).
(Inventory) 2. If it is not a sale, subject to donor's tax
(unless it is a deemed sale) or estate tax (for
Personal Property individuals only).
used in Business 3. If the donor is engaged in business, contributions
(Inventories and may be claimed as deduction (either subject to 5%
Depreciable Assets or 10% limit or deductible in full - for priority
programs).
Elements of Donation:
Delivery of the Gift
• As a real contract (COCD), there must be
a delivery of the gift so that the donation is
completed (on the part of the donor).
• Upon delivery, the donor's tax shall
accrue.
• Delivery may be actual or constructive:
– symbolic delivery (delivery of the key or title)
– Traditio brevi mano (short hand)
– Traditio longa mano (long hand; pointing the
property)
Elements of Donation:
Acceptance of the Gift
• The donee should accept the gift for the
perfection of the contract of donation.
• The acceptance may be made in the same
instrument of donation or in a separate paper.
• Acceptance by a guardian in favor of the ward
maybe done.
• The donation is only perfected upon the
knowledge of the donor of the acceptance of the
donee.
• Nevertheless, the donor's tax should accrue
upon completion.
Remember 
The transfer of property is completed by
delivery, either actually or constructively, of
the donated property to the donee.
The transfer of property by gift is perfected
from the moment the donor knows of the
acceptance of the donee.
Classification of Donors

1. Residents and Citizens – taxable globally


2. Non-resident Alien:
a. With reciprocity
b. Without reciprocity

Similar as to the classifications in Estate


Taxation.
Computation of Gift Tax
(Donor’s Tax - Relative)
On first donation:
Gross Gift xx
Less: Deductions from gross gift xx
Net gift xx
Times the Applicable rate %
Donor’s tax due and payable xx
Computation of Gift Tax
(Donor’s Tax - Relative)
On subsequent donation:
Gross gift made this month xx
Less: Deductions from gross gift (xx)
Net gifts xx
Add: ALL prior net gift w/in the year xx
Aggregate net gifts xx
Times applicable Tax rate %
Donor’s Tax Due xx
Less: Donor’s Tax paid on prior gifts (xx)
Donor’s Tax Due and Payable xx
Who are Relatives?
1. Brothers, sisters (whether by whole or half-blood),
spouse, ancestors and lineal descendants.
2. Legally adopted children are considered as
relatives, hence they are entitled to the same rights,
privileges and obligations of legitimate children, as
provided by law.
3. Relative by consanguinity (by blood) in the collateral
within fourth degree of relationship.
Example:
Determine whether the following is a relative or
stranger to a donor:
Grandson
Sister-in-Law
Granddaughter of the grandson
Mother's Grandfather
First cousin's daughter
Half-sister
Stepbrother
Spouse
Remember 
ONLY gifts to relatives are computed using the
cumulative basis.
Donation to strangers (beyond 4th degree) is
computed using individual basis since the rate
(30%) will be the same regardless of the amount.
The classification of taxpayers are still the same
in estate tax.
The reciprocity rule shall also be considered for
intangible personal property of Non-Resident
Aliens in computing gross gift.
Gross Gift
1. Direct Gift (donor to donee)
2. Gift through creation of trust (indirect)
3. Condonation of debt
4. Repudiation of inheritance if:
1. Specifically and categorically done in favor of
identified heirs; and
2. To the exclusion or disadvantage of other co-
heirs.
Gross Gift
5. Renunciation by the surviving spouse of his/her share
in the conjugal partnership or absolute community after
the dissolution of the marriage in favor of the heirs of the
deceased spouse or any other person/s

6. Transfer for insufficient consideration, provided that it


is not in contemplation of death, revocable transfer or
transfer under general power of appointment. Otherwise,
it will be subject to estate tax.
Gross Gift
1. As a rule, the value of the property/right donated shall
be the fair market value existing when the gift was
made (as of the time of donation).
2. The time to value is the moment when the donation
has been completed and perfected (delivered and
accepted).
3. When the donation is subject to a suspensive
condition, the value of the gift is to be determined
only at the time when the stipulated condition is
fulfilled, subject to the time of delivery and
acceptance of the gift.
Valuation Methods
1. Real properties are valued at the assessed value or zonal
value, whichever is higher.
2. Personal properties are valued at current market price or
fair market value.
3. Right to use or usufructuary is valued based on the
Basic Standard Mortality Rate Table (BSMT) with the
consideration of the present value using the prevailing
market interest rate at the time of donation.
4. Shares of stocks are valued at:
a. If traded – Closing price
b. If not traded – using the adjusted net asset method
Valuation: Usufruct
Usufruct is the legal right to use and enjoy the benefits and
profits of property belonging to another.
To determine the value of the right of usufruct, use of
habitation, as well as that of annuity, there shall be taken
into account the probable life of the beneficiary in
accordance with the latest Basic Standard Mortality Table
(BSMT), to be approved by the Secretary of Finance, upon
the recommendation of the Insurance Commission. [Sec.
88(A), NIRC]
Valuation: Usufruct
Example:
Z, Father, donated to A, a Filipino, a usufructuary
right over a family apartment building with an
annual rent income of P 300,000. The property is
registered in the name of A’s sister, B (owner of
naked title). A, who is 39 years old, will enjoy the
usufruct.
Valuation: Usufruct
Continuation...
Additional Information:
Zonal Value of the apartment at donation P 5M
Assessed Value of the apartment 3M
Prevailing effective interest rate per year 10%
BSMT life expectancy of male with 40 age
(A’s next birthday) 37.36 years
PV of P1 over 3 years at 10% 2.487
PV of P1 over 37 years at 10% 9.706
Valuation: Usufruct
Continuation...
Required: Compute for the reportable usufruct value
of A and bare dominium value of B assuming that the
right to use the apartment (usufructuary) is:
1.Within 10 years
2.Life-long, without term limit
Valuation: Usufruct
Solution: IF within 10 years
Annual Value (5M x 10%) P 500,000
Times PV of P1 over 3 years 2.487
Usufruct Value in the gross gift P 1,243,500

FMV of property (higher) P 5,000,000


Less: Usufruct Value ( 1,243,500)
Bare Dominium Value of B P 3,756,000
Valuation: Usufruct
Solution: IF life-long, without limit
Annual Value (5M x 10%) P 500,000
Times PV of P1 over 37 years 9.706
Usufruct Value in the gross gift P 4,853,000

FMV of property (higher) P 5,000,000


Less: Usufruct Value ( 4,853,000)
Bare Dominium Value of B P 147,000
Donation Between Husband
and Wife
Gift from common property – the gift is taxable
one-half to each donor spouse.
General Rule: Donation between husband and
wife is not taxable as it is declared void by law.
Exception: Moderate gifts between the spouse
are valid.
Donation Between Husband
and Wife
Husband and wife are considered as separate and distinct
taxpayers for purposes of the donor’s tax.
However, if what was donated is a conjugal or community
property and only the husband signed the deed of
donation, there is only one donor for donor’s tax purposes,
without prejudice to the right of the wife to question the
validity of the donation without her consent pursuant to the
pertinent provision of the Civil Code of the Philippines and
the Family Code of the Philippines.
Example:
Donations of properties, with fair market values:
Land in Indonesia P 1,000,000
Land and Building in the Philippines 1,500,000
Shares of stock of a domestic corporation 500,000
Shares of stock of a foreign corporation 400,000
Receivable from a friend (residing in the same
country as that of donor) 50,000
There was a transfer inter vivos (to take effect during the
lifetime of the transferor) of property in the country of the
transferor. Consideration received – P 90,000;
Fair Market Value of the property at the time of transfer was 200,000
Cancellation of indebtedness of a resident of the country where
the transferor resides, as an act of liberality 20,000

Gross gift if the donor was a citizen or resident of the Philippines?


Example:
Mr. and Mrs. Matulungin made the following donations during the current calendar
year:

February 13 To X - eldest son on account of marriage


to be celebrated on June 12, 2015, car with
a condition that X is to assume the unpaid
chattel mortgage of P150,000 P 850,000

April 10 To Y – eldest daughter, on account of marriage


to be celebrated on December 28, 2015, house
and lot with the condition that Y is to assume
the following:
Unpaid Mortgage P 300,00
Unpaid Taxes 12,000 2,100,000

Required: Compute the donor’s tax due and payable on the donation.

393
Political Contributions
(Omnibus Election Code (OEC) and Repulic Act No. 7166)

As a rule, any contributions given to candidates, political


parties or coalition of parties are not subject to donor’s
tax as long as the following conditions are met:
The contribution is for campaign purposes; and
The donation is duly reported to the Commission on
Election (COMELEC)
The campaign contribution is subject to donor’s tax on
the part of the donor, if such contributions are not
reported to the COMELEC.

394
Political Contributions
(Omnibus Election Code (OEC) and Repulic Act No. 7166)

• On the part of the political candidate or party (as donee),


it is also exempt from income tax if:
1. The campaign contributions must have been utilized to
cover the candidate’s expenditures for his electoral
campaign.
2. Any unutilized/excess funds, that is, campaign
contrubutions net of the campaign expenditures, shall be
considered as subject to income tax, and such must be
included in the candidate’s income tax return. (Rev. Reg.
007-11)
Political Contributions
(Omnibus Election Code (OEC) and Repulic Act No. 7166)

• Furthermore, RR 007-11 provides that any


candidate (winning or losing) who fails to
file with the COMELEC the appropriate
Statement of Expenditures required under
the Omnibus Election Code, shall be
automatically precluded from claiming
such expenditures as deductions from
his/her campaign contributions. As such,
the entire amount of such contributions
shall be considered as directly subject to
income tax.
Political Contributions
(Omnibus Election Code (OEC) and Repulic Act No. 7166)

• Aside from the above income tax liability, Rev.


Reg. 008-09 obligates the candidates and the
political parties to act as withholding agent for
the creditable withholding tax (5%) due on
income payments made for all campaign
expenditures, and on contributors/supporters for
purchases of goods and services intended to be
given to political parties and candidates.
Exemptions under
Special Laws
International Rice Research Institute
Ramon Magsaysay Foundation
Integrated Bar of the Philippines
Development Academy of the Philippines
National Museum
National Library
Archives of the National Historical Institute
Musuem of Philippine Costumes
Intramuros Administration
Destroyed Donations
Donor’s tax accrues upon the completion of the
donation, meaning upon delivery.
Gifts destroyed after they have been delivered
are considered as valid donations. Thus, even if it
had been destroyed already, the donation shall
be subject to donor’s tax still.
Total destruction has nothing to do with the
donor’s tax liability when the thing donated is
already delivered.
Deduction from Gross Gift
DEDUCTION RC, NRC, RA NRA

1. Dowries or gift made on account marriage


of a son or daughter, legitimate,
illegitimate or legally adopted, to the extent YES NO
of P10,000 per child per marriage. The gift
must be made before marriage or within one
year thereafter.

2. Gifts to the National Government YES YES


3. Gifts in favor of educational, charitable,
religious, cultural and social welfare YES YES
institutions, etc. (subject to 30% rule)

4. Encumbrance on property donated YES YES


(mortgages, if any)
5. Diminution in the value of property YES YES
Example: Dowry
Manny P made the following donations during the current
calendar year:
January 21, 2015
To A, eldest son, on account of his
marriage to be celebrated on February
14, 2015, a brand New Honda Civic P 850,000
March 10, 2015
To B, older brother, on account of his
marriage to be celebrated on
May 1, 2015, a brand new passenger
Jeepney 450,000
The net gift is:
Tax Rates Applicable
If given to relatives, 2% - 15% tabular tax
If given to stranger, 30%.

402
Example:
Mr. and Mrs. K, made the following donations of conjugal
funds and properties in 2014 (unless stated otherwise) as
follows:
February 14: To L, a legitimate son, a piece of land with a
FMV of P 400,000 on account of L’s
graduation from college.

May 14: To M, a legitimate daughter, on account of M’s


marriage to be celebrated on December 25,
2014, house and lot with FMV of P 1,000,000.

June 14: To N, a brother of Mrs. K, P 200,000.


Example: (continuation)
September 14: To O, the efficient and beautiful secretary of Mr. K for
taking care of K while Mrs. K is on vacation in USA, jewelry worth P
300,000.

October 14: To P, the honest and good looking driver of Mrs. K who
accompanied Mrs. K on her trip to USA, a diamond ring worth P 500,000.

December 14: To Q, the daughter of O on account of Q’s birthday, pieces


of jewelry inherited by Mr. K during marriage, with a FMV of P 400,000.

December 25: To R, a legitimate son, a residential house and lot with


FMV of P1,200,000 but subject to the condition that R would assume the
mortgage indebtedness in the amount of P400,000.

Determine the donor’s tax due on each donation for each spouse.
Example:
MAX, after winning the Jackpot prize of Mega Lotto, made the following donations
during the current calendar year:
February 14, 2015 - To City of Manila, Cash for the construction
of boxing gym P 1,000,000

June 12, 2015 - To Mom, his widowed mother on account


of her second marriage to be celebrated
on July 4, 2015, cash 500,000
- To International Rice Research Institute for the
discovery of new breed of rice, Cash 500,000

September 21, 2015 - To the national library, for the acquisition of latest
books on science and mathematics 450,000
- To Deo, his only brother, on account of his
marriage on December 1, 2015, a new car 850,000
Example: (continuation)
On September 30, 2015 the car was totally
damaged by fire in a freak accident inMakati
City while Deo was on a date with his
girlfriend. The donor has not yet filed te
donor’s tax return on the September 21, 2015
donation.

406
COMPLIANCE
REQUIREMENTS FOR
DONATION
Filing and Payment of
Donor’s Tax
The deadline for the filing of donor’s tax return (BIR Form
1800) will be 30 days after the donation was made.
The payment for donor’s tax shall be the same day as of
that the day the return was filed (Pay-as-You-File
System)
When the Commissioner gives an extension, the payment
of the tax due may be made on such day as extended by
the CIR, but not to exceed six (6) months.
Filing and Payment of
Donor’s Tax
The filing of returns for donor’s tax is with the Revenue
District Office or duly authorized collection (e.g. City
Treasurer) in which the donor resided at the time of
transfer.
If there is no legal residence in the Philippines, filing should
be made with the Office of the Commissioner on Internal
Revenue.
Attachments to the Donor’s
Tax Return
Based on the BIR Form 1800, the following documents shall be
attached:
1. Sworn statement of the relationship of the donor to the donee;
2. Proof of tax claimed tax credit, if applicable;
3. Certified true copy of the Original/Transfer/Condominium
Certificate of Title (OCT, TCT, CCT) of the donated property (for
real properties);
4. Certified true copy of the latest Tax Declaration of lot and/or
improvement, if applicable (for market value purposes);
5. Certificate of No Improvement issued by the Assessor’s Office
where the donated real property/ies have not declared
improvements, if applicable;
Attachments to the Donor’s
Tax Return
1. Proof of valuation of shares of stock at the time of
donation, if applicable;
1. For listed stocks – newspaper clippings/certification issued by
the Stock Exchange as to the value of per share
2. For unlisted stocks – latest audited Financial Statements of the
issuing corporation with the computation of the book value per
share.
2. Proof of valuation of other types of personal properties,
if applicable;
3. Proof of claimed deductions, if applicable; and
4. Proof of the Tax Debit Memo used as payment.
BUSINESS
TAXES
Concept of Business
A business is described as “trade or
commercial activities” which are regularly
engaged in as means of livelihood or with a
viewpoint of obtaining profit.
The sales of goods and services related to
trade, profession or business in the
Philippines are generally subject to business
taxes, except when exempted as provided by
law.
Characteristics of Taxable
Business Transactions
1. Regular Transactions;
2. Incidental transactions;
3. Transactions for profit or for non-for-profit;
4. Transactions consummated within the Philippines;
and
5. Lawful transactions
1. Regular Transactions
A business is generally characterized as performing habitual
systematic, continuous, and regular income generating
activities such as selling of goods or services tp customers
or clients.
It is not a performance of a single disconnected act or transacton
to obtain a gain.
The rule of regularity generally determines whether or not an
economic transaction is subject to business tax.
Exceptions:
a. Sale of services by a non-resident foreign person; and
b. Sale of goods by a non-resident foreign person

The sale of goods and services of these foreign individuals,


although not regular, are considered as being rendered in the
course of business and therefore, subject to VAT. (Sec.105,
NIRC, R.A. 9337; Sec. 4 105-3 Rev. Regs. 16-2005)
2. Incidental Transactions
“In the course of Trade or Business” is a phrase to describe
the regular conduct or pursuit of a commercial or
economic activity, including transactions incidental
thereto, to achieve the purpose for which the business is
created. (Sec. 105, NIRC)
Some incidental transactions subject to business taxes are:
a. Sale of scrap materials;
b. Sale of ordinary assets used in business other than
inventory
c. Transaction deemed sales
3. Transactions for Profit or for
Non-for-Profit
The business may be pursued by any person, regardless of whether or not
the business is a non-stock, non-profit private organization (irrespective of
the disposition of its net income and whether or not it sells exclusively to
members or their guests), or government entity.
“Even a non-stock, non-profit organization or government entity is liable to pay
VAT on the sale of services or goods. The primary purpose of a corporation is
immaterial... As long as the entity provides services for a fee, remuneration or
consideration, then the service rendered is subject to VAT.” (CIR vs. C.A. G.R.
No.125355, March 30, 2000)
RMO No. 20-2013 provided that “tax exemption ruling granted to exempt
entities, prior to June 30, 2012 shall be valid until 30 December 2013 and those
issuances issued after 30 June 2012 shall continue to be valid for 3 yeards
from the date of issuance unless sooner revoked or cancelled.

417
4. Transactions Consummated
within the Philippines
Business tax is imposed on transactions involving the use
or the consumption of goods or services. The imposition of
business tax follows the consumption or destination
principle. The place of sale is presumed to be the place of
consumption.
In addition, the “Doctrine of Cross Border” provides that
no business tax (particularly VAT) shall be imposed on
sales of products or services destined for the consumption
outside of the territorial border if the taxing authority. (RMC
No.74-99)
5. Lawful Transactions
Legally registered. Non-reregistration of business
makes the business illegal; however, non-registration is
not a valid excuse to absolve the business from the
imposition of income and business tax.
Engaged in activities not contrary to law, morals,
good customs, public order or public policy.
As a rule, anything sold in the course of business must be
within the commerce of men and therefore, subject to
business tax. Taxpayers engaged in unlawful or illegal
transactions are not absolved income and business tax
plus corresponding surcharges and penalties.
Business:
1. Regular Transactions;
2. Incidental transactions;
3. Transactions for profit or
Subject to Business Taxes:
for non-for-profit; 1. VAT (12% and 0%)
4. Transactions consummated 2. Other Percentage Taxes
within the Philippines; and 3. Excise Taxes
5. Lawful transactions

BUSINESSES
Not Subject to Business
Taxes:
Non-Business: 1. Exempt commercial
1. Sale of Goods of a transactions within;
non-residentsforeign person 2. Subsistence or livelihood
(individual and corporation) activities;
2. Sale of services of a 3. Privilege stores;
non-resident foreign person 4. Casual sales other than
(individual and corporation) ordinary assets;
5. Compensation and other
benefits from employment
Concept of Business Taxes

Value-Added Tax (12% and 0%)


Percentage Taxes (0% -30%, usually 3%)
Excise Taxes (for manufacturers and importers of
luxurious and sin products)
Concept of Business Taxes
Non-Business Transactions Subject to Business
Taxes
1.Importation of goods or services (in general), whether for
business or not, is subject to 12% VAT.
2.Sale of Shares of Stock through stock exchange is subject to
½ of 1% of other percentage tax (OPT) based on selling price
or gross value in money.
3.Overseas dispatch, communication originating from the
Philippines is subject to 10% OPT
4.Horse race winning is subject to 10% OPT; jai-alai is subject
to 30% OPT.
Concept of Business Taxes
Economic Activities not Subject to Business
Taxes
1.Sale of goods or services outside the Philippines
(Doctrine of Cross Border);
2.Exempt commercial transactions within;
3.Subsistence or livelihood activities;
4.Privilege stores;
5.Casual sales other than ordinary assets;
6.Compensation and other benefits from
employment
Concept of Business Taxes
1. Sale of goods or services outside the
Philippines (Doctrine of Cross Border)
Export sales or sales outside the Philippines are
either zero-rated or VAT-exempt
a.Subject to VAT of 0% rate, if made by a VAT-
registered persons
b.VAT-exempt and OPT-exempt,if made by a non-VAT
registered person.
Concept of Business Taxes
2. Exempt Commercial Transactions Within

Exempt commercial transactions within as


provided in Section 109 of the NIRC and Special
Laws are exempt from business tax.

Example: Sales of agricultural and marine food


product in their original state, sale to senior
citizen
Concept of Business Taxes
3. Subsistence or Livelihood Activities
Marginal Income Earners (MIE) are unemployed
individuals or unlicensed professionals that do not realized
gross sales or receipts exceeding P 100,000 in any 12-
month period. MIE includes the following:
a.Agricultural growers/producers (farmers/fishermen) selling
directly to ultimate consumers;
b.Small sari-sari stores
c.Small carinderias
d.Drivers/operatos of a single unit tricycle.

MIE are subject to income taxes but exempt from payment


of business taxes. (RMC No. 7-2014)
Concept of Business Taxes
4. Privilege stores
Privilege stores or tiangges are temporary stalls for the
purpose of selling variety of goods or services for
special events such as fiestas for not more than 15
days in a year. These stores are not subject to business
tax. They are only required tofile annual income tax
return.

Organizers of events are required to provide these


privilege store operators with central cash register or
point-of-sale machines, or manual official receipts or
invoices for their uses. (Rev. Regs. No. 16-2013)
Concept of Business Taxes
5. Casual sales other than ordinary assets

A casual sale is an occasional sale of goods or services


by a person who is not engaged in business. It involves
selling of personal properties or belongingnes used in
business, such as:
a.Sale of house and/or lot classified as capital asset (not
used in business); and
b.Sale of personal assets not used in business tax but
subject to income tax.
Concept of Business Taxes
6. Compensation and other benefits from
employment

As a rule, compensation income and other benefits


dervied from an employer-employee relationship
are subject to income tax but exempt from business
tax. (Sec 10(I), NIRC)

Additional compensation in the form of commission


income received by an employee from his
employee is not subject to VAT.
BUSINESS REGISTRATION
For regulation purposes, the State, through exercise
of its police power, requires a business to be
registered first before the commencement of its
economic activities. Non-compliance to business
registration renders the business illegal.
At the time the business is being registered, the
taxpayer will indicate in the BIR Form whether the
business is subject to VAT or OPT. If the products of
the business is harmful or non-essential, in addition
to VAT or OPT , the excise tax shall also ne imposed.
Initial Registration
The application for registration must be filed with the RDO
(Revenue District Office) where the principal place of
business, branch, storage place or premise is located, as the
case may be, before the start of the business.
The regsitration shall include the taxpayer’s name, residence,
business, the place where such business is carried on, and other
information as may be required by the Commissioner of the
Internal Revenue.
For identification purposes, a person who is subject to internal
revenue tax is issued with a Taxpayer’s Identification Number
(TIN).
Only one TIN will be assigned by the BIR for each person. Any
person who secures more than one TIN or who fails to indicate
his correct TIN on documents specified to be indicated with TIN
shall be subject to applicable criminal sanctions (Sec. 274,
NIRC).
Initial Registration
Upon registration, the person must pay an annual
registration fee in the amount of P500 for every
separate or distinct establishment or place of
business, before the start of such business and every
year thereafter on or before the 31st day of January.
(Sec. 236, NIRC)
The phrase “separate or distinct establishment or place
of business” includes the head office, branch, facility
and/or warehouse
BUSINESS TAXES
Under the NIRC (RA 8424), business taxes are classified as follows:
1. Value-Added Tax (VAT). It is a general consumption tax that
requires a 12% additional tax on the sales price of goods and/or
services by VAT-registered seller or VAT-registrable seller required
by law to be under VAT-system. As rule, businesses with gross
sales/receipts exceeding P1,919,500. Otherwise, subject to other
percentage tax.

2. Other Percentage Taxes (OPT). These are general consumption


taxes imposed to Non-VAT registered business whose total annual
gross sales/receipts do not exceed P1,919,500 or business
transactions specifically subject to OPT regardless of the total
amount of annual gross sales/receipts as provided by law. The
imposition of VAT and OPT are not simultaneously, rather they are
mutually exclusive.
BUSINESS TAXES
3. Excise Taxes (ET). The excise tax may still be
imposed in addition to VAT or OPT (Sec.129, NIRC).
Excise taxes are imposed on production or sales of
products that are:
a.Harmful to health such as alcohol or tobacco or “sin
products”;
b.Goods that are non-essential such as jewelries, perfumes,
and cars;
c.Products that deplete natural resources such as golds,
silver, copper and other mineral products that are
manufactured or produced in the Philippines; and
d.Some imported products to protect local industries.
Comparison:
VALUE-ADDED TAX PERCENTAGE TAX EXCISE TAX
An indirect tax which may A tax imposed on sale of A tax imposed on
be shifted or passed on services; Persons who are manufacturers or
the buyer, transferee or not registered under VAT importers of sin products
lessee of the goods, system shall also be subject and/or luxurious products
properties or services. to percentage tax.

12% on sale of goods, Vary depending on the Vary depending on the


properties or services, or object object
0% on export of goods and
properties, or services
performed to an export-
oriented companies

Gross sales or receipts Taxes on winnings, stock Taxes on


exceeding P 1,919,500 transactions, amusement, MANUFACTURERS or
life insurance, agents of IMPORTERS of cigars,
foreign insurance cigarettes, distilled spirits,
companies, banks and non- tobacco, wines, etc.
banking institutions, etc.
VALUE –
ADDED TAX
When should a business required
to register under VAT system?
The business is required to registed under VAT system
when it is not categorized as VAT-exempt and:
a. Its gross sales/receipts are categorized under
mandatory VAT-registration (annual gross sales
exceeding P 1,919,500 and the goods or services sold
are non-VAT exempt), or

b. The business opted to register under VAT system


despite the fact that its transactions are classified VAT-
exempt as provided by law
Mandatory Registration
A taxpayer’s registration under VAT system becomes
compulsory when:
a. A taxpayer has realized gross sales/receipts of more
than P1,919,500 a year and these sales are not
exempted transactions under Section 109 (A) to (U)
of the NIRC.
b. His expected annual gross sales or receipts exceed
P1,919,500. (Rev. Regs. No. 16-2011, as amended)
“There are reasonable grounds to believe that his
gross sales/receipts for the next 12 months shall
exceed P 1,919,500.” (RMC No. 62 -2005)
Optional VAT-Registration
Optional VAT-registration may be accomplished by:

a. Persons with taxable business transactions that do not exceed


P1,919,500 per year but instead chose to register under VAT
system; or
b. VAT persons with mixed transactions who opted to apply VAT on
his VAT-exempt transactions. These are VAT-exempt persons
under Section 109 (A) to (U) of NIRC that chose to register under
VAT system upon business registration.
c. Franchise grantees of radio/TV broadcasting whose annual gross
receipts do not exceed P10 million may also elect to register under
VAT system.

Once registered as VAT person, the taxpayer shall be liable to output


VAT and be entitled to input VAT credit beginning on the first day of
the month following registration.
Example:
Gipit Merchandising had a gross sales in 2011 (initial year of
operations) of P1,450,000. In January 2012, it had the
following data (all figures do not include any taxes):
Inventory, January 1, purchased from
non-VAT suppliers P 15,000
Inventory, January 1, purchased from
VAT suppliers 20,000
Purchases for the month from VAT-
registered persons 70,000
Sales for the month 200,000

Percentage tax out of the transactions of January


Example:
Gipit Merchandising had a gross sales in 2011 (initial year
of operations) of P1,450,000. In January 2012, it had the
following data (all figures do not include any taxes):
Inventory, January 1, purchased from
non-VAT suppliers P 15,000
Inventory, January 1, purchased from
VAT suppliers 20,000
Purchases for the month from VAT-
registered persons 70,000
Sales for the month 200,000

VAT payable for January, if the taxpayer opted to be VAT-


registered.
441
Non-VAT Registration
A taxpayer who did not opt to register under
VAT system or whose gross sales/receipts does
not exceed P1,919,500 must register under non-
VAT system. Such taxpayer is generally to other
percentage tax (OPT).

Example:
APPLE Trading is registered under non-VAT
business in 2015. in year, 2016, it generated P 2,000,000
sales. What are the implications to APPLE Trading
regarding its subsequent renewal of registration?
442
On Sale of Goods or Properties On Importation On Sale of
Services or Lease
of Properties
Gross Selling Price of the goods Landed value or cost Gross Receipts
or Properties sold, exchanged plus excise taxes, derived from the
or bartered, which may be: custom duties, and sale or exchange
a. Real properties held for sale other charges paid by of services,
b. Right to use patent, copyright, the importer prior to including the use or
OUTPUT design or model the release of goods lease of properties
VAT c. Radio, television, satellite from customs custody
transmission, etc.

• Purchase or Importation of No Input tax upon -same as in sale of


goods importation; goods or
• Purchase of services on which however, INPUT VAT properties-
INPUT VAT has been actually paid. arising from
• Purchase of real properties importation shall be
VAT • Transitional input tax creditable once the
• Presumptive Input VAT goods are sold.
• Tax credits and VAT carry-over
NON-VAT Supplier VAT Supplier of
of GOODS & GOODS & VAT Customers
SERVICES SERVICES of GOODS

PRESUMPTIVE VAT Customers of


SERVICES

TRANSITIONAL SELLER NON-VAT


Customers

STANDARD
(to Government) EXPORTS

CAPITAL GOODS IMPORTATIONS of DEEMED SALES


Goods for SALE
Sources of OUTPUT VAT
Specifically, VAT-registered persons/taxpayers maybe classified
as (1) 12% Regular VAT, and (2) Zero-rated VAT
1. 12% Regular VAT – An output VAT is a tax added to the
value of goods/services collected from the buyers. It is to be
treated as a current liability of the taxpayer-seller to the
BIR because he is only a collecting agent of the tax. While
an input VAT is a tax added to the value of goods or
services purchased by a VAT-registered person from a VAT-
registered supplier. It is to be treated as a current asset of
the taxpayer-buyer because it is an advance payment of
VAT.
2. Zero-Rated VAT - these taxpayers are subject to 0% VAT
rate or effectively zero-rated sales/receipts as provided by
Sections 106 (A)(2) of the NIRC.

445
OUTPUT VAT: 12% VAT
The Output VAT on sale of goods or properties
shall be computed at 12% of the gross
selling price of the following:
a.All tangible and intangible objects
b.Real properties held primarily for sale;
c.Right or privilege to use patent, copyright, design or
model, plan secret formula or process, goodwill,
trademark, trade brand or other like property or right;
d.Right to use motion picture films, tapes, and discs;
e.Radio, television, satellite transmission and cable
television time
OUTPUT VAT: 12% VAT
The term ‘gross selling price’ means the total
amount of money or its equivalent which the
purchaser pays or obligated to pay to the seller in
consideration of the sale, barter or exchange, excluding
VAT.
Sales returns and allowances are deductible from gross sales
or receipts if a proper credit or refund was made during the
month/quarter.
Sales discounts may only be deducted if (1) it was granted at
the time of sale, (2) expressly indicated in the invoice, and (3) the
granting of the discount does not depend on the happening of a
future event.
OUTPUT VAT: 12% VAT
Importation
All importations are subject to VAT of 12%, except
those exempt under Sec. 4 of RR No. 6-97.
Importations made by a tax-exempt taxpayer shall,
likewise, be exempt from VAT. However, the subsequent
purchaser, transferee or recepient who are not tax-
exempt shall pay the VAT on the imported goods as if he
was the importer.
The tax base of imported good for VAT purposes include
total value of importation or its landed cost plus excise
and ad valorem tax and other charges on importation.
OUTPUT VAT: 12% VAT
IMPORTED
TREATMENT
GOODS
1. Importation of Non-VAT Subject to Output VAT
Exempt Goods by a VAT
person for business use Can Claim Input VAT
2. Importation of Non-VAT Subject to Output VAT
Exempt Goods by a VAT
person for personal use No Input VAT
3. Importation of Non-VAT Subject to Output VAT
Exempt Goods by a Non- VAT
person for business use No Input VAT
4. Importation of Non-VAT Subject to Output VAT
Exempt Goods by a Non- VAT
person for personal use No Input VAT
Example:
An importer wishes to withdraw his importation
from the Bureau of Customs. The imported
goods were subjected to a 10% customs duty
in the amount of P12,500 and to other charges
in the amount of P9,500. The value-added tax
due is:

450
VAT- Exempt Transactions
a. Sale or importation of agricultural and marine food products in
their original state, livestock and poultry of a kind generally used
as, or yielding or producing, foods for human consumption; and
breeding stock and genetic materials;
b. Sale or importation of fertilizers, seeds, seedlings and fingerlings,
fish, prawn, livestock and poultry feeds, including ingredients,
whether locally produced or imported, used in the manufacture of
finished feeds (except specialty feeds for race horses, fighting
cocks, aquarium fish, zoo animals and other animals generally
considered as pets);
c. Importation of personal and household effects belonging to
residents of the Philippines returning from abroad and non-resident
citizens coming to resettle in the Philippines; provided, that such
goods are exempt from customs duties;
VAT- Exempt Transactions
d. Importation of professional instruments and
implements, wearing apparel, domestic animals, and
personal household effects (except any vehicle, vessel,
aircraft, machinery and other goods for use in the
manufacture and merchandise of any kind in commercial
quantity) belonging to persons coming to settle in the
Philippines, for their own use and not for sale, barter or
exchange, accompanying such persons, or arriving within
ninety (90) days before or after their arrival, upon the
production of evidence satisfactory to the Commissioner of
Internal Revenue, that such persons are actually coming
to settle in the Philippines and that the change of
residence is bona fide
VAT- Exempt Transactions
e. Services subject to percentage taxes
f. Services by agricultural contract growers and milling for
others of palay into rice, corn into grits and sugar cane into raw
sugar.

Agricultural Contract Grower:


Refers to persons producing for others’ poultry, livestock or
other agricultural and marine foods products in their original
state such as contract for a package of services of receiving
eggs from breeder farm, sorting, fumigating, setting, hatching,
sexing of day-old broilers, sorting and delivering them to other
contract grower.
VAT- Exempt Transactions
g. Medical, dental, hospital and veterinary services,
EXCEPT those rendered by professionals
- laboratory fees are exempted
- if the hospital or clinic operates a pharmacy or
drugstore, the sale of drugs and medicines are
subject to VAT.
- hospital bills constitute medical services. The sale
of drugs and medicines to in-patients which are
included in the bill is not subject to VAT.
- Sale to out-patients are subject to VAT.
VAT- Exempt Transactions
h. Educational Services rendered by:
-Private educational institution, accredited
by:
a. Department of Education
b. Commission on Higher Education
c. Technical Education and Skills
Development Authority
-Government Educational Institutions
VAT- Exempt Transactions
i. Compensation incomes
j. Services rendered by regional area headquarters
k. Transactions which are exempt under
international agreements to which the Philippines
is a signatory or under special laws
l. Agricultural cooperatives:
a. Sale to their members
b. Sale to non-members if the cooperative is the producer (if not
subject to VAT)
c. Importation of direct farm inputs, machineries and equipment,
including spare parts
VAT- Exempt Transactions
m. Gross receipts from lending activities by
credit or multi-purpose cooperatives:
a. To members, exempt
b. To non-members, exempt
c. To non-members for non-lending activities,
subject to VAT
VAT- Exempt Transactions
n. Sale by non-agricultural, non-electric and
non-credit cooperatives, provided that the
share capital contribution of each member
does not exceed P15,000
OUTPUT VAT: 12% VAT
Transactions Deemed Sales
a. Transfer, use or consumption not in the course of business of goods
or properties originally intended for sale (Inventories);
b. Distribution or transfer to: (1) shareholders or investors as share in
the profits (dividend), (2) creditors in payment of debt (dacion)
c. Consignment of goods if the actual sale is not made within 60 days
following the date of consignment
d. Retirement from business or cessation of business with respect to
inventories of taxable goods existing of such retirement or cessation.

If the seller is a VAT-registered person, the sale of his ORDINARY


ASSET and other incidental sales (real or personal) shall be
subject to VAT. (RR 4-07)

459
OUTPUT VAT: 12% VAT
Transactions not Deemed Sales
• Change of corporate control (Parent-
Subsidiary)
• Change in the trade or corporate name of
the business
• merger or consolidation of corporations
OUTPUT VAT: 12% VAT
Sale of Scrap Materials
1. Sale of scrap such as empty drums, plastic
bags, cartons, and wood crates; obsolete
inventories and fully depreciated fixed assets
at a minimal prices or lower than the purchase
price are subject to VAT.
2. Ordinary assets, other than inventories held
for sale, which are originally subject to
depreciation are are likwise subject to VAT,
when sold.
Example:
JD, a trader, is VAT taxpayer having the following
information regarding his sales during the month of
September 2014, exclusive of VAT:
Cash sales P 200,000
Open Account Sales 500,000
Installment Sales 100,000
Note: Collection during the month for this sale 30,000
Consignment sales (net of VAT):
0-30 days old (on which there were remittances
from consignees of P200,000) 600,000
31 to 60 days old 700,000
61 days old and above 900,000
How much is the taxable sales?______________________
OUTPUT VAT: 12% VAT
Sale of Properties
Sale of real property classified as capital asset is not
subject to VAT. Such transaction is subject to capital gains
tax of 6% based on sales price or FMV, whichever is higher.
In general, sale of real property primarily held in the
normal course of business (inventory/ordinary asset) is
subject to VAT, except:
Residential lot with selling price of P 1,919,500 and below; and
Sale of house and lot and other residential dwellings with selling
price at P 3,199,200 and below.

463
Illustration
Capital Assets Capitals Gains
(Real Properties) Taxes 6%

Capital Assets
Normal Tax
(Personal Properties)

If the gross price is more


Residental Lot
than P 1919,500, VAT

Ordinary Assets Residential House If the gross price is more


(Inventories) and Lot than P 3199,200, VAT

Regardless of the
Commercial Lots
price, VAT

Ordinary Assets Depreciable Assets,


VAT
Other than Inventories used in Business
OUTPUT VAT: 12% VAT
Sale of Real Properties
• In computing the VAT, the basis shall be the
selling price or the FMV, or ZV whichever is the
highest.
• If the selling price is given, but the VAT is not
billed separately in the sales document, and
such selling price is higher than the zonal value
or FMV, it is deemed to be VAT-Inclusive.
• If the gross selling price is based on the zonal
value or FMV, such is deemed to be VAT
exclusive.
OUTPUT VAT: 12% VAT
Sale of Two or More Adjacent Residential
Dwellings
• Any sale of two or more adjacent
residential lots and residential dwellings
disposed within 12-month period in favor
of one buyer, the aggregate value shall be
considered when determining whether the
threshold limit of P1,919,500 or
P3,199,200 is breached or not.
OUTPUT VAT: 12% VAT
Sale of real properties in the course of trade or business
On installment plan (initial payments do not exceed 25% of the
gross selling price)

Installments received Xxx


Add:
Interest xxx
Other charges xxx Xxx
Tax base Xxx
Note: Upon full payment, if the zonal or market value is
higher than the total receipts or collections, the additional
VAT shall be paid accordingly.
OUTPUT VAT: 12% VAT
On cash basis or deferred payment plan (initial
payments exceed 25% of the gross selling
price)
The tax base shall be the higher between selling
price stated in the sales document and zonal or
market value, regardless of the installment
agreement. Any additional receipts from interests
and charges shall also be subject to VAT.
.
Example:
Marimar, a dealer of real properties, sold the following
during the taxable year:
Item Classification Price
Residential Lot Inventory P 1,500,000
Residential Lot Inventory P 2,199,500
Residential Dwelling Own dwelling P 3,600,000
House and Lot Inventory P 4,000,000
Commercial Lot Inventory P 1,200,000

How much is the Output VAT?


OUTPUT VAT: 12% VAT
Sale of Service
In general, all kinds of sale, exchange or supply of services
rendered in the Philippines are subject to 12% VAT, except
those which are classified and qualified as zero-rated or VAT-
exempt.
Under the situs of service: Consumption/Destination
Principle
Tax Base:
Total amount of money or its equivalent representing the contract price,
compensation service fee, rental or royalty.
Amount charged for materials supplied, with the services and deposits and
advance payments actually or constructively received during the taxable
quarter, excluding VAT.
OUTPUT VAT: 12% VAT
VAT in Professional Fees
1. As a rule, earnings from a practice of profession will be
subject to VAT if:
1. The professional is a VAT-registered person; or
2. A non-VAT registered but his total gross receipts
exceed P 1,919,500.
3. Also, aside from VAT is subject to 10% creditable
withholding tax if the aggregate amount per year is
P720,000 and below, and 15% creditable
withholding tax if exceeding P720,000.
OUTPUT VAT: 12% VAT
VAT on Service Contractors
1. Subject to 12% VAT
1. If the contract is with the government, the
government shall withhold final withholding VAT
of 5%.
2. Also subject to 2% creditable withholding
tax for sale of services and 1% creditable
withholding tax for sale of goods.
OUTPUT VAT: 12% VAT
VAT on Security Agency
• Agency fees are subject to 12% VAT,
excluding the salary of the guards.
– Subject to a 2% creditable withholding tax for
sale of service based on the agency fee.
– If the contract does not separate the agency
fees from the salary of the guards, the whole
amount will be subjected to VAT and 2%
creditable withholding tax.
OUTPUT VAT: 12% VAT

VAT on Real Estate Brokers


The commission income of real estate
brokers are subject to VAT of 12% if he
is VAT-registered and/or his total
commission exceeds P1,919,500 per
year.
OUTPUT VAT: 12% VAT
VAT on Dealers in Securities
• Dealers in securities are subject to VAT
based on their gross receipts (gross
selling price less cost of securities
sold).
OUTPUT VAT: 12% VAT
VAT on Pre-Need Companies
• Companies selling pre-need plans (educational
plan, life plan, etc.)
• Subject to 12% VAT on their gross income
actually or constructively received.
• Gross Income shall mean actual receipts on
contract price minus contributions to trust
funds to be set up independently.
OUTPUT VAT: 12% VAT
VAT on Non-Life Insurance
• Non-life insurance premiums shall be subject to
12% VAT when:
– Collected by a foreign company authorized to transact
business in the Philippines
– Collected by a domestic corporation

• Life Insurance shall be subject to 2% if collected


by a domestic or foreign corporation authorized to
transact business in the Philippines
OUTPUT VAT: 12% VAT
VAT on Lending Investors
• Lending investors includes all persons, but does
not include
– banks (depository and savings),
– non-bank financial intermediaries,
– finance companies,
– pawnshops, and
– other financial intermediaries not performing quasi-
banking.
• Subject to VAT of 12% on their interest
incomes.
OUTPUT VAT: 12% VAT
VAT on Domestic Transportation Services
1. Subject to VAT of 12% on:
1. Transport of goods and cargoes originating in the
Philippines whether by land, air and sea
2. Transport of passengers by AIR and SEA originating in
the Philippines.
2. Transport of passengers by land are subject
to 3% OPT.
OUTPUT VAT: 12% VAT
VAT on Lessor of Commercial and Residential
Units

1. If the monthly rent per unit does not exceed P12,800,


regardless of the aggregate amount, the lessor is
exempted from VAT and OPT.

2. If the monthly rent per unit exceeds P 12,800, but the


aggregate amount does not exceed P1,919,500, the
lessor is only subject to OPT, not to VAT.

3. If the monthly rent per unit exceeds P 12,800 and the


aggregate amount exceeds P1,919,500, the lessor is
only subject to VAT.
OUTPUT VAT: 12% VAT
VAT on Hotels, Restaurants and Caterers
The taxable base includes:
– Charges for rooms
– laundry
– valet services
– food and beverages
– corkage
– handling charges for telephone, telex cable or fax services
– cake shop sales
– lease to concessionaires, and other services fee

But does not include:


– service charges billed separately and actually distributed to waiters
and employees;
– actual cost of long distance and overseas telephone calls and other
charges of the telecommunication companies;
– local taxes
OUTPUT VAT: Zero-Rated VAT
Export sales

1. The sale and actual shipment of goods from the


Philippines to a foreign country.
2. Sale of raw materials or packaging materials to
a nonresident buyer for delivery to a resident
local export-oriented enterprise.
3. Sale of raw materials or packaging materials to
export-oriented enterprises whose export sales
exceed 70% of total annual aproduction.
OUTPUT VAT: Zero-Rated VAT
1. Sale of gold to the Bangko Sentral ng Pilipinas.
2. Those considered export sales under the Omnibus
Investment Code of 1987 (E. O. No. 226) and other
special laws, e.g., sales to diplomatic missions and
other agencies and/or instrumentalities granted tax
immunities.
3. Sale of goods, supplies, equipment and fuel to
persons engaged in international shipping or
international air transport operations.
OUTPUT VAT: Zero-Rated VAT

Foreign currency denominated sale (FCDS)

Sale to non-resident, paid in acceptable foreign


currency and accounted in accordance with the
rules and regulations of the BSP
OUTPUT VAT: Zero-Rated VAT
Effectively zero-rated sales

Effectively zero-rated sales of goods and properties shall


refer to the local sale (constructive export) by a VAT-
registered person to a person or entity who was granted
indirect tax exemptions under special laws or international
agreement, such as:
1. Sale to Asian Development Bank (ADB);
2. Sale to International Rice Research Institute (IRRI);
3. Sale to duly registered and accredited enterprises with Subic
Bay Metropolitan Authority (SBMA); and
4. Sale to duly registered and accredited enterprises with
Philippine Economic Zone Authority (PEZA).
OUTPUT VAT: Zero-Rated VAT
Zero- Rated Services
The following services performed by a VAT-taxpayer in the
Philippines shall be subject to zero rate (0%) VAT:
a.Processing, manufacturing, repacking goods for other
persons doing business outside the Philippines which are
subsequently exported, where the services are paid for in
acceptable foreign currency and accounted in accordance with
the rules and regulations of BSP;
b.Services rendered to persons or entities whose exemption
under special laws or international agreements to which
Philippines is a signatory effectively subjects the supply of such
services to zero-rate;
OUTPUT VAT: Zero-Rated VAT
b. Services rendered to persons engaged in international
shipping or international air transport operation, including
leases of property for the use thereof;

c. Services performed by subcontractors and/or contractors in


processing converting, or manufacturing goods for an enterprise whose
export sales exceed 70% of the total annual production;

d. Transport of passengers and cargo by air or sea vessels from the


Philippines to a foreign country;

e. 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.
OUTPUT VAT: Zero Rated
A seller engaged in zero-rated VAT transactions charges
no output tax, but he can:
a. Claim creditable input VAT (for the VAT previously
charged by the suppliers) against the Output VAT on
other sales subject to regular VAT.
b. Carry-over the excess input VAT, in case the
creditable input VAT is not fully utilized, to the
succeeding quarter or quarters. There is no
prescription period for the input VAT carry-over.
c. Claim as VAT refund or convert to Tax Credit
Certificate (TCC) the excess input VAT which may be
used as payment for direct internal revenue taxes.
Sources of Input VAT
Purchases or importation of goods (for business use
only):
a.Goods for sale
b.Goods for conversion into finished product (including
packaging materials)
c.Goods for use as supplies
d.Goods for use as materials supplied in the sale of
services
e.Goods for use in trade or business for which
depreciation or amortization is allowed
f.In case of importation, an input tax may be claimed for
the importation of goods for business use by a VAT-
registered taxpayer. Input tax paid by a non-VAT person,
whether for personal or business use, are not creditable.
Also, input VAT paid by a VAT registered on goods
imported for personal use are not creditable.
Example:
Christine is a VAT-registered taxpayer engaged in buying and selling
business. During the year, she has the following information, VAT not
included:
Gross Sales (all sold on account) P700,000
Sales returns and Allowances 30,000
Sales Discounts granted at the time of sale
(net method is used) 40,000
Warranty allowance for defective products 10,000
Cash discount given if credit is paid within 15 days 2% of net
sales
Purchases 210,000
Purchase returns and allowances 20,000
Purchase Discounts taken 10,000
The output VAT is ____________________
The input VAT is ____________________

490
Sources of Input VAT
Purchase of services on which a value-added tax has
been actually paid

–Professional fees paid


–Repairs and construction services
–Other purchases of services except compensation paid to
employees
Sources of Input VAT
Purchase of Capital Goods
• Applies only to domestic purchase or importation of
capital goods subject to depreciation for income tax
purposes.

• Where the aggregate acquisition cost (exclusive of


VAT) of depreciable capital goods during any calendar
month does not exceed P1,000,000, the total input tax
is creditable against output tax in the month acquired
(Outright Credit)
Sources of Input VAT
• Where the aggregate acquisition cost (exclusive of VAT) of
depreciable capital goods during any calendar month exceeds
P1,000,000, the total input tax is creditable against output tax, as
follows:
– Spread evenly over 60 months (starting in the
calendar month acquired) the input tax, if the
estimated useful life of the depreciable capital good
is 5 years or more.
– Spread evenly over the actual number of months of
estimated useful life (starting in the calendar month
acquired) the input tax, if the estimated useful life of
the depreciable capital good is less than 5 years.
Sources of Input VAT

If the depreciable capital good is sold or


transferred within a period of 5 years or prior to
the exhaustion of the amortizable input tax
thereon, the entire unamortized input tax on the
capital good sold or transferred can be claimed
as input tax credit in the month/quarter when the
sale or transfer was made.
Example:
A VAT taxpayer made the following purchases of capital
goods from VAT registered sellers for use in his business
(amounts are net of VAT) for the 3rd quarter:
Year 2011 Estimated Life Cost
July 10 – Machine 1 2 years P 200,000
16 – Machine 2 6 years 900,000
Aug. 8 – Machine 3 2 years 400,000
20 – Machine 4 6 years 500,000
Sept. 14 – Machine 5 7 years 2,000,000

Machine 1 was retired on September 30, 2011. The input


tax in September is:
Example:
The taxpayer is a VAT taxpayer
Date in a month, VAT not included:
Sales of goods 1,500,000
Sales of fixed assets
No. 1, purchased from VAT taxpayer 200,000
No. 2, purchased from non-VAT taxpayer 100,000
Purchases of goods, from VAT supplier 400,000
Purchases of fixed assets from VAT suppliers:
No. 3, with useful life of 6 years 900,000
No. 4, with useful life of 8 years 2,000,000
No. 5, with useful life of 3 years 1,300,000
Value-added tax payable
______________________

496
Sources of Input VAT
Transitional Input VAT (TIV)
•A person who becomes liable to VAT or any
person who elects to be a VAT-registered person
shall be allowed input tax on his beginning
inventory of goods, materials and supplies
which is equivalent to 2% of such inventory or the
actual VAT paid on such goods, materials and
supplies, whichever is HIGHER.
Sources of Input VAT
• In computing the TIV, do not include those
beginning inventories (goods, materials and
supplies) which are exempt from VAT.

• Remember, that TIV and PIV cannot be


converted or allowed for tax credit certificate, to
be paid against any other direct tax, but may be
allowed as creditable input VAT only.
Sources of Input VAT
Presumptive Input VAT (PIV)– any persons or firms
engaged in PROCESSING (SaMaMi):
- Sardines, Mackerel, Milk
or MANUFACTURING (ReSuCOPa);
- Refined Sugar, Cooking Oil, Packed
Noodle-based instant meals
shall be allowed a presumptive input VAT
equivalent to 4% of the gross value in money of
their purchases of primary agricultural
products which are used as inputs to their
production.
499
Example:
Virgin is a producer of cooking oil from coconut and corn. Previously exempt
from the value-added tax, he became subject to the value-added tax on
January 1, 2010. For January 2010, with sales, value-added tax not included, of
P700,000, he had the following other data for the month:
Inventory, January 1, 2010: NRV Cost
Corn and coconut purchased
from farmers P120,000 P100,000
Packaging materials purchased
from VAT suppliers 24,640 22,400
Supplies purchased from VAT
suppliers 11,200 13,440
Purchases during the month of coconut
and corn from farmers 330,000
Purchases during the month from VAT suppliers:
Packaging materials 56,000
Supplies 16,800
The value-added tax payable for the month is:
Sources of Input VAT
Standard Input VAT (Sale to Government)
The sale to Government or its political subdivision by VAT-
registered person shall be subject to 12% VAT, provided
that:
The government shall withhold 5% final withholding
VAT upon payment to the VAT registered person;
The VAT-registered person may claim a Standard Input
VAT of 7% against its output VAT from the sale to
government. The Actual Input VAT attributable to sales
of goods and services to the government shall not be
credited against the Output VAT arising from sales to
non-government entities.

501
Example:
A taxpayer, engaged in processing and selling of sardines and mackerel, is
registered under the VAT system of January 1, 2014. His records during the
month show:
Value of inventory as of December 31, 2013,
Purchased from VAT-registered persons P 370,000
VAT paid on inventory as of December 31, 2013 7,500
Value of inventory as of December 31, 2013
Purchased from non-VAT persons 200,000
Gross Cash Sales, net of VAT 340,000
Gross Credit Sales, inclusive of VAT 250,000
Export Sales of Sardines 500,000
Purchases of Raw sardines and mackerel used in the process 150,000
Imported Equipment from Germany on January 5, 2014
Cost, exclusive of VAT 1,100,000
Excise Taxes and Custom Duties 70,000
Useful Years 5 and a half year
Purchases of VAT-exempt goods 120,000
OTHER
PERCENTAGE
TAXES
Overview
To compliment the imposition of VAT, percentage taxes are
imposed:
1.If the gross sales or receipts of a non-VAT taxpayer
engaged in selling goods and services does not exceed P
1,919,500, and
2.If the taxpayer does not register himself under VAT
system
3.If the same non-VAT taxpayer breached the limit, he shall
be taxed at 12% even if not registered under VAT system.

His gross sales or receipts shall be subject to 3%


percentage tax. The tax is an expense to the taxpayer,
Return and Payment of Other
Percentage Taxes
General rule: Every person liable to pay
percentage taxes shall file a monthly
return of the amount of his gross sales,
receipts or earnings and pay the tax
thereon within twenty (20) days after the
end of each taxable month.
Return and Payment of Other
Percentage Taxes
• The taxpayer may file a separate return for each
branch or place of business, or a consolidated
return for all branches or places of business with
the authorized agent bank, Revenue District
Officer, Collection Agent or duly authorized
Treasurer of the City or Municipality where said
business or principal place of business is
located, as the case maybe.
Return and Payment of Other
Percentage Taxes
Exceptions:
• The tax on overseas dispatch, message or
conversation originating from the
Philippines shall be paid by the person
rendering the service within twenty (20)
days after the end of each quarter.
• Amusement taxes shall be paid by the
proprietor, lessee, operator or any party
liable within twenty (20) days after the
end of each quarter.
Return and Payment of Other
Percentage Taxes
• The tax on winnings shall be deducted and
withheld by the operator, manager or person in
charge of the horse races and remitted to the
Bureau of Internal Revenue within twenty (20)
days from the date the tax was deducted and
withheld.
• The stock transaction tax of 1/2 of 1%, shall be
collected by the stock broker and remitted to the
Bureau of Internal Revenue within five (5)
banking days from the date of collection.
Return and Payment of Other
Percentage Taxes
• The stock transaction tax of 4%, 2% and 1%, in
case of primary offering, shall be paid by the
corporation within thirty (30) days from the date of
listing of the shares of stock in the local stock
exchange. In case of secondary offering, the tax
shall be collected by the stockbroker and remitted to
the Bureau of Internal Revenue within five (5)
banking days from the date of collection.
• Any person retiring from a business subject to
percentage tax shall notify the nearest internal
revenue officer, file his return and pay the tax due
thereon within twenty (20) days after closing his
business.
Other Percentage Taxes
• OPT for VAT-Exempt Persons (3%)
• Domestic Carriers and Keepers of Garage
(3% of actual receipts or MQR)
• International Air Carrier (Exempt, 3% or VAT)
• Franchises
– Gas and Water (2%)
– Radio and Television Broadcasting (3% or 12%)
– PAGCOR 5% of gross receipts from gaming
operations (RMC 33 – 2013)
Other Percentage Taxes
• Overseas calls, dispatch, messages or
conversations, except DING (10%)
– Diplomatic Services by foreign persons
– International Organizations
– News Services
– Government
• Gross Receipts of Banks and Non-Banks
performing banking and pawnshops (5%,
1%, 0% or 7%)
Other Percentage Taxes
• Life Insurance
– Related Income - premiums(2%)
– Unrelated Income - management fees, rent,
etc. (12%)
– Investment Income ( Exempt or 7%)
• Agents of Foreign Insurance (4%), if
directly to Foreign Company (2%)
Other Percentage Taxes
• Amusement Taxes (Tax on Proprietor)
– Jai-alai and Race Tracts (30%)
– Cabarets, night or day clubs (18%)
– Cockpits (18%)
– Professional Basketball games (15%)
– Boxing Exhibitions (10%), except for
World or Oriental Championships,
provided that:
• One contender is a Filipino; and
• the promoter is a Filipino or if corporation, 60% of
such is owned by Filipinos
Other Percentage Taxes
• Horce Race Winnings (Tax on Operators)
– Owners of winning horse (10%)
– Wagerers
• Winnings or dividends (Winnings less the cost of
winning ticket) - 10%
• Double, Forcastiquinnella, Trifecta - 4%
Other Percentage Taxes
• Issuance of Shares of Stock through Initial
Public Offering (IPO)
IPO to Outstanding Shares after the IPO
– Up to 25% 4% of the GP
– Over 25% to 33.33% 2% of the GP
– Over 33.33% 1% of the GP
Other Percentage Taxes
• Sales of Stocks in Local Stock Exchange
(1/2 of 1%)
Example:
Matuti operates a cockpit. Inside the cockpit, he also operates a
restaurant. Data for a particular quarter follow:
Gross receipts:
Cockpit operation P 500,000
Restaurant operation:
Sale of food 100,000
Sale of liquor 150,000

The amusement tax due from Matuti is: _________________


Example:
Gloria invested P 500,000 in the shares
of stock of Tabako Corp. The
corporation’s shares are listed and are
traded in the local stock exchange.
Gloria sold the shares for P350,000
through the local stock exchange. The
percentage tax on the sale is:
_______________

518
Example:
As franchisee, it had the following data on revenues and receivables, taxes
not included:

Receivables
Quarter ended 3/31/2009 operations: Revenues Beginning End
Covered by the franchise P 2,000,000 P 300,000 P 400,000
Not covered by the franchise 600,000 80,000

The business taxes, before any tax credit, if generating and selling
electricity: _______________
The business taxes, before any tax credit, if generating and selling gas and
water utilities: _____________

519
Example:
Marino is an owner of a small variety store. His gross
sales in any one year do not exceed P1,500,000. He is
not VAT-registered. The following data are taken from the
books of the variety store for the quarter ending March 31,
2009:
Merchandise inventory,
December 31, 2008 P 10,000
Gross sales 45,000
Purchases from VAT-registered supplier 38,500

The percentage tax due is:___________________

520
COMMUNITY
TAX
521
Overview

• A community tax is a tax levied by cities


and municipalities on qualified individuals
and juridical persons who are domiciled in
the Philippines.
Community Tax: Individual
• Every inhabitant of the Philippines who are at
least 18 years old are required to pay
community tax when:
– He has been regularly employed on a wage or
salary basis for at least thirty (30) consecutive
working days during any calendar year;
– He has been engaged in business or occupation;
– He owns real property with an aggregate value of
P1,000.00 or more; or
– He is required by law to file an income tax return.
Community Tax: Individual
However:
“No person shall be imprisoned for
debt or nonpayment of poll tax.”
Community Tax: Individual
Amount Applicable:
• Basic Tax – P5.00
• Additional Tax – P1.00 for every P1,000.00 of income
regardless of whether from business, exercise of
profession or from property.
• Maximum Additional Tax is only limited to P5,000.00.
• In the case of husband and wife, the additional tax shall
be based upon the total property owned by them and the
total gross receipts or earnings derived by them.
Community Tax: Corporate
• Every corporation no matter how created or organized,
whether domestic or resident foreign, engaged in or doing
business in the Philippines.

Amount Applicable:
• Basic Tax - P500.00
• Additional Tax:
– P2.00 for every every P5,000.00 worth of real property in the
Philippines owned by it during the preceding year based on the
valuation used for the payment of the real property tax under
existing laws, found in the assessment rolls of the city or
municipality where the real property is situated.
– The LGU described tha basis for additional community for real
property owned as the valuation used for the payment of real
property tax found in the assessment rolls of the municipality or city
where the real property is situated.
•    
Community Tax: Corporate
• P2.00 for every P5,000 of gross receipts or earnings
derived by it from its business in the Philippines during the
preceding year.

• Maximum Additional Tax is only limited to P10,000.00.

• Dividends received by a corporation from another


corporation shall, for the purpose of the additional tax, be
considered as part of the gross receipts or earnings of said
corporation.

• Exemptions from Community Tax:


– Diplomatic and consular representatives
– Transient visitors when their stay in the Philippines does not
exceed three months.
Optional Community Tax
• One peso (P1.00) for an individual or
corporation which is exempt from
community tax but who desires to pay a
community tax for whatever legal
purposes they may desire to make use of
it.
  
Payment of the Community Tax
• The following rules are applicable when to
pay community tax:
– If the individual or coporation is liable to pay
community tax as of January 1 of the year, the the
community tax should be paid not later than the last
day of February of the same year.

– If the taxpayer becomes liable after end of February


and any day thereafter up to March 31 of the year,
then the community tax shall be paid within twenty
days from the date the taxpayer becomes liable.
Payment of the Community Tax
– If the taxpayer becomes liable after March 31 of the
year and any day thereafter up to June 30, then the
community tax shall be paid on the date the taxpayer
becomes liable.

– If the taxpayer becomes liable after June 30 of the


year, then for the current year the taxpayer is exempt,
the payment shall be on or before February 28 of the
following year.

– Late payment of community tax is subject to additional


25% surcharge on the basic amount of tax, or 50% if
due to willful neglect; and 2% interest per month from
the last day of the required date of payment.
INTERESTS,
PENALTIES AND
SURCHARGES
Overview: Civil Penalties
Civil Penalties are as follow:
1. Interests
2. Surcharges
a. Simple Neglect
b. Willfull or Fraudulent
Interest
In general, there shall be assessed and collected on any unpaid
amount of tax, interest at the rate of 20% per annum, or such
higher rate as may be prescribed by rules and regulations, from
the date prescribed for payment until the amount is fully paid.

1. Deficiency Interest – Any deficiency in the tax due, as the term is


defined in the Tax Code, shall be subject to the interest at the rate
of 20% per annum, which interest shall be assessed and collected
from the date prescribed for its payment until the full payment
thereof.
Interest
2. Delinquency Interest – Delinquency interest in case of
failure to pay:
1. The amount of the tax due on any return required to be
filed, or
2. The amount of the 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
CIR, there shall be assessed and collected on the unpaid
amount interest at the rate of 20% per annum until the
amount is fully paid, which interest shall form part of the
tax.
Interest
3. Interest on extended payment – If any person
required to pay the tax is qualified and elects to pay the
tax on installment under the provisions of the Tax Code,
but fails to pay the tax or any installment thereof, or any
part of such amount of installment on or before the date
prescribed for its payment, or where the CIR has
authorized an extension of time within which to pay a tax
or a deficiency tax or any part thereof, there shall be
assessed and collected interest at the rate of 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
Example:
Taxpayer was assessed deficiency income tax of
P200, 000 payable on or before June 15, 2012.
Within the period however, he was only able to
pay P100, 000 and the balance only on August
30, 2012. The total tax due that he is liable
should be:
Example:
X filed his ITR and paid the tax shown thereon in
full on April 15, 2011. On April 15, 2012, X
received an assessment notice and demand from
BIR to pay a deficiency tax of P20, 000 excluding
surcharge and interest on or before April 30,
2012. How much is the total amount of tax
payable as shown in the assessment notice if
BIR found out fraud?

537
Surcharges
1. Simple Neglect (25%)
Failure to file any return and pay the tax due thereon.
If the return is not filed with the proper internal revenue
officer.
Failure to pay on time the deficiency tax shown in the
notice of assessment.
Failure to pay the full or part of the amount of tax shown on
any return required to be filed, or the full amount of tax due
for which no return is required to be filed, on or before the
date prescribed for its payment.

538
Surcharges
2. Willful Neglect (50%)
Willful neglect to file the return on time.
False or fraudulent return is willfully filed (failure to report
sales, receipts or income in an amount exceeding 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 under-declaration of
sales, receipts or income or for substantial overstatement
of deductions, thus making the return filed false or
fraudulent).
Example:
Miramar’s income tax for 2010 was P75, 000,
as shown in her income tax return (ITR). She
filed her return only on July 15, 2012 and paid
the total amount upon filing the return. The total
amount payable assuming there was fraud
should be:
Example:
Mirant Corporation filed its final adjustment income tax return for
calendar year 2007 with a taxable income of P500,000. At the
applicable income tax rate of 35% for the year 2007, its income tax
amounted to P175,000. However, upon investigation, it was disclosed
that its income tax return was false or fraudulent because it did not
report a taxable income amounting to another P500,000. On its taxable
income of P1,000,000, per investigation, the income tax due is
P350,000. Deducting its payment per return filed, the deficiency,
excluding penalties, amounted to P175,000. It was duly informed of
this finding through a Preliminary Assessment Notice. Failing to protest
on time against the preliminary assessment notice, a formal letter of
demand and assessment notice was issued on May 31, 2009 calling
for payment of the deficiency income tax on or before June 30, 2009.
The total amount due per the assessment notice is:

541
TAX
REMEDIES
542
Overview
The basic purpose of remedies is to maintain
equilibrium between the interest of the state and the
taxpayer.
Remedies can be either administrative or judicial.
Administrative remedies involves assessment and
collection, protest and refund.
Judicial remedies may either be a civil suit or
criminal suit, appeal to CTA, injunction/ temporary
restraining order, or criminal suit against erring BIR
officials.
Overview
Remedies to the Common Remedies to the
State Remedies Taxpayer
1. ADMINISTRATIVE LEVEL (BIR)
Assessment Compromise Protest
Collection Abatement Refund
2. JUDICIAL LEVEL
Civil Suit/Action Appeal to CTA
Criminal Suit/ TRO/ Injunction
Action
Criminal Suit
against erring BIR
officials
Remedies to the State: Administrative
Level – Assessment
It is a finding by the taxing authority that the taxpayer has
not paid the correct taxes.
An assessment contains not only a computation of tax
liabilities but also a demand for payment within a
prescribed period. It also signals the time when penalties
and interests begin to accrue against the taxpayer.
Time of assessment (statute of limitation or prescriptive
period) – national internal revenue taxes shall be
assessed within 3 years:
After the due date for the filing of the return (a return filed before
the due date shall be considered as filed on such due date);
From the day the return was filed, where the return is filed beyond
the due date; and
From the filing of the amended return, if the return was amended
substantially.
Remedies to the State:
Administrative Level – Assessment
EXCEPTIONS - The 3-year prescriptive period of assessment
is extended if:
False or fraudulent return with intent to evade the tax was filed - the
assessment may be made within 10 years from the discovery of
the falsity or fraud;
No return is filed - assessment may be made within 10 years after
the discovery of the failure or omission to file the return; and
Before the expiration of the 3-year prescriptive period for assessment
of the tax, both the taxpayer and the CIR have agreed in writing
(waiver) to its assessment after such time, the tax may be
assessed within the period agreed upon. The period so agreed upon
may be extended by subsequent written agreement made before the
expiration of the period previously agreed upon.
Remedies to the State:
Administrative Level – Assessment
If the government tries to assess a tax beyond
the prescriptive periods, the taxpayer may claim
defense of prescription of the right of the
government to assess. The defense of
prescription, however, is not jurisdictional and
must be raised seasonably, otherwise it is
deemed waived.
If the return is not false nor
fraudulent:
Collection by Judicial proceedings only

Date return was filed, or the last day


required by law for filing, if filed
before the last day.

3 years

Last day to collect, by


judicial proceedings, if
there is no assessment
If the return is not false
nor fraudulent:
Assessment followed by Collection by Summary or Judicial proceeding
Date return was filed, or the last day
required by law for filing, if filed
before the last day.

3 years 5 years

Last day to assess


Last day to collect by summary (levy
or distraint) or judicial proceedings
Example:

Anita filed her annual income tax return


on April 3, 2015 for her income last
2014. Until what day can the Bureau of
Internal Revenue make its assessment?
Example:
Anita filed her annual income tax return
on May 3, 2015 for her income last 2014.
Until what day can the Bureau of Internal
Revenue make a collection if there
should be an assessment?

551
If the return is false or fraudulent:
Collection by Judicial proceedings only
Date of discovery of the falsity,
fraud or omission

10 years

Last day to collect, by judicial


proceedings, if there is no assessment

552
If the return is false or fraudulent:
Assessment followed by Collection by Summary or
Judicial proceeding
Date return was filed, or the last day required by law for
filing, if filed before the last day.

10 years 5 years

Last day to assess

Last day to collect by


summary (levy or distraint) or
judicial proceedings
Example:
XYZ Corporation filed its annual income
tax return on April 10, 2015. On October 3,
2016, it was found out that the return filed
was fraudulent. Until what day can the
Bureau of Internal Revenue make a
collection?
Example:
XYZ Corporation filed its annual income
tax return on April 10, 2015. On October
3, 2016, it was found out that the return
filed was fraudulent. Until what day can
the Bureau of Internal Revenue make a
collection if there should be an
assessment?

555
Pre-Assessment Notice
The PAN is not required in the following cases:
a. When the deficiency tax is a result of mathematical errors in the
computations appearing on the face of the return;
b. When a discrepancy has been determined between the tax
withheld and the amount actually remitted by the withholding
agent;
c. When a taxpayer who opted to claim tax refund or credit of
excess creditable withholding tax for a taxable period was
determined to have carried over and automatically applied the
same amount against the estimated tax liabilities for the taxable
quarter or quarters of the succeeding taxable years;
d. When the excise tax due on excisable articles has not been paid;
e. When an article locally purchased or imported by an exempt
person has been sold, traded or transferred to non-exempt
persons.

556
Remedies to the State:
Administrative Level – Assessment
How are tax audits/investigations initiated?
1. Issuance of Electronic Letter of Authority (eLA), Tax Verfication
Notice (TVN) and/or Letter of Notice (LN) is considered as a
“notice of audit or investigation” that prohibits amendment to any
return covering period referred to in the eLA, TVN and/or LN
2. RMO No. 62 – 2010 discontinued the manual issuance of Letter
of Authority (LA) and TVNs
3. There must be a grant of authority before any revenue officer
can conduct an examination or issue an assessment. Thus, the
BIR cannot extend its examination or assessment beyond the
period covered by the Letter of Authority (LA).
LA should cover a taxable period not exceeding one taxable
year. The practice of issuing an LA covering audit of
“unverified prior year’s” is prohibited.
Remedies to the State:
Administrative Level – Assessment
Place of Examination
1. The primary place of examination is the
taxpayer’s place of business.
2. The secondary place of examination is at
the Office of the BIR

Only duly authorized Revenue Office can audit


Remedies to the State:
Administrative Level – Assessment
Submission of documents
Use of best evidence available when:
1.The reports or records of the taxpayer are not available (i.e. lost
or destroyed; unreasonably refuses to submit records); or
2.The reports and records submitted by the taxpayer are
determined to be false, incomplete or erroneous or cannot be
understood. [Sec. 6(B), Tax Code]
End of Audit/Investigation
Preparation of report of investigation showing preliminary findings
Notice of Informal Conference – RR No. 18 -2013 removed the
requirement for the issuance of a letter of informal conference
before a Preliminary Assessment Notice (PAN) is issued.
Remedies to the State:
Administrative Level – Collection
Collection means enforcing the payment of tax. The
following are the administrative collection remedies of the
government:
I. Summary proceedings
1. Distraint (actual or constructive)
2. Levy
3. Tax lien
4. Forfeiture
5. Suspension of business operations in violation of VAT
6. Enforcement of an administrative fine
II. Judicial proceedings
Remedies to the State:
Administrative Level – Collection
Time of collection (statute of limitation or prescriptive period):
Return filed was not false or fraudulent
Collection with prior assessment - within 5 years from the date of assessment,
either by summary proceedings of distraint and levy or by judicial
proceedings.
Collection without prior assessment - within 3 years from the date of filing the
return or from the last day required by law for filing, if the return was filed on
or before such last day, by judicial proceedings only.
Return filed was false or fraudulent with intent to evade the tax or no
return is filed.
Collection with prior assessment - within 5 years from the date of assessment,
either by summary proceedings of distraint and levy or judicial proceedings.
Collection without prior assessment - within 10 years after the discovery of the
falsity, fraud or omission to file the return, by judicial proceedings only.
Remedies to the State:
Administrative Level – Collection
Any internal revenue tax, which has been assessed within
the period agreed upon by the taxpayer and the CIR, 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 years prescriptive period to collect. The period so
agreed upon may e extended by subsequent written
agreement made before the expiration of the period
previously agreed upon.
If the government tries to collect by any of the above
remedies beyond the prescriptive periods, the taxpayer may
claim defense of prescription of the right of the government
to collect. The defense of prescription, however, is not
jurisdictional and must be raised seasonably, otherwise it is
deemed waived
Remedies to the State:
Administrative Level – Collection
Distraint: seizure (taking) by the government of
personal property (tangible of intangible)
to enforce payment of taxes.
ACTUAL DISTRAINT CONSTRUCTIVE DISTRAINT
Made only on the property of a Made on the property of any
delinquent taxpayer taxpayer, whether delinquent
or not.
There is taking of possession. The taxpayer is merely
prohibited from disposing of his
property.
Remedies to the State:
Administrative Level – Collection
Levy: seizure (taking) by the government of real property
to enforce payment of taxes.
DISTRAINT LEVY
Personal Property Real Property

Forfeiture by the Forfeiture is authorized


government is not provided.

The taxpayer is not given The right of redemption is


the right of redemption with granted in case of real
respect to the distrained property levied upon and
personal property sold or forfeited to the
government.
Levy vs. Garnishment
Levy Garnishment
1. As to subject matter Real property owned by Personal property owned
and in possession of the by the taxpayer but in
taxpayer. the possession of a
third party.

2. As to disposition for Forfeited in favor of the Purchased by the


want of bidders or bids government then sold to government then resold
inadequate to satisfy tax meet the deficiency. to meet the deficiency.
deficiency

3. As to advertisement for Advertisement once a No advertisement is


sale week for three weeks. required.
Remedies to the State:
Administrative Level – Collection
c. Tax Lien: a legal claim or charge on property, either
real or personal, established by law as security in
default of the payment of taxes. The extent of lien shall
be the tax together with the interests, penalties, and
costs that may accrue. The lien attaches not only from
the service of warrant of distraint but from the time the
tax become due and payable.
Remedies to the State:
Administrative Level – Collection
d. Forfeiture: If there is no bidder in the
public sale or if the amount of the highest
bid is insufficient to pay taxes, penalties
and costs, the real property shall be
forfeited to the Government. The effect
is to transfer the title of the specific
thing from the owner to the Government.
Run After Tax Evaders (RATE)

It is a program initiated by the DOF and BIR to


investigate and prosecute individuals and entities
engaged in tax evasion and other criminal
violations of the National Internal Revenue Code
of 1997
The objectives of the RATE program are:
1. generate the maximum deterrent effect on the
taxpaying public by impressing the fact that tax
evasion is a crime and violators will be caught and
punished
2. enhance voluntary compliance among taxpayers
3. promote confidence of the public in the tax system.
Run After Tax Evaders
(RATE)
Background
In March 2005, the BIR and the DOF launched the Run After
Tax Evaders (RATE) Program.
Since March 2005, 87 complaints of tax evasion have been
submitted to the Department of Justice (DOJ) for preliminary
investigation under the RATE Program, including those filed
against actors, businessmen, public officials and other high
profile personalities.
The BIR registered a record income tax collection in 15 April
2005 of P21.4 Billion or a 43.6% increase from the P14.8
Billion collected compared to the previous year.
But almost 5 years after the program’s launch, only 6 out of
the 87 complaints for tax evasion submitted to the DOJ
progressed to the filing of criminal cases in court.
Run After Tax Evaders (RATE)
Fraudulent activities or criminal tax violations
covered by the RATE Program
Offenses relating to income:
1. Failure to file tax returns
2. Failure to pay taxes
3. Deliberate underdeclaration of income by more than 30% of
that declared per return (substantial underdeclaration)
4. Hiding or transferring assets or income
5. Non-remittance of withholding taxes
Offenses relating to deductions:
1. Deliberate overstatement of amountof deductions by more
than 30% of actual deductions (substantial overstatement
of deductions)
2. Claiming personal expenses as business expenses
3. Claiming false deductions
Run After Tax Evaders (RATE)
Other violations:
1. Use of fake Certificate Authorizing Registration
(CAR), Tax Clearance Certificate (TCC) or other
accountable forms.
2. Failure to register with the BIR
3. Keeping more than one (1) set of books of
accounts
4. Making false entries in books and records
Run After The Smugglers (RATS)
In 2005, the Bureau of Customs launched an aggressive
battle against smugglers who pose serious and direct
threat to the national economy by depriving the
government of its much- needed revenues.

To boost its collection, the BOC introduced the Run After


the Smugglers (RATS) Program which aimed to file
customs cases against high profile smugglers.

It is designed not only to collect taxes but also to ensure


that importers comply with existing laws and regulations on
tariff and customs which complements the post-audit
power of the BOC under RA 9135, which took effect on
June 2, 2001.
Oplan Kandado
On January 23, 2009, the BIR issued Revenue
Memorandum Order No. 3 – 2009 to implement a
nationwide “Oplan Kandado” Program
Under the program, business operations of non-compliant
taxpayers will be suspended and their establishments will
be temporarily closed if they will be found to have violated
certain tax laws.
The programs aims to intensify the Bureau’s enforcement
operations through strict imposition of prescribed
administrative sanctions for non-compliance with the basic
tax requirements.
Oplan Kandado
Grounds for suspension:
Failure to issue receipts or invoices by a VAT-
registered or registrable taxpayer;
Failure to file a VAT return;
Understatement of taxable sales or receipts by
30% or more of the correct amount thereof in the
case of a VAT-registered or registrable taxpayer;
Failure to register
Oplan Kandado
The closure of the business establishment shall last for a
period of not less than five (5) days, and shall be in force
until the violation is rectified by the concerned taxpayer.
The suspension and temporary closure of business shall
not preclude the BIR from filing the appropriate charges
under the RATE Program of the Bureau, if evidence so
warrants the taxpayer concerned or responsible office of
the corporations.
Oplan Kandado
The closure order shall only be lifted by the BIR when there
has been:
1. A subsequent filing or amendment of returns with the
payment of the tax inclusive of statutory penalties;
Subsequent registration with the payment of the
corresponding compromise penalties
Payment of deficiency taxes inclusive of penalties
corresponding to the sales where no invoices/receipts have
been issued; and
Payment of deficiency taxes inclusive of penalties
corresponding to the understatement of taxable sales or
receipts.
Summary of Remedies to
Government
• Administrative Remedies
– Assessment
– Collection
• Distraint (Actual or Constructive)
• Levy
• Garnishment
• Forfeiture
• Tax Lien
• RATE, RATS and OPlan Kandado
• Judicial Remedies
Remedies to the Taxpayer:
Administrative Level – Protest
Protest is a challenge against assessment.
The filing of a petition for reconsideration or
reinvestigation shall be made within 30 days
from the receipt of the assessment with the CIR.
Within 60 therefrom, all relevant supporting
documents should have been submitted,
otherwise the assessment shall become final.
Protesting an Assessment
Notice of Informal
Conference
Assessment and
Respond Demand
Protest the assessment
Pre-assessment
Notice Respond Submit supporting
15 days 15 days 30 days 60 days documents

Decision of the CTA

Decision of the BIR Decision of the CTA


Supporting Appeal to CTA Appeal to SC
Documents 30 days 15 days

submitted

Appeal to CTA Decision of the CTA


Appeal to SC

180 days, no decision of the BIR 30 days 15 days


Example:
Date assessment was received - February 8, 2009.
Petition for reconsideration was filed with the Bureau of
Internal Revenue of February 18, 2009. Documents
supporting the petition were filed with the Bureau of
Internal Revenue on February 28, 2009. Decision of
denial of the petition was received on March 11, 2009.
Second request for reconsideration was filed with the
Bureau of Internal Revenue on March 21, 2009. Date
revised assessment was received was April 2, 2009. Last
day to appeal to the Court of Tax Appeals:
Example:
Assessment received - January 5, 2015. Petition for
reconsideration filed with the Bureau of Internal Revenue -
February 1, 2015. Documents supporting the petition filed
by the taxpayer - February 7, 2015. Decision of the
Bureau of Internal Revenue denying the petition was
received - March 22, 2015. Second request for
reconsideration filed with the Bureau of Internal Revenue -
March 30, 2015. Decision of denial of second request for
reconsideration was received - April 12, 2009. Last day to
appeal to the Court of Tax Appeals:

581
Example:
Date assessment was received - January 2, 2009.
Petition for reconsideration was filed with the
Bureau of Internal Revenue - January 12, 2009.
Documents supporting the petition for
reconsideration was filed with the Bureau of
Internal Revenue - January 22, 2009. No decision
on the protest by July 12, 2009. Last day to
appeal to the Court of Tax Appeals:

582
Example:
On January 20, 2008, a taxpayer filed a protest on/request
for reconsideration of an assessment of a tax. He received
a final decision of the Bureau of Internal Revenue on the
protest on April 30, 2008. He failed to appeal to the
decision to the Court of Tax Appeals. The Bureau of
Internal Revenue was collecting the tax by summary
proceedings on June 20, 2013. The taxpayer was
opposing the collection of the tax on the ground of
prescription of the government to collect. When shall be
the last day to collect?

583
Remedies to the Taxpayer:
Administrative – Refund
A taxpayer may file for tax refund in case
of excessive or erroneous payment of a
tax with the BIR:
a. Tax is collected erroneously or illegally.
b. Penalty is collected without authority.
c. Sum collected is excessive

584
Remedies to the Taxpayer:
Administrative – Refund
The claims must be in writing.
It must be filed with the CIR within 2
years after the payment of the tax or
penalty.
There must be a proof of payment.
Remedies to the Taxpayer:
Administrative – Refund
Tax credit or refund
a. No credit or refund of taxes or penalties shall be allowed
unless the taxpayer files in writing with the CIR a claim for
credit or refund within 2 years after the payment of the tax
or penalty.
b. A return filed showing an overpayment shall be considered
as a written claim for credit or refund.
c. A Tax Credit Certificate (TCC) validly issued under the
provisions of the Tax Code may be applied against any
internal revenue tax (except withholding taxes) for which the
taxpayer is directly liable.
Refund for Tax Illegally or Erroneously Collected
(Illustrative Summary)
Case 1:
Date of Claim for refund Denial Last to appeal to CTA
Payment filed with BIR received

30
days

2 years
Refund for Tax Illegally or Erroneously Collected
(Illustrative Summary)
Case 2:
Date of Claim for refund
Denial
Payment filed with BIR
received

30 days

Last day to appeal to


the CTA
Example:
Date of tax erroneously paid June 10, 2013
Date of claim for refund was filed
with BIR March 3, 2015
Date of BIR decision of denial was
received April 5, 2015

Last day to appeal to the Court of Tax Appeals is on:


Example:
Date the national internal revenue tax was
erroneously paid - April 10, 2007. Claim for
refund was filed with the Bureau of Internal
Revenue - March 10, 2008. Date decision of
denial of refund was received – March 21, 2009.
Last day to appeal to the Court of Tax Appeals:

590
Forfeiture of Refund or Tax
Credit
Forfeiture of refund - a refund check or warrant, which
shall remain unclaimed or uncashed within 5 years from
the date the said check or warrant was mailed or
delivered, shall be forfeited in favor of the government and
the amount shall revert to the General Fund.
Forfeiture of tax credit - a tax credit issued in accordance
with the provisions of the Tax Code, which shall remain
unutilized after 5 years from the date of issue shall,
unless revalidated, be considered invalid, and shall not
be allowed as payment for internal revenue tax liabilities of
the taxpayer, and the amount covered by the certificate
shall revert to the General Fund.
591
Remedies to the State: Judicial
Remedies – Civil and Criminal
Action
1. Civil action is resorted to when a tax liability becomes collectible,
that is, the assessment becomes final and unappealable, or the
decision of the CIR has become final, executory, and demandable.
2. Criminal action, like civil action, cannot be instituted without the
approval of the CIR. It is resorted to not only for collection of taxes
but also for enforcement of statutory penalties of all sorts. The
judgment in the criminal case shall not only impose the penalty but
shall also order the payment of the taxes.
3. The extinction of a taxpayer’s criminal liability does not necessarily
result in the extinguishment of his civil liability. Conversely, the
subsequent satisfaction of a tax liability will not operate to
extinguish the criminal liability.
Remedies to the Taxpayer: Judicial
Remedies – Civil Action

a. Appeal to the CTA within 30 days from the


receipt of decision on the protest or from the
lapse of 180 days due to inaction of the
Commissioner, whichever comes earlier.
b. Action for damages against a revenue
officer by reason of any act done in the
performance of official duty
Remedies to the Taxpayer: Judicial
Remedies – Criminal Action

a. Filing of criminal complaint against


erring BIR officials and employees.
b. Injunction, when the CTA in its
opinion the collection by the CIR may
jeopardize the taxpayer.
Remedies to the Taxpayer: Judicial
Remedies – Criminal Action

General Rule: No action shall suspend the collection,


payment, levy or distraint, and/or sale of any property of the
taxpayer.
Exception: The CTA is empowered to suspend the collection
of internal revenue taxes and custom duties only when
there was a:
a.Showing that collection of the tax liability may jeopardize the
interest of the government and/or the taxpayer;
b.Deposit of the amount claimed or file a surety bond for not
more than twice the amount of tax with the Court when required;
and
c.Showing by the taxpayer that appeal is not frivolous nor
dilatory
Remedies to Both Government
and Taxpayer: Compromise
Mutual concession between the taxpayer and the
government in setting a tax deficiency amicably.
What cases may be compromised?
a. Delinquent accounts
b. Cases under administrative protests
c. Civil tax cases being disputed before the courts
d. Collection cases filed in courts
e. Criminal violation, other than those already filed in court or
those involving criminal tax refunds.
Remedies to Both Government
and Taxpayer: Compromise
What cannot be compromised?
a. Criminal violation of NIRC already filed in court.
b. Cases involving fraud.

What are the grounds for compromise?


a. A reasonable doubt as to the validity of the claim
against the taxpayer exists; or
b. The financial position of the taxpayer demonstrate a
clear inability to pay the assessed tax
Remedies to Both Government
and Taxpayer: Compromise
Prescribed minimum compromise rates:
a. Financial incapacity - 10% of the basic assessed tax
b. Other cases - 40% of the basic assessed tax

Compromised settlement subject to approval of the Evaluation


Board, composed of the CIR and the 4 Deputy
Commissioners:
a. Where the basic tax exceeds P1,000,000, or
b. Where the settlement offered is less than the prescribed minimum
rates above.
Remedies to Both Government and
Taxpayer: Abatement
A tax may be cancelled or obliterated upon the
authority of the BIR under certain circumstances.

What are the grounds for abatement?


a. The tax or any portion thereof appears to be unjustly
or excessively assessed;
b. The administration and collection costs involved do
not justify the collection of the amount due; and
c. The Commissioner may also, even without claim
therefore, refund or credit any tax where on the face
of the return upon which payment was made such
payment appears clearly to have been erroneously
paid.
End of
Discussion