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TABLE OF CONTENTS O.4. POWER TO TAX INVOLVES POWER TO
DESTROY ............................................................ 27
TAXATION 1 O.5. ESCAPE FROM TAXATION ......................... 27

I. GENERAL PRINCIPLES OF TAXATION .... 2 O.6. EXEMPTION FROM TAXATION .................. 29

A. DEFINITION, CONCEPT AND PURPOSE OF O.7. DOCTRINE OF EQUITABLE RECOUPMENT 31


TAXATION ......................................................... 2 O.8. COMPENSATION AND SET-OFF ................. 31
A.1. TAXATION .......................................................2 O.9. COMPROMISE AND TAX AMNESTY ........... 31
A.2. PURPOSE .......................................................2 O.10. TAXPAYER’S SUIT ..................................... 32
B. NATURE AND CHARACTERISTICS OF II. NATIONAL TAXATION ......................... 34
TAXATION ......................................................... 3
A. ORGANIZATION AND FUNCTIONS OF THE
B.1 NATURE ...........................................................3 BUREAU OF INTERNAL REVENUE ................ 34
B.2 CHARACTERISTICS .........................................3 A.1. RULE-MAKING AUTHORITY OF THE
C. POWER OF TAXATION AS DISTINGUISHED SECRETARY OF FINANCE .................................. 34
FROM POLICE POWER AND EMINENT DOMAIN A.2. JURISDICTION, POWER AND FUNCTIONS OF
........................................................................... 4 THE COMMISSIONER OF INTERNAL REVENUE35

E. PRINCIPLES OF A SOUND TAX SYSTEM ..... 6 B. NATIONAL INTERNAL REVENUE CODE


(NIRC) OF 1997, AS AMENDED ...................... 36
F. SCOPE AND LIMITATIONS OF TAXATION ... 7
B.1. INCOME TAXATION ..................................... 36
F.1. INHERENT LIMITATIONS................................ 7
B.2. INCOME ....................................................... 43
F.2. CONSTITUTIONAL LIMITATIONS ................. 9
B.3. GROSS INCOME .......................................... 47
G. STAGES OR ASPECTS OF TAXATION .........15
B.4. DEDUCTIONS FROM GROSS INCOME ...... 70
H. DEFINITION, NATURE AND
CHARACTERISTICS OF TAXES ........................16 C. INCOME TAX ON INDIVIDUALS ................. 88

H.1 TAXES ............................................................ 16 C.1. INCOME TAX ON RESIDENT CITIZENS, NON-


RESIDENT CITIZENS AND RESIDENT ALIENS .. 88
I. REQUISITES OF A VALID TAX ......................16
C.2. INCOME TAX ON NON-RESIDENT ALIENS
J. TAX AS DISTINGUISHED FROM OTHER ENGAGED IN TRADE OR BUSINESS ................. 94
FORMS OF EXACTIONS ...................................16 C.3. INCOME TAX ON NON-RESIDENT ALIENS
K. KINDS OF TAXES .........................................18 NOT ENGAGED IN TRADE OR BUSINESS ......... 95

L. SITUS OF TAXATION ................................... 20 C.4. INDIVIDUAL TAXPAYERS EXEMPT FROM


INCOME TAX ....................................................... 96
M. CONSTRUCTION AND INTERPRETATION
D. INCOME TAX ON CORPORATIONS .......... 101
OF...................................................................... 21
D.1. INCOME TAX ON DOMESTIC
M.1. TAX LAWS .................................................... 21
CORPORATIONS AND RESIDENT FOREIGN
M.2. TAX EXEMPTION AND EXCLUSION ........... 21 CORPORATIONS ............................................... 101
M.3. TAX RULES AND REGULATIONS .............. 22 D.2. INCOME TAX ON NON-RESIDENT FOREIGN
M.4. PENAL PROVISIONS OF TAX LAWS...........23 CORPORATIONS .............................................. 108

M.5. NON-RETROACTIVE APPLICATION OF TAX D.3. INCOME TAX ON SPECIAL CORPORATIONS


LAWS TO TAXPAYERS ........................................23 ........................................................................... 108

N. SOURCES OF TAX LAWS ........................... 23 D.4. IMPROPERLY ACCUMULATED EARNINGS


TAX ......................................................................112
O. DOCTRINES IN TAXATION ......................... 24
D.5 EXEMPTION FROM TAX ON CORPORATIONS
O.1. PROSPECTIVITY OF TAX LAWS .................. 24 .............................................................................113
O.2. IMPRESCRIPTIBILITY OF TAXES................ 25 D.6. TAX ON GENERAL PARTNERSHIPS,
O.3. DOUBLE TAXATION.................................... 26 GENERAL PROFESSIONAL PARTNERSHIPS, CO-

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OWNERSHIPS, JOINT VENTURES AND II. DONOR’S TAX .................................... 144
CONSORTIUMS .................................................. 114
A. BASIC PRINCIPLES .................................... 144
E. FILING OF RETURNS AND PAYMENT OF
INCOME TAX .................................................. 116 B. DEFINITION................................................ 144

E.1. DEFINITION OF A TAX RETURN AND C. NATURE ..................................................... 144


INFORMATION RETURN.................................... 116 D. PURPOSE OR OBJECT .............................. 144
E.2. PERIOD TO FILE INCOME TAX RETURN OF E. REQUISITES OF VALID DONATION .......... 144
INDIVIDUALS AND CORPORATIONS ................ 116
F. TRANSFERS WHICH MAY BE CONSTITUTED
E.3. PERSONS LIABLE TO FILE INCOME TAX
RETURNS ........................................................... 117
AS DONATION ............................................... 145

E.4. WHERE TO FILE INCOME TAX RETURNS .. 118 G. TRANSFER FOR LESS THAN ADEQUATE
AND FULL CONSIDERATION ........................ 145
E.5. PENALTIES FOR NON-FILING OF RETURNS
............................................................................ 118 H. CLASSIFICATION OF DONOR ................... 145
F. WITHHOLDING OF TAXES ......................... 118 I. DETERMINATION OF GROSS GIFT
F.1. CONCEPT OF WITHHOLDING TAXES ......... 118 (INCLUDING COMPOSITION OF GROSS GIFT)
........................................................................ 146
F.2. KINDS OF WITHHOLDING TAXES .............. 119
J. VALUATION OF GIFTS MADE IN PROPERTY
........................................................................ 147
TAXATION 2 K. TAX CREDIT FOR DONOR’S TAXES PAID IN
A FOREIGN COUNTRY ...................................148
I. ESTATE TAX ......................................... 121
L. EXEMPTIONS OF GIFTS FROM DONOR’S
A. BASIC PRINCIPLES .................................... 121 TAX ................................................................. 149
B. DEFINITION ............................................... 121 M. PERSON LIABLE ....................................... 149
C. NATURE ..................................................... 121 N. TAX BASIS ................................................. 149
D. PURPOSE OR OBJECT .............................. 121 III. VALUE-ADDED TAX (VAT) .................157
E. TIME AND TRANSFER OF PROPERTIES .. 121 A. CONCEPT ................................................... 157
F. CLASSIFICATION OF DECEDENT ..............122 B. CONSTITUTIONALITY OF VAT .................. 157
F.1. CONCEPT OF RESIDENCE .......................... 122
C. CHARACTERISTICS/ELEMENTS OF A VAT-
F.2. RULE OF RECIPROCITY ............................. 123 TAXABLE TRANSACTION .............................. 157
G. GROSS ESTATE VIS-À-VIS NET ESTATE . 124 D. IMPACT OF TAX V. INCIDENT OF TAX ..... 158
H. DETERMINATION OF GROSS ESTATE AND E. TAX CREDIT METHOD ............................... 158
NET ESTATE (AND COMPOSITION) ............. 124
F. DESTINATION PRINCIPLE ......................... 159
VALUATION OF GROSS ESTATE (SEC 88) ...126
G. PERSONS LIABLE ...................................... 159
J. ITEMS TO BE INCLUDED IN GROSS ESTATE
H. VAT ON SALE OF GOODS OR PROPERTIES
........................................................................126
........................................................................160
K. DEDUCTIONS FROM ESTATE ...................129
I. ZERO-RATED SALES OF GOODS OR
K.1. ORDINARY DEDUCTIONS .......................... 129 PROPERTIES, AND EFFECTIVELY ZERO-
L. EXCLUSIONS FROM ESTATE ....................135 RATED SALES OF GOODS OR PROPERTIES162

M. TAX CREDIT FOR ESTATE TAXES PAID IN A J. TRANSACTIONS DEEMED SALE (SEC. 106 (B)
FOREIGN COUNTRY ...................................... 137 ........................................................................ 164

N. FILING OF NOTICE OF DEATH ................. 140 K. CHANGE OR CESSATION OF STATUS AS


VAT-REGISTERED PERSON (SEC 106[C]) .... 165
O. ESTATE TAX RETURN .............................. 140
L. VAT ON IMPORTATION OF GOODS.......... 166
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M. VAT ON SALE OF SERVICE AND USE OR C.5. FEES AND CHARGES FOR REGULATION &
LEASE OF PROPERTIES ................................ 167 LICENSING ........................................................ 235

N. ZERO-RATED SALE OF SERVICES .......... 169 C.6. SITUS OF TAX COLLECTED ...................... 235

O. VAT EXEMPT TRANSACTIONS ................ 169 D. TAXING POWERS OF BARANGAYS ........ 236

Q. SOURCES OF INPUT TAX .......................... 176 E. COMMON REVENUE RAISING POWERS. 237

R. PERSONS WHO CAN AVAIL OF INPUT TAX F. COMMUNITY TAX ..................................... 238
CREDIT............................................................ 176 F.1. TAX PERIOD AND MANNER OF PAYMENT
...........................................................................240
S. DETERMINATION OF OUTPUT/INPUT TAX;
VAT PAYABLE; EXCESS INPUT TAX CREDITS F.2. ACCRUAL OF TAX......................................240
........................................................................ 177 F.3. TIME OF PAYMENT ....................................240
S.1. DETERMINATION OF OUTPUT TAX............177 F.4. PENALTIES ON UNPAID TAXES, FEES OR
S.2. DETERMINATION OF INPUT TAX CHARGES ..........................................................240
CREDITABLE .......................................................177 F.5. AUTHORITY OF TREASURER IN COLLECTION
S.3. ALLOCATION OF INPUT TAX ON MIXED AND INSPECTION OF BOOKS ..........................240
TRANSACTIONS .................................................177 G. TAXPAYER’S REMEDIES .......................... 240
T. SUBSTANTIATION OF INPUT TAX CREDITS G.1. PERIODS OF ASSESSMENT AND
........................................................................ 177 COLLECTION OF LOCAL TAXES, FEES OR
CHARGES ..........................................................240
U. REFUND OR TAX CREDIT OF EXCESS INPUT
TAX (CF REFUND OF ERRONEOUSLY PAID G.2. PROTEST OF ASSESSMENT .....................240
TAXES) ........................................................... 182 G.3. CLAIM FOR REFUND OF TAX CREDIT FOR
ERRONEOUSLY OR ILLEGALLY COLLECTED TAX,
V. INVOICING REQUIREMENTS ....................183
FEE OR CHARGE...............................................240
W. FILING OF RETURN AND PAYMENT ...... 185
H. CIVIL REMEDIES BY THE LGU FOR
X. WITHHOLDING OF FINAL VAT ON SALES TO COLLECTION OF REVENUES ....................... 240
GOVERNMENT .............................................. 185
H.1. LOCAL GOVERNMENT’S LIEN FOR
IV. TAX REMEDIES UNDER THE NIRC.....197 DELINQUENT TAXES, FEES OR CHARGES .....240

A. TAXPAYER’S REMEDIES ......................... 200 H.2. CIVIL REMEDIES, IN GENERAL .................241

B. GOVERNMENT’S REMEDIES................... 209 I. REAL PROPERTY TAXATION .................... 242


I.1. FUNDAMENTAL PRINCIPLES (CAPUE)...... 242
V. ORGANIZATION AND FUNCTION OF THE
BUREAU OF INTERNAL REVENUE......... 218 I.2. NATURE OF REAL PROPERTY TAX ........... 242
I.3. IMPOSITION OF REAL PROPERTY TAX ..... 242
A. POWERS OF THE CIR ............................... 218
I.4. APPRAISAL AND ASSESSMENT OF REAL
B. ORGANIZATION AND FUNCTION OF THE
PROPERTY TAX ................................................ 244
BIR ..................................................................219
I.5. DECLARATION OF REAL PROPERTY ........ 244
VI. LOCAL GOVERNMENT CODE OF 1991, AS
I.6. LISTING OF REAL PROPERTY IN THE
AMENDED .............................................. 228 ASSESSMENT ROLLS ....................................... 244
A. LOCAL GOVERNMENT TAXATION .......... 228 I.7. APPRAISAL AND VALUATION OF REAL
C. TAXING POWERS OF MUNICIPALITIES ... 233 PROPERTY ........................................................ 245

C.1. TAX ON VARIOUS TYPES OF BUSINESSES I.8. ASSESSMENT OF REAL PROPERTY ......... 246
...........................................................................233 I.9. COLLECTION OF REAL PROPERTY TAX ... 246
C.2 CEILING ON BUSINESS TAX IMPOSSIBLE ON I.10. SPECIAL RULES ON PAYMENT ................ 246
MUNICIPALITIES WITHIN METRO MANILA .... 235
J. TAXPAYER’S REMEDIES ........................... 247
C.3. TAX ON RETIREMENT ON BUSINESS ...... 235
J.1. ADMINISTRATIVE ....................................... 247
C.4 RULES ON PAYMENT OF BUSINESS TAX 235
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J.2. JUDICIAL .................................................... 248 I. REMEDIES .................................................. 267
VII. TARIFF AND CUSTOMS CODE OF 1978, I.1. GOVERNMENT ............................................ 267
AS AMENDED ........................................ 252 I.2. TAXPAYER .................................................. 269
A. TARIFF AND DUTIES, DEFINED ............... 252 VIII. JUDICIAL REMEDIES....................... 275
B. GENERAL RULE: ALL IMPORTED ARTICLES A. JURISDICTION OF THE COURT OF TAX
ARE SUBJECT TO DUTY [SEC. 101, TCC; SEC. APPEALS ....................................................... 275
104, CMTA] .................................................... 252
A.1. CIVIL TAX CASES........................................ 275
C. PURPOSE FOR IMPOSITION .................... 252
A.2. CRIMINAL CASES ...................................... 275
D. FLEXIBLE TARIFF CLAUSE....................... 252 B. JUDICIAL PROCEDURES .......................... 276
E. REQUIREMENTS OF IMPORTATION ....... 253 B.1. JUDICIAL ACTION FOR COLLECTION OF
E.1. BEGINNING AND ENDING OF IMPORTATION TAXES................................................................ 276
.......................................................................... 253 B.2. CIVIL CASES................................................277
E.2. OBLIGATIONS OF IMPORTER .................. 253 B.3. CRIMINAL CASES ...................................... 279
F. IMPORTATION IN VIOLATION OF TCC .... 257 C. TAXPAYER’S SUIT IMPUGNING THE
F.1. SMUGGLING............................................... 257 VALIDITY OF TAX MEASURES OR ACTS OF
F.2. OTHER FRAUDULENT PRACTICES .......... 258 TAXING AUTHORITIES ................................. 280
C.1. TAXPAYER’S SUIT, DEFINED ....................280
G. CLASSIFICATION OF GOODS...................258
C.2. DISTINGUISHED FROM CITIZEN’S SUIT ..280
G.1. TAXABLE IMPORTATION .......................... 258
C.3. REQUISITES FOR CHALLENGING THE
G.2. PROHIBITED IMPORTATION.................... 258
CONSTITUTIONALITY OF A TAX MEASURE OR
G.3. CONDITIONALLY-FREE IMPORTATION .. 259 ACT OF TAXING AUTHORITY ...........................280
H. CLASSIFICATION OF DUTIES................... 264
H.1. ORDINARY/REGULAR DUTIES ................ 264
H.2. SPECIAL DUTIES....................................... 267

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TAXATION LAW
TAXATION 1

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I. General Principles of police power of the state. These regulatory


purposes are also known as Sumptuary. Thus,
Taxation taxation can:
(1) Strengthen anemic enterprises or provide
A. DEFINITION, CONCEPT AND PURPOSE incentive to greater production through grant
OF TAXATION of tax exemptions or the creation of conditions
conducive to their growth.
A.1. TAXATION (2) Protect local industries against foreign
(1) Is a mode of raising revenue for public competition by imposing additional taxes on
purpose; the exercise of sovereign power to raise imported goods, or encourage foreign trade by
revenue for the expense of the government. providing tax incentives on imported goods.

(2) The process or means by which the sovereign, (3) Be a bargaining tool by setting tariff rates first
through its law-making body, raises income to at a relatively high level before trade
defray the necessary expenses of government; a negotiations are entered into with another
method of apportioning the cost of government country.
among those who in some measure are privileged (4) Halt inflation in periods of prosperity to curb
to enjoy its benefits and must, therefore, bear its spending power; ward off depression in
burdens [51 Am. Jur. 34; 1 Cooley 72-93]. periods of slump to expand business.
(3) As a power, it refers to the inherent power of (5) Reduce inequalities in wealth and incomes, as
the state to demand enforced contributions for for instance, the estate, donor's and income
public purpose or purposes. taxes, their payers being the recipients of
(4) Is described as a destructive power which unearned wealth or mostly in the higher
interferes with the personal and property rights of income brackets. Progressive system of
the people and takes from them a portion of their taxation prevents the undue concentration of
property for the support of the government. wealth in the hands of a few individuals.
[Paseo Realty & Development Corporation v. CA, Progressivity is keystoned on the principle that
G.R. No. 119286 (2004)] those who are able to pay shoulder the bigger
portion of the tax burden. [Mamalateo]

A.2. PURPOSE (6) Taxes may be levied to promote science and


invention (see RA. No. 5448) or to finance
1) Revenue-raising educational activities (see RA. No. 5447) or to
Primary purpose of taxation is to provide funds or improve the efficiency of local police forces in
property with which to promote the general the maintenance of peace and order through
welfare and protection of its citizens. grant of subsidy (see RA.No. 6141).
Fees may be properly regarded as taxes even (7) Be an implement of the police power to
though they also serve as an instrument of promote the general welfare.
regulation. If the purpose is primarily revenue, or
if revenue is, at least, one of the real and (8) Protect local industries from foreign
substantial purposes, then the exaction is competition.
properly called a tax. [PAL v. Edu, G.R. No. L- Taxation is no longer envisioned as a measure
41383 (1988)] merely to raise revenue to support the
existence of the government; taxes may be
levied with a regulatory purpose to provide
2) Non-revenue/special or regulatory means for the rehabilitation and stabilization
Taxation is often employed as a device for of a threatened industry which is affected with
regulation by means of which certain effects or public interest as to be within the police power
conditions envisioned by governments may be of the state. [Caltex v. COA, G.R. No. 92585
achieved. Taxes may be levied with a regulatory (1992)]
purpose to provide means for the rehabilitation
and stabilization of a threatened industry which (9) To address push for the government’s health
is affected with public interest as to be within the measure, just like what happened in the

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landmark legislation on sin taxes in 2012 (see provided in the fundamental law or implied
R.A. No. 10351). therefrom, while the rest spring from the nature
of the taxing power itself although they may or
may not be provided in the Constitution.
B. NATURE AND CHARACTERISTICS OF
TAXATION
B.2 CHARACTERISTICS
B.1 NATURE (1) It is an enforced contribution for its imposition
is in no way dependent upon the will or assent
1) Inherent in sovereignty – The power to tax is an of the person taxed. It is not contractual, either
attribute of sovereignty. It is a power emanating express or implied, but positive acts of
from necessity. It is a necessary burden to government.
preserve the State's sovereignty and a means to
give the citizenry an army to resist an aggression, (2) It is generally payable in the form of money,
a navy to defend its shores from invasion, a corps although the law may provide payment in kind
of civil servants to serve, public improvement (e.g. backpay certificates under Sec. 2, R.A. No.
designed for the enjoyment of the citizenry and 304, as amended);
those which come within the State's territory, and (3) It is proportionate in character or is laid by
facilities and protection which a government is some rule of apportionment which is usually
supposed to provide [Phil. Guaranty Co., Inc. v. based on ability to pay.
Commissioner, G.R. No. L-22074 (1965)].
“The rule of taxation shall be uniform and
equitable. The Congress shall evolve a
2) Essentially a legislative function – The power to progressive system of taxation.” [Sec. 28 (1),
tax is peculiarly and exclusively legislative and Art. VI, 1987 Constitution]
cannot be exercised by the executive or judicial (4) It is levied on persons, property, rights, acts,
branch of the government [1 Cooley 160-161]. privileges, or transactions.
Hence, only Congress, our national legislative
body, can impose taxes. The levy of a tax, (5) It is levied by the State which has jurisdiction
however, may also be made by a local legislative or control over the subject to be taxed.
body subject to such limitations as may be (6) It is personal to the taxpayer.
provided by law. It includes the authority to:
(7) It is levied by the law-making body of the
(a) Determine the nature, purpose, extent, State. The power to tax is a legislative power
coverage, apportionment, situs, and method but is also granted to local governments,
of collection of the tax; subject to such guidelines and limitations as
(b) Grant tax exemptions or condonations; and law may be provided by law.
(c) Specify or provide for the administrative as “Each local government unit shall have the
well as judicial remedies that either the power to create its own sources of revenues
government or the taxpayers may avail and to levy taxes, fees, and charges subject to
themselves in the proper implementation of such guidelines and limitations as the
the tax measure. Congress may provide, consistent with the
basic policy of local autnomy. Such taxes, fees,
and charges shal accrue exclusively to the
3) Subject to constitutional and inherent local governments.” [Sec. 5, Art. X, 1987
limitations – The power to tax is said to be the Constitution];
strongest of all the powers of government. It is (8) It is levied for public purpose. Revenues
unlimited, plenary, comprehensive and supreme, derived from taxes cannot be used for purely
in the absence of constitutional restrictions, the private purposes or for the exclusive benefit of
principal check on its abuse resting in the private persons. [Gaston v. Republic Planters
responsibility of members of Congress to their Bank, G.R. No. 77194 (1988)]. The “public
constituents. However, the power of taxation is purpose or purposes” of the imposition is
subject to constitutional and inherent limitations implied in the levy of tax. [Mendoza v.
[Mamalateo]. These limitations are those Municipality, G.R. No. L-7373 (1954)]. A tax
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levied for a private purpose constitutes a (9) It is also an important characteristic of most
taking of property without due process of law; taxes that they are commonly required to be
and paid at regular periods or intervals (see 1
Cooley 64) every year.

C. POWER OF TAXATION AS DISTINGUISHED FROM POLICE POWER AND EMINENT DOMAIN

When the distinction of exercise of powers is relevant


Since Congress has the power to exercise the State inherent powers of Police Power, Eminent Domain and
Taxation, the distinction between police power and the power to tax, which could be significant if the
exercising authority were mere political subdivisions (since delegation by it to such political subdivisions of
one power does not necessarily include the other), would not be of any moment when, as in the case under
consideration, Congress itself exercises the power. [NTC v. CA, 311 SCRA 508 (1999)]
Therefore, the distinction is important when the one exercising it is the LGU (mere delegated authority).

Taxation Eminent Domain Police Power


Authority (who May be exercised only by May be exercised by the May be exercised only by
exercises the the government or its government or its the government or its
Power) political subdivisions. political subdivisions or political subdivisions.
may be granted to public
service companies or
public utilities.
Purpose The property (generally in Merely a power to take The use of the property is
the form of money) is private property for public “regulated” for the
taken for the support of use. purpose of promoting the
the government. general welfare; it is not
compensable.
Persons Affected Operates upon a Operates on an individual Operates upon a
community or class of as the owner of a community or a class of
individuals. particular property. individuals.
Effect The money contributed There is no transfer of
becomes part of the title. At most, there is
There is a transfer of the
public funds. restraint on the injurious
right to property.
use of property.
Benefits Received It is assumed that the He receives the market The person affected
individual receives the value of the property receives indirect benefits
equivalent of the tax in taken from him. as may arise from the
the form of protection maintenance of a healthy
and benefits he receives economic standard of
from the government. society.
Amount of Generally, there is no No amount imposed but Amount imposed should
Imposition limit on the amount of tax rather the owner is paid not be more than
that may be imposed. the market value of sufficient to cover the
property taken. cost of the license and
necessary expenses.
Relationship to Subject to constitutional Inferior to the impairment Relatively free from
Constitution limitations, including the prohibition; government constitutional limitations
prohibition against cannot expropriate and is superior to the
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impairment of the private property, which impairment of contract


obligation of contracts. under a contract had provision.
previously bound itself to
purchase from the other
contracting party.

([Mamalateo, Reviewer on Taxation 2nd Edition (2008), Rex Bookstore, Inc., pp. 11-12)

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D. THEORY AND BASIS OF TAXATION authorities, every person who is able to must
contribute his share in the running of the
(1) Lifeblood theory government. The government for its part is
Taxes are the lifeblood of the government and expected to respond in the form of tangible
their prompt and certain availability is an and intangible benefits intended to improve
imperious need. [CIR v. Pineda, G.R. No. L- the lives of the people and enhance their
22734 (1967)] moral and material values. This symbiotic
relationship is the rationale of taxation and
Taxes are the lifeblood of the government and
should dispel the erroneous notion that it is an
so should be collected without unnecessary
arbitrary method of exaction by those in the
hindrance. It is said that taxes are what we pay
seat of power. [CIR v. Algue, supra]
for civilized society. Without taxes, the
government would be paralyzed for lack of the
(4) Jurisdiction over subject and objects
motive power to activate and operate it [CIR v.
The limited powers of sovereignty are confined
Algue, G.R. No. L-28896 (1988)].
to objects within the respective spheres of
governmental control. These objects are the
(2) Necessity theory proper subjects or objects of taxation and
The power of taxation proceeds upon theory none else.
that the existence of government is a
necessity; that is cannot continue without
means to pay its expenses; and that for those E. PRINCIPLES OF A SOUND TAX
means it has the right to compel all citizens SYSTEM
and property within its limits to contribute. (1) Fiscal adequacy
The sources of tax revenue should coincide
The power to tax is an attribute of sovereignty. with, and approximate the needs of,
It is a power emanating from necessity. It is a government expenditures. The revenue
necessary burden to preserve the State's should be elastic or capable of expanding or
sovereignty and a means to give the citizenry: contracting annually in response to variations
 an army to resist an aggression; in public expenditures.
 a navy to defend its shores from invasion;
 a corps of civil servants to serve’ (2) Administrative feasibility
 public improvement designed for the Tax laws should be capable of convenient, just
enjoyment of the citizenry and those which and effective administration. Each tax should
come within the State's territory; and be capable of uniform enforcement by
 facilities and protection which a government officials, convenient as to the
government is supposed to provide. time, place, and manner of payment, and not
[Phil. Guaranty v. CIR, G.R. No. L-22074 unduly burdensome upon, or discouraging to
(1965)] business activity.

The obligation to pay taxes rests upon the (3) Theoretical justice or equality
necessity of money for the support of the state. The tax burden should be in proportion to the
For this reason, no one is allowed to object to taxpayer’s ability to pay. This is the so-called
or resist the payment of taxes solely because ability to pay principle. Taxation should be
no personal benefit to him can be pointed out. uniform as well as equitable
[Lorenzo v. Posadas, G.R. No. L-43082 (1937)] Note: The non-observance of the above
principles will not necessarily render the tax
(3) Benefits-protection Theory (Symbiotic imposed invalid except to the extent those
Relationship) specific constitutional limitations are violated.
This principle serves as the basis of taxation (De Leon)
and is founded on the reciprocal duties of
protection and support between the State and
its inhabitants.
Despite the natural reluctance to surrender
part of one's hard earned income to the taxing
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F. SCOPE AND LIMITATIONS OF (b) Inherently Legislative


TAXATION Stated in another way, taxation may
exceptionally be delegated, subject to such
F.1. INHERENT LIMITATIONS well-settled limitations as:
(a) Public Purpose (1) The delegation shall not contravene any
The proceeds of the tax must be used (a) for constitutional provision or the inherent
the support of the State or (b) for some limitations of taxation;
recognized objects of government or directly
to promote the welfare of the community. (2) The delegation is effected either by the
Constitution or by validly enacted
Test: Whether the statute is designed to legislative measures or statute; and
promote the public interest, as opposed to the
furtherance of the advantage of individuals, (3) The delegated levy power, except when the
although each advantage to individuals might delegation is by an express provision of the
incidentally serve the public. [Pascual v. Sec. Constitution itself, should only be in favor
of Public Works, G.R. No. L-10405 (1960)] of the local legislative body of the local or
municipal government concerned. [Vitug
The protection and promotion of the sugar and Acosta]
industry is a matter of public concern; the
legislature may determine within reasonable
bounds what is necessary for its protection (i) General Rule: Delegata potestas non potest
and expedient for its promotion. [Lutz v. delegari. The power to tax is exclusively vested
Araneta, G.R. No. L-7859 (1955)] in the legislative body and it may not be re-
delegated.
The public purpose of a tax may legally exist
even if the motive which impelled the Judge Cooley enunciates the doctrine in the
legislature to impose the tax was to favor one following oft-quoted language: "One of the
industry over another. [Tio v. Videogram, G.R. settled maxims in constitutional law is that
No. L-75697 (1987)] the power conferred upon the legislature to
make laws cannot be delegated by that
Tests in Determining Public Purpose: department to any other body or authority.
(1) Duty Test - Whether the thing to be Where the sovereign power of the state has
furthered by the appropriation of public located the authority, there it must remain;
revenue is something which is the duty of and by the constitutional agency alone the
the State as a government to provide. laws must be made until the Constitution itself
is charged.” [People v. Vera, G.R. No. L-45685,
(2) Promotion of General Welfare Test - November 16, 1937]
Whether the proceeds of the tax will
directly promote the welfare of the Legislature has the power to determine the:
community in equal measure. (1) nature (kind),
(3) Character of the Direct Object of the (2) object (purpose),
Expenditure – It is the essential character (3) extent (rate),
of the direct object of the expenditure (4) coverage (subjects) and
which must determine its validity as (5) situs (place) of taxation.
justifying a tax and not the magnitude of
the interests to be affected nor the degree
to which the general advantage of the (ii) Exceptions
community, and thus the public welfare, (a) Delegation to local governments – This
may be ultimately benefited by their exception is in line with the general
promotion. Incidental advantage to the principle that the power to create
public or to the State, which results from municipal corporations for purposes of
the promotion of private enterprises or local self-government carries with it, by
business, does not justify their aid with necessary implication, the power to confer
public money. [Pascual v. Sec. of Public the power to tax on such local governments.
Works, supra] (1 Cooley 190). This is logical for after all,
municipal corporations are merely
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instrumentalities of the state for the better as no delegation of the strictly


administration of the government in legislative power to tax is involved.
respect to matters of local concern. [Pepsi-
(3) The powers which cannot be
Cola Bottling Co. of the Phil. Inc. v. Mun. of
delegated include the
Tanauan, G.R. No. L-31156 (1976)]. Under
determination of the subjects to be
the new Constitution, however, LGUs are
taxed, the purpose of the tax, the
now expressly given the power to create its
amount or rate of the tax, the
own sources of revenue and to levy taxes,
manner, means, and agencies of
fees and charges, subject to such
collection, and the prescribing of
guidelines and limitations as the Congress
the necessary rules with respect
may provide which must be consistent with
thereto.
the basic policy of local autonomy. [Art. X,
Sec 5, 1987 Constitution]
(c) Territorial
(b) Delegation to the President Rule: A state may not tax property lying
outside its borders or lay an excise or privilege
(1) to enter into Executive agreements;
tax upon the exercise or enjoyment of a right
and
or privilege derived from the laws of another
(2) to ratify treaties which grant tax state and therein exercise and enjoyed. (51
exemption subject to Senate Am.Jur. 87-88).
concurrence.
Reasons:
The Congress may, by law, authorize the (1) Tax laws (and this is true of all laws) do not
President to fix within specified limits, and operate beyond a country’s territorial limits.
subject to such limitations and restrictions
(2) Property which is wholly and exclusively
as it may impose, tariff rates, import and
within the jurisdiction of another state
export quotas, tonnage and wharfage dues,
receives none of the protection for which a
and other duties or imposts within the
tax is supposed to be a compensation.
framework of the national development
program of the Government. [Art. 6, Sec.
Note: Where privity of relationship exists. It
28(2), 1987 Constitution]
does not mean, however, that a person outside
(c) Delegation to administrative agencies – of state is no longer subject to its taxing
Limited to the administrative powers. The fundamental basis of the right to
implementation that calls for some tax is the capacity of the government to
degree of discretionary powers under provide benefits and protection to the object
sufficient standards expressed by law or of the tax. A person may be taxed where there
implied from the policy and purposes of is between him and the taxing state, a privity
the Act. of the relationship justifying the levy. Thus, the
(1) There are certain aspects of the citizen’s income may be taxed even if he
resides abroad as the personal (as
taxing process that are not
distinguished from territorial) jurisdiction of
legislative and they may, therefore,
his government over him remains. In this case,
be vested in an administrative body.
the basis of the power to tax is not dependent
The powers which are not
on the source of the income nor upon the
legislative include: (1) the power to
location of the property nor upon the
value property for purposes of
residence of the taxpayer but upon his relation
taxation pursuant to fixed rules; (2)
the power to assess and collect the as a citizen to the state. As such citizen, he is
entitled, wherever he may be, inside or outside
taxes; and (3) the power to perform
of his country, to the protection of his
any of the innumerable details of
government.
computation, appraisement, and
adjustment, and the delegation of
such details.
(d) International Comity
(2) The exercise of the above powers is
Comity – respect accorded by nations to each
really not an exception to the rule
other because they are sovereign equals.
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Thus, the property or income of a foreign state (c) The practical effect of an exemption
or government may not be the subject of running to the benefit of the government is
taxation by another state. merely to reduce the amount of money that
has to be handled by the government in the
Reasons:
course of its operations: For these reasons,
(1) In par in parem non habet imperium. As
provisions granting exemptions to government
between equals there is no sovereign
agencies may be construed liberally in favor of
(Doctrine of Sovereign Equality among
non-tax liability of such agencies. [Maceda v.
states under international law). One state
Macaraig, Jr., G.R. No. 88291 (1991)].
cannot exercise its sovereign powers over
another.) Exception: There is no constitutional
prohibition against the government taxing
(2) In international law, a foreign government
itself. [Coll. v. Bisaya Land Transportation, 105
may not be sued without its consent →
Phil. 338 (1959)].
useless to impose a tax which could not be
collected.
If the taxing authority is a local government
(3) Usage among states that when a foreign unit: RA 7160 expressly prohibits LGUs from
sovereign enters the territorial jurisdiction levying tax on the National Government, its
of another, there is an implied agencies and instrumentalities and other
understanding that the former does not LGUs. [Sec. 133 (o), Local Government Code]
intend to degrade its dignity by placing
itself under the jurisdiction of the other. F.2. CONSTITUTIONAL LIMITATIONS

(a) Provisions Directly Affecting Taxation


(e) Exemption of Government Entities,
(i) Prohibition against imprisonment for non-
Agencies, and Instrumentalities
payment of poll tax
No person shall be imprisoned for debt or non-
If the taxing authority is the National
payment of a poll tax. [Art. III, Sec. 20, 1987
Government:
Constitution]
General Rule: Agencies and instrumentalities
of the government are exempt from tax.
(ii) Uniformity and equality of taxation
Note: Unless otherwise provided by law, the The rule of taxation shall be uniform and
exemption applies only to government entities equitable. Congress shall evolve a progressive
through which the government immediately system of taxation. [Art. VI, Sec. 28(1), 1987
and directly exercises its sovereign powers. Constitution]
With respect to government-owned or
(1) Uniformity – All taxable articles or
controlled corporations performing
properties of the same class shall be taxed
proprietary (not governmental) functions, they
at the same rate. [City of Baguio v. de Leon,
are generally subject to tax in the absence of
G.R. No. L-24756 (1968)].
tax exemption provisions in their charters or
the law creating them. (a) Uniformity of operation throughout tax
Reasons for the exemption:
unit - The rule requires the uniform
application and operation, without
(a) To levy a tax upon public property would discrimination, of the tax in every place
render necessary new taxes on other public where the subject of it is found. This
property for the payment of the tax so laid and means, for example, that a tax for a
thus, the government would be taxing itself to national purpose must be uniform and
raise money to pay over for itself. equal throughout the country and a tax
(b) This immunity also rests upon for a province, city, municipality, or
fundamental principles of government, being barangay must be uniform and equal
necessary in order that the functions of throughout the province, city,
government shall not be unduly impeded. (1 municipality or barangay.
Cooley 263). (b) Equality in burden – Uniformity implies
equality in burden, not equality in

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amount or equality in its strict and essentiality to the taxpayer of the object of
literal meaning. The reason is simple taxation, or on the taxpayer’s ability to pay.
enough. If legislation imposes a single Example is that individual income tax system
tax upon all persons, properties, or that imposes rates progressing upwards as
transactions, an inequality would the tax base (taxpayer’s taxable income)
obviously result considering that not all increases. A progressive tax, however, must
persons, properties, and transactions not be confused with a progressive system of
are identical or similarly situated. taxation.
Neither does uniformity demand that
While equal protection refers more to like
taxes shall be proportional to the
treatment of persons in like circumstances,
relative value or amount of the subject
uniformity and equity refer to the proper
thereof. Taxes may be progressive.
relative treatment for tax purposes of persons
in unlike circumstances.
(2) Equity
(a) Uniformity in taxation is effected through (iii) Grant by Congress of authority to the
the apportionment of the tax burden among President to impose tariff rates
the taxpayers which under the Constitution Delegation of Tariff powers to the President
must be equitable. “Equitable” means fair, under the flexible tariff clause [Sec. 28(2), Art.
just, reasonable and proportionate to the VI, 1987 Constitution], which authorizes the
taxpayer’s ability to pay. Taxation may be President to modify import duties. [Sec. 1608,
uniform but inequitable where the amount of Customs Modernization and Tariff Act;
the tax imposed is excessive or unreasonable. previously, Sec. 401, TCC]
(b) The constitutional requirement of equity in
(iv) Prohibition against taxation of religious,
taxation also implies an approach which
charitable entities, and educational entities
employees a reasonable classification of the
entities or individuals who are to be affected
Art. VI, Sec. 28(3), 1987 Constitution:
by a tax. Where the “tax differentiation is not (a) Charitable institutions, churches and
based on material or substantial differences,” personages or convents appurtenant
the guarantee of equal protection of the laws thereto, mosques, non-profit
and the uniformity rule will likewise be cemeteries, and all lands, buildings, and
infringed. improvements,
(b) Actually, directly, and exclusively used
Taxation does not require identity or equality
for religious, charitable, or educational
under all circumstances, or negate the
purposes shall be exempt from taxation.
authority to classify the objects of taxation.
Classification, to be valid, must be reasonable (c) The tax exemption under this
and this requirement is not deemed satisfied constitutional provision covers property
unless: taxes only and not other taxes [Lladoc v.
(1) It is based upon substantial distinctions Commissioner, G.R. No. L-19201 (1965)].
which make real differences;
(2) These are germane to the purpose of the
legislation or ordinance; In general, special assessments are not
covered by the exemption because by
(3) The classification applies not only to
nature they are not classified as taxes.
present conditions but also to future
[Apostolic Prefect v. City Treasurer of
conditions substantially identical to those
Baguio, G.R. No. L-47252 (1941)]
of the present; and
(4) The classification applies equally to all
those who belong to the same class. To be entitled to the exemption, the petitioner
[Pepsi-Cola v. Butuan City, G.R. No. L- must prove that:
22814 (1968)]
The progressive system of taxation would (1) It is a charitable institution
place stress on direct rather than indirect (2) Its real properties are actually, directly and
taxes, on non-essentiality rather than exclusively used for charitable purposes.
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achieve; and no money inures to the private


Revenue or income from trade, business or benefit of the persons managing or operating
other activity, the conduct of which is not the institution.
related to the exercise or performance of
“Exclusive" - possessed and enjoyed to the
religious, educational and charitable purposes
exclusion of others; debarred from
or functions shall be subject to internal
participation or enjoyment; "Exclusively" - "in
revenue taxes when the same is not actually,
a manner to exclude; as enjoying a privilege
directly or exclusively used for the intended
exclusively.”
purposes. [BIR Ruling 046-2000]
If real property is used for one or more
Test of Use of the property, and not commercial purposes, it is not exclusively used
Exemption the ownership for the exempted purposes but is subject to
taxation. The words "dominant use" or
Actual, direct and exclusive
Nature of "principal use" cannot be substituted for the
use for religious, charitable words "used exclusively" without doing
Use
or educational purposes. violence to the Constitution and the law.
Real property taxes on Solely is synonymous with exclusively. [Lung
facilities which are Center of the Philippines v. Quezon City, G.R.
No. 144104 (2004)]
(1) actual,
Note: Lung Center did not necessarily overturn
(2) incidental to, or the case of Abra Valley College v. Aquino.
(3) reasonably necessary Lung Center just provided a stricter
for the accomplishment interpretation. In Abra Valley, the Court held:
of said purposes such as The primary use of the school lot and building
in the case of hospitals, is the basic and controlling guide, norm and
a school for training standard to determine tax exemption, and not
Scope of nurses, a nurses’ home, the mere incidental use thereof. Under the
Exemption property to provide 1935 Constitution, the trial court correctly held
housing facilities for that the school building as well as the lot
interns, resident doctors where it is built, should be taxed, not because
and other members of the second floor of the same is being used by
the hospital staff, and the Director and his family for residential
recreational facilities for purposes (incidental to its educational
student nurses, interns purpose), but because the first floor thereof is
and residents, such as being used for commercial purposes. However,
athletic fields. [Abra since only a portion is used for purposes of
Valley College v. Aquino, commerce, it is only fair that half of the
G.R. No. L-39086 assessed tax be returned to the school
(1988)] involved.

TEST: Whether an enterprise is charitable or (v) Prohibition against taxation of non-stock,


not: whether it exists to carry out a purpose non-profit educational institutions
recognized in law as charitable or whether it is Art. XIV, Sec. 4, 1987 Constitution
maintained for gain, profit, or private
(3) All revenues and assets of non-stock,
advantage.
non-profit educational institutions used
A charitable institution does not lose its actually, directly, and exclusively for
character as such and its exemption from educational purposes shall be exempt from
taxes simply because it derives income from taxes and duties.
paying patients, whether out-patient, or
Proprietary educational institutions,
confined in the hospital, or receives subsidies
including those cooperatively owned, may
from the government, so long as the money
likewise be entitled to such exemptions
received is devoted or used altogether to the
subject to the limitations provided by law,
charitable object which it is intended to
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including restrictions on dividends and Art. VI, Sec. 28, par. 3 Art. XIV, Sec. 4,
provisions for reinvestment. par. 3
religious, charitable,
(4) Subject to conditions prescribed by law,
or educational
all grants, endowments, donations, or
purposes.
contributions used actually, directly, and
exclusively for educational purposes shall Property taxes Income, property,
be exempt from tax. and donor’s taxes
and custom duties.
This provision covers only non-stock, non-
profit educational institutions. (vi) Majority vote of Congress for grant of tax
The exemption covers income, property, and exemption
donor’s taxes, custom duties, and other taxes Art. VI, Sec. 28, 1987 Constitution. No law
imposed by either or both the national granting any tax exemption shall be passed
government or political subdivisions on all without the concurrence of a majority of all
revenues, assets, property or donations, used the Members of the Congress.
actually, directly and exclusively for
educational purposes. (In the case of religious
Basis: The inherent power of the state to
and charitable entities and non-profit
impose taxes carries with it the power to grant
cemeteries, the exemption is limited to
tax exemptions.
property tax.)
The exemption does not cover revenues
Exemptions may be created by:
derived from, or assets used in, unrelated
activities or enterprise. (1) The Constitution, or
(2) Statutes, subject to constitutional
Similar tax exemptions may be extended to limitations
proprietary (for profit) educational institutions
by law subject to such limitations as it may Vote required for the grant of exemption:
provide, including restrictions on dividends Absolute majority of the members of Congress
and provisions for reinvestment. The (at least ½ + 1 of ALL the members voting
restrictions are designed to insure that the SEPARATELY)
tax-exemption benefits are used for Vote required for withdrawal of such grant of
educational purposes. exemption: Relative majority is sufficient
Lands, buildings, and improvements actually, (majority of the quorum).
directly and exclusively used for educational The provision guaranteeing equal protection
purposes are exempt from property tax [Sec. of the laws and that mandating the rule of
28(3), Art. VI, 1987 Constitution], whether the taxation shall be uniform and equitable
educational institution is proprietary or non- likewise limit, although not expressly, the
profit. legislative power to grant tax exemption.
Art. VI, Sec. 28, par. 3 Art. XIV, Sec. 4, Grants in the nature of tax exemptions:
par. 3 (1) Tax amnesties
Charitable Non-stock, non- (2) Tax condonations
institutions, churches profit educational (3) Tax refunds
and parsonages or institutions.
convents
appurtenant thereto, Note:
mosques, non-profit (1) Local government units may, through
cemeteries, and all ordinances duly approved, grant tax
lands, buildings, and exemptions, incentives or reliefs under
improvements, such terms and conditions as they may
actually, directly, and deem necessary. [Sec. 192, LGC]
exclusively used for
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(2) The President of the Philippines may, Even the legislative body cannot deprive the
when public interest so requires, condone SC of its appellate jurisdiction over all cases
or reduce the real property tax and interest coming from inferior courts where the
for any year in any province or city or a constitutionality or validity of an ordinance or
municipality within the Metropolitan the legality of any tax, impost, assessment, or
Manila Area. [Sec. 277, LGC] toll is in question. [San Miguel Corp v. Avelino,
G.R. No. L-39699 (1979)]
(vii) Prohibition on use of tax levied for special
purpose Art. VI, Sec. 30, 1987 Constitution. No law
All money collected on any tax levied for a shall be passed increasing the appellate
special purpose shall be treated as a special jurisdiction of the Supreme Court without
fund and paid out for such purpose only. its advice and concurrence.
If the purpose for which a special fund was
created has been fulfilled or abandoned, the
balance, if any, shall be transferred to the Scope of Judicial Review in taxation: limited
general funds of the Government. [Gaston v. only to the interpretation and application of
Republic Planters Bank, G.R. No. L-77194 tax laws. Its power does not include inquiry
(1988)]. into the policy of legislation. Neither can it
legitimately question or refuse to sanction the
provisions of any law consistent with the
(viii) President’s veto power on appropriation, Constitution. [Coll. v. Bisaya Land
revenue, tariff bills Transportation, 105 Phil. 338 (1959)].
Art. VI, Sec. 27(2), 1987 Constitution. The
President shall have the power to veto any
(x) Grant of power to the local government
particular item or items in an appropriation,
units to create its own sources of revenue
revenue, or tariff bill, but the veto shall not
LGUs have power to create its own sources of
affect the item or times to which he does not
revenue and to levy taxes, fees and charges,
object.
subject to such guidelines and limitations as
the Congress may provide which must be
consistent with the basic policy of local
(ix) Non-impairment of jurisdiction of the
autonomy. [Art. X, Sec. 5, 1987 Constitution]
Supreme Court
Art VIII, Sec. 2, 1987 Constitution. The
Congress shall have the power to define, (xi) Flexible tariff clause
prescribe, and apportion the jurisdiction of Delegation of tariff powers to the President
the various courts but may not deprive the under the flexible tariff clause [Art. VI, Sec.
Supreme Court of its jurisdiction over cases 28(2), 1987 Constitution]
enumerated in Section 5 hereof. Flexible tariff clause: the authority given to the
President, upon the recommendation of
Art. VIII, Sec. 5(2(b)), 1987 Constitution. The NEDA, to adjust the tariff rates under Sec.
Supreme Court shall have the following 1608 of the CMTA (previously, Sec. 401, CMTA)
powers: in the interest of national economy, general
welfare and/or national security.
(2) Review, revise, modify or affirm on
appeal or certiorari, as the laws or the Rules
of Court may provide, final judgments and (xii) Exemption from real property taxes
orders of lower courts in Art. VI, Sec. 28(3), 1987 Constitution
(b) all cases involving the legality of any Charitable institutions, churches and
tax, impost, assessment or toll or personages or convents appurtenant
any penalty imposed in relation thereto, mosques, non-profit cemeteries,
thereto. and all lands, buildings, and improvements,
actually, directly, and exclusively used for

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religious, charitable, or educational (3) Assessment or collection is not arbitrary or


purposes shall be exempt from taxation. oppressive
The due process clause may be invoked where
(xiii) No appropriation or use of public money a taxing statute is so arbitrary that it finds no
for religious purposes support in the Constitution, as where it can be
Art. VI, Sec. 29, 1987 Constitution shown to amount to the confiscation of
property. [Sison v. Ancheta, G.R. No. L-
(1) No money shall be paid out of the 59431(1984)]
Treasury except in pursuance of an
appropriation made by law. Instances of violations of the due process
clause:
(2) No public money or property shall be
(1) If the tax amounts to confiscation of
appropriated, applied, paid, or
employed, directly or indirectly, for the property;
use, benefit, or support of any sect, (2) If the subject of confiscation is outside the
church, denomination, sectarian jurisdiction of the taxing authority;
institution, or system of religion, or of
(3) If the tax is imposed for a purpose other
any priest, preacher, minister, other
than a public purpose;
religious teacher, or dignitary as such,
except when such priest, preacher, (4) If the law which is applied retroactively
minister, or dignitary is assigned to the imposes just and oppressive taxes.
armed forces, or to any penal institution,
(5) If the law violates the inherent limitations
or government orphanage or
on taxation.
leprosarium.
(3) All money collected on any tax levied for
a special purpose shall be treated as a (ii) Equal protection
special fund and paid out for such Art. III, Sec. 1, 1987 Constitution. No person
purpose only. If the purpose for which a shall be deprived of life, liberty, or property
special fund was created has been without due process of law, nor shall any person
fulfilled or abandoned, the balance, if be denied the equal protection of the laws.
any, shall be transferred to the general
funds of the Government
All persons subject to legislation shall be
treated alike under similar circumstances and
conditions both in the privileges conferred and
(b) Provisions Indirectly Affecting Taxation
liabilities imposed. (1 Cooley 824-825; See
(i) Due process
Sison v. Ancheta, supra).
Art. III, Sec. 1, 1987 Constitution. No person
shall be deprived of life, liberty, or property The doctrine does not require that persons or
without due process of law, nor shall any properties different in fact be treated in laws
person be denied the equal protection of as though they were the same. Indeed, to treat
the laws. them the same or alike may offend the
Constitution. What the Constitution prohibits
is class legislation which discriminates against
(1) Substantive Due Process – An act is done
some and favors others. As long as there are
under the authority of a valid law or the
rational or reasonable grounds for so doing,
Constitution itself.
Congress may, therefore, group the persons or
(2) Procedural Due Process – An act is done properties to be taxed and it is sufficient “if all
after compliance with fair and reasonable of the same class are subject to the same rate
methods or procedure prescribed by law. and the tax is administered impartially upon
them.” (1 Cooley 608).
Due Process in Taxation requirements:
(1) Public purpose The equal protection clause is subject to
(2) Imposed within taxing authority’s reasonable classification (See requisites for
territorial jurisdiction valid classification, supra).

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(iii) Religious freedom consideration. [Tolentino v. Secretary of


Art. III, Sec. 5, 1987 Constitution. No law Finance, supra]
shall be made respecting an establishment
of religion, or prohibiting the free exercise
thereof. (Non-establishment clause) G. STAGES OR ASPECTS OF TAXATION
The free exercise and enjoyment of religious The exercise of taxation involves the following
profession and worship, without stages:
discrimination or preference, shall forever
(1) [LEGISLATIVE ACT] Levy or imposition – This
be allowed. (Free exercise clause)
process involves the passage of tax laws or
No religious test shall be required for the ordinances through the legislature. The tax
exercise of civil and political rights. laws to be passed shall determine those to
be taxed (person, property or rights), how
much is to be collected (the rate and the
The free exercise clause is the basis of tax
base of tax), and how taxes are to be
exemptions.
implemented (the manner of imposing and
The imposition of license fees on the collecting tax). It also involves the granting
distribution and sale of bibles and other of tax exemptions, tax amnesties or tax
religious literature by a non-stock, non-profit condonation.
missionary organization not for purposes of
(2) [EXECUTIVE ACT] Assessment and collection
profit amounts to a condition or permit for the
– This process involves the act of
exercise of their right, thus violating the
administration and implementation of tax
constitutional guarantee of the free exercise
laws by the executive through its
and enjoyment of religious profession and
administrative agencies such as the Bureau
worship which carries with it the right to
of Internal Revenue or Bureau of Customs.
disseminate religious beliefs and information.
[American Bible Society v. City of Manila, G.R. (3) [TAXPAYER’S ACT] Payment – this process
No. L-9637 (1957)] It is actually in the nature involves the act of compliance by the
of a condition or permit for the exercise of the taxpayer in contributing his share to pay
right. This is different from a tax in the income the expenses of the government. Payment
of one who engages in religious activities or a of tax also includes the options, schemes or
tax on property used or employed in remedies as may be legally open or
connection with those activities. It is one thing available to the taxpayer.
to impose a tax on the income or property of a
(4) [TAXPAYER’S AND EXECUTIVE ACT] Refund – A
preacher. It is quite another thing to exact a
claim for refund must first be filed with the
tax for the privilege of delivering a sermon.
Commissioner of Internal Revenue. A suit
The Constitution, however, does not prohibit or proceeding may be filed within two years
imposing a generally applicable tax on the from the date of payment of the tax or
sale of religious materials by a religious penalty regardless of any supervening
organization. [Tolentino v. Secretary of cause that may arise after payment. The
Finance, G.R. No. 115455 (1994)] Commissioner may, even without a written
claim therefor, refund or credit any tax,
where on the face of the return, such
(iv) Non-impairment of obligations of contracts
payment appears clearly to have been
Art. III, Sec. 10, 1987 Constitution. No law erroneously paid. [Sec. 229, NIRC]
impairing the obligation of contracts shall
be passed.

The Contract Clause has never been thought


as a limitation on the exercise of the State's
power of taxation save only where a tax
exemption has been granted for a valid

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H. DEFINITION, NATURE AND (3) The person or property taxed is within the
CHARACTERISTICS OF TAXES jurisdiction of the taxing authority;
(4) Assessment and collection is in
H.1 TAXES consonance with the due process clause;
AND
(a) Are enforced proportional contributions
from persons and property levied by the law- (5) The tax must not infringe on the inherent
making body of the State by virtue of its and constitutional limitations of the power
sovereignty for the support of the government of taxation.
and all public needs.
(b) Are the enforced proportional and J. TAX AS DISTINGUISHED FROM
pecuniary contributions from persons and
OTHER FORMS OF EXACTIONS
property levied by the law-making body of the
state having jurisdiction over the subject of the (1) Tariff
burden for the support of the government and Taxes Tariff
public needs. All embracing term to A kind of tax imposed
include various kinds on articles which are
(c) Are what we pay for civilized society.
of enforced traded internationally
Without taxes, the government would be
contributions upon
paralyzed for lack of the motive power to
persons for the
activate and operate it. [CIR v. Algue, supra]
attainment of public
purposes
Essential Characteristics
(a) It is a forced charge, imposition or (2) Toll
contribution. As such, it operates ad Taxes Toll
infinitum. Paid for the support Paid for the use of
(b) It is assessed in accordance with some of the government another’s property.
reasonable rule of apportionment which Demand of Demand of
means that conformably with the sovereignty proprietorship
constitutional mandate for Congress to
evolve a progressive tax system, taxes Generally, no limit on Amount paid
must be based on taxpayer’s ability to pay the amount collected depends upon the
[Art VI, Sec 28[a], 1987 Constitution] as long as it is not cost of construction
excessive, or maintenance of the
(c) It is a pecuniary burden payable in money. unreasonable or public improvement
(d) It is imposed by the State on persons, confiscatory used.
property, or exercise within its jurisdiction, Imposed only by the Imposed by the
in accordance with the principle of government government or by
territoriality. private individuals or
(e) It is levied by the legislative body of the entities.
State. A toll is a sum of money for the use of
(f) It is levied for a public purpose. something, generally applied to the
consideration which is paid for the use of a
(g) It is personal to the taxpayer. road, bridge or the like, of a public nature. (1
Cooley 77.)
I. REQUISITES OF A VALID TAX The view has been expressed, however, that
the taking of tolls is only another method of
(1) For a public purpose; taxing the public for the cost of the
(2) Rule of taxation should be uniform; construction and repair of the improvement
for the use of which the toll is charged. (71 Am.
Jur. 2d 351.)
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(3) License fee (2) The power to regulate as an exercise of


License and police power does not include the power to
Taxes
Regulatory Fee impose fees for revenue purposes. The
Imposed under the Levied under the amount of tax bears no relation at all to the
taxing power of the police power of the probable cost of regulating the activity,
state for purposes of state. occupation, or property being taxed.
revenue. [Progressive Development Corp. vs.
Quezon City, G.R. No. L-36081 (1989)]
Forced contributions Exacted primarily to
for the purpose of regulate certain (3) An exaction, however, may be considered
maintaining businesses or both a tax and a license fee. This is true in
government occupations. the case of car registration fees which may
functions. be regarded as taxes even as they also
serve as an instrument of regulation. If the
Generally unlimited Should not purpose is primarily revenue, or if revenue,
as to amount unreasonably exceed is, at least, one of the real and substantial
the expenses of purposes, then the exaction is properly
issuing the license called a tax. [Phil. Airlines, Inc. vs. Edu, G.R.
and of supervision. No. L- 41383 (1988)]
Imposed on persons, Imposed only on the (4) But a tax may have only a regulatory
property and the right right to exercise a purpose. The general rule, however, is that
to exercise a privilege the imposition is a tax if its primary purpose
privilege. is to generate revenue, and regulation is
Failure to pay does Failure to pay makes merely incidental; but if regulation is the
not necessarily make the act or business primary purpose, the fact that incidentally
the act or business illegal. revenue is also obtained does not make the
illegal. imposition a tax. [Progressive
Development Corp. vs. Quezon City, supra]
Penalty for non-
payment: surcharges
or imprisonment Primary purpose test (as seen in Progressive
(except poll tax). Development Corp v. QC):
(1) Imposition must relate to an occupation or
License or permit fee is a charge imposed activity that so engages the public interest
under the police power for purposes of in health, morals, safety and development
regulation. as to require regulation for the protection
and promotion of such public interest;
License is in the nature of a special privilege,
of a permission or authority to do what is (2) Imposition must bear a reasonable
within its terms. It makes lawful an act which relation to the probable expenses of
would otherwise be unlawful. A license regulation, taking into account not only the
granted by the State is always revocable. costs of direct regulation but also its
[Gonzalo Sy Trading vs. Central Bank of the incidental consequences as well.
Phil.,G.R. No. L-41480 (1976)] Note: Taxes may also be imposed for
regulatory purposes. It is called regulatory tax.
Importance of the distinctions Fees may be properly regarded as taxes even
(1) It is necessary to determine whether a though they also served as an instrument of
particular imposition is a tax or a license fee regulation. If the purpose is primarily revenue,
because some limitations apply only to one or if revenue is, at least, one of the real and
and not to the other, and for the reason that substantial purposes, then the exaction is
exemption from taxes may not include properly called a tax. [PAL v. Edu, supra]
exemption from license fee.

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(4) Special assessment Taxes Debt


Taxes Special Assessment compensation (see
Levied not only on Levied only on land Art. 1279, Civil Code)
land
Imprisonment is a A person cannot be
Imposed regardless Imposed because of sanction for non- imprisoned for non-
of public an increase in value payment of tax, payment of debt
improvements of land benefited by except poll tax (except when it arises
public improvement from a crime)
Contribution of a Contribution of a Governed by the Governed by the
taxpayer for the person for the special prescriptive ordinary periods of
support of the construction of a periods provided for prescription
government public improvement in the NIRC
It has general Exceptional both as Does not draw Draws interest when
application both as to to time and locality interest except only it is so stipulated or
time and place when delinquent where there is default
Imposed only by Can be imposed by
public authority private individual
A special assessment is not a personal liability
of the person assessed, i.e., his liability is
limited only to the land involved. It is based
A tax is not a debt in the ordinary sense of the
wholly on benefits (not necessity).
word.
A charge imposed only on property owners
benefited is a special assessment rather than
(6) Penalty
a tax notwithstanding that the statute calls it
Taxes Penalty
a tax. The rule is that an exemption from
Violation of tax laws Any sanction imposed
taxation does not include exemption from
may give rise to as a punishment for
special assessment. But the power to tax
imposition of penalty violation of law or
carries with it the power to levy a special
acts deemed injurious
assessment.
Note: The term "special levy" is the name used Generally intended to Designed to regulate
in the present Local Government Code (RA. No. raise revenue conduct
7160). A province, city, or municipality, or the May be imposed only May be imposed by
National Government, may impose a special by the government the government or
levy on lands especially benefited by public private individuals or
works or improvements financed by it. [Sec. entities
240, RA 7160]
Cannot be a subject Can be a subject of
of set off or set off or
(5) Debt compensation compensation (see
Taxes Debt Art. 1279, Civil Code)
Based on laws Generally based on
contract, express or
implied. K. KINDS OF TAXES
Generally cannot be Assignable (1) As to object
assigned (a) Personal, Poll or Capitation Tax – tax of
a fixed amount imposed on persons
Generally paid in May be paid in kind residing within a specified territory,
money whether citizens or not, without regard
Cannot be a subject Can be a subject of to their property or the occupation or
of set off or set off or business in which they may be engaged
compensation (e.g. community (formerly residence)
tax). Taxes of a specified amount
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imposed upon each person performing are indirect (e.g., VAT, percentage tax,
a certain act or engaging in a certain excise taxes on specified goods,
business or profession are not, however, customs duties).
poll taxes. (71 Am. Jur. 2d 357).
(b) Property Tax – tax imposed on property,
(3) As to tax rates
real or personal, in proportion to its
(a) Specific Tax – a tax of a fixed amount
value or in accordance with some other
imposed by the head or number or by
reasonable method of apportionment
some other standard of weight or
(e.g., real estate tax). The obligation to
measurement. It requires no
pay the tax is absolute and unavoidable
assessment (valuation) other than the
and is not based upon the voluntary
listing or classification of the objects to
action of the person assessed.
be taxed (e.g., taxes on distilled spirits,
(c) Privilege/Excise Tax – any tax which wines, and fermented liquors; cigars
does not fall within the classification of and cigarettes)
a poll tax or a property tax. Thus, it is
(b) Ad Valorem Tax – a tax of a fixed
said that an excise tax is a charge
proportion of the value of the property
imposed upon the performance of an
with respect to which the tax is
act, the enjoyment of a privilege, or the
assessed. It requires the intervention of
engaging in an occupation, profession,
assessors or appraisers to estimate the
or business. The obligation to pay the
value of such property before the
tax is based on the voluntary action of
amount due from each taxpayer can be
the person taxed in performing the act
determined. The phrase “ad valorem”
or engaging in the activity which is
means literally, “according to value.”
subject to the excise. The term “excise
(e.g., real estate tax, excise tax on
tax” is synonymous with “privilege tax”
automobiles, non-essential goods such
and the two are often used
as jewelry and perfumes, customs
interchangeably (e.g., income tax, value
duties (except on cinematographic
added tax, estate tax, donor’s tax).
films)).
(c) Mixed
(2) As to burden or incidence
(a) Direct Taxes – taxes which are
demanded from persons who also (4) As to purpose
shoulder them; taxes for which the (a) General or Fiscal Tax – levied for the
taxpayer is directly or primarily liable, or general or ordinary purposes of the
which he cannot shift to another (e.g., Government, i.e., to raise revenue for
income tax, estate tax, donor’s tax, governmental needs (e.g., income tax,
community tax) VAT, and almost all taxes).
(b) Indirect Taxes – taxes which are (b) Special/Regulatory/Sumptuary Tax –
demanded from one person in the levied for special purposes, i.e., to
expectation and intention that he shall achieve some social or economic ends
indemnify himself at the expense of irrespective of whether revenue is
another, falling finally upon the actually raised or not (e.g., protective
ultimate purchaser or consumer; taxes tariffs or customs duties on imported
levied upon transactions or activities goods to enable similar products
before the articles subject matter manufactured locally to compete with
thereof, reach the consumers who such imports in the domestic market).
ultimately pay for them not as taxes but
Tariff duties intended mainly as a
as part of the purchase price. Thus, the
source of revenue are relatively low so
person who absorbs or bears the burden
as not to discourage imports.
of the tax is other than the one on whom
it is imposed and required by law to pay
the tax. Practically all business taxes
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(5) As to scope (or authority imposing the tax) situs is necessarily in the state which has
(a) National – taxes imposed by the jurisdiction or which exercises dominion over
national government (e.g., national the subject in question. Within the territorial
internal revenue taxes, customs duties, jurisdiction, the taxing authority may
and national taxes imposed by laws). determine the situs.
(b) Municipal or Local – taxes imposed by
local governments (e.g., business taxes
Factors that Determine Situs:
that may be imposed under the Local
(1) Nature of the tax;
Government Code, professional tax).
(2) Subject matter of the tax (person, property,
act or activity);
(6) As to graduation
(a) Progressive – The rate of tax increases as (3) Possible protection and benefit that may
the tax base or bracket increases, e.g., accrue both to the government and the
income tax, estate tax, donor’s tax. taxpayer;
(b) Regressive – The rate of tax decreases as (4) Citizenship of the taxpayer;
the tax base or bracket increases. There is
(5) Residence of the taxpayer;
no regressive tax in the Philippines.
(6) Source of income.
(c) Proportionate – The rate of tax is based on
a fixed percentage of the amount of the
property, receipts or other basis to be taxed, (b) Situs of Income Tax
e.g., real estate tax, VAT, and other
percentage taxes. Taxpayer Source of Income
Citizen- Residency Within Without
(d) Digressive – A fixed rate is imposed on a
ship Phils. Phils.
certain amount and diminishes gradually
on sums below it. The tax rate in this case Filipino Resident Taxable Taxable
is arbitrary because the increase in tax rate
is not proportionate to the increase of tax Filipino Non- Taxable Non-
base. Resident Taxable
Alien Resident Taxable Non-
Taxable
Regressive/Progressive system of taxation
A regressive tax must not be confused with the Alien Non- Taxable Non-
regressive system of taxation. Resident Taxable
In a society where the majority of the people
have low incomes, regressive taxation system (c) Situs of Property Tax
exists when there are more indirect taxes
imposed than direct taxes. Since the low- Kind of Property Situs
income sector of the population as a whole Real property Where it is located
buys more consumption goods on which the (lex rei sitae)
indirect taxes are collected, the burden of Tangible Personal Where property is
indirect taxes rests more on them than on the property physically located
more affluent groups. although the owner
A progressive tax is, therefore, also different resides in another
from a progressive system of taxation. jurisdiction.
Intangible personal Gen Rule: Domicile
property (e.g., of the owner.
L. SITUS OF TAXATION credits, bills Mobilia sequuntur
(a) Meaning: Situs of taxation literally means receivables, bank personam
the place of taxation. The basic rule is that the deposits, bonds, (movables follow
state where the subject to be taxed has a situs promissory notes, the person)
may rightfully levy and collect the tax; and the mortgage loans,
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Kind of Property Situs General Rule: Tax laws are construed strictly
judgments and against the government and liberally in favor
corporate stocks) of the taxpayer. [Manila Railroad Co. v. Coll. of
Exceptions: Customs, G.R. No. L-30264 (1929)].
(1) When property No person or property is subject to taxation
has acquired a unless within the terms or plain import of a
business situs in taxing statute. (see72 Am.Jur. 2d 44).
another
jurisdiction; or Taxes, being burdens, they are not to be
presumed beyond what the statute expressly
(2) When the law and clearly declares. [Coll. v. La Tondena, G.R.
provides for the No. L-10431 (1962)]. Thus, a tax payable by
situs of the “individuals” does not apply to “corporations.”
subject of tax
(e.g., Sec 104, Tax statutes offering rewards are liberally
NIRC) construed in favor of informers. [Penid v.
Virata, G.R. No. L-44004 (1983)].

(d) Situs of Excise Tax Exceptions:


Kind of Excise Tax Situs (1) The rule of strict construction as against the
Income Tax Source of the government is not applicable where the
income, nationality language of the statute is plain and there is
or residence of no doubt as to the legislative intent. (see 51
taxpayer (Sec. 23, Am.Jur.368). In such case, the words
NIRC) employed are to be given their ordinary
meaning. E.g. Word “individual” was
Donor’s Tax Location of changed by the law to “person”. This
property; nationality clearly indicates that the tax applies to
or residence of both natural and juridical persons, unless
taxpayer otherwise expressly provided.
Estate Tax Location of (2) The rule does not apply where the taxpayer
property; nationality claims exemption from the tax.
or residence of
taxpayer Tax statutes are to receive a reasonable
construction or interpretation with a view to
carrying out their purpose and intent. They
(e) Situs of Business Tax should not be construed as to permit the
taxpayer easily to evade the payment of tax.
Kind of Business Situs (Carbon Steel Co. v. Lewellyn, 251 U.S. 201).
Tax Thus, the good faith of the taxpayer is not a
VAT Where transaction is sufficient justification for exemption from the
made payment of surcharges imposed by the law for
Sale of Real Where the real failing to pay tax within the period required by
Property property is located law.

Sale of Personal Where the personal


Property property was sold M.2. TAX EXEMPTION AND EXCLUSION
Tax exemptions must be shown to exist clearly
and categorically, and supported by clear
legal provisions. [NPC v. Albay, G.R. No.
M. CONSTRUCTION AND
87479 (1990)]
INTERPRETATION OF
General Rule: In the construction of tax
M.1. TAX LAWS statutes, exemptions are not favored and are
construed strictissimi juris against the
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taxpayer. [Republic Flour Mills v. Comm. & It is an elementary rule in administrative law
CTA, G.R. No. L-25602 (1970)]. that administrative regulations and policies
enacted by administrative bodies to interpret
(a) NPC v. Albay [supra]: Tax exemptions must
the law which they are entrusted to enforce
be shown to exist clearly and categorically,
have the force of law and entitled to great
and supported by clear legal provisions.
respect. They have in their favor a
(b) Floro Cement v. Gorospe [supra]: Claims presumption of legality [Gonzales v. Land
for an exemption must be able to point out Bank, G.R. No. 76759 (1990)]
some provision of law creating the right,
Requisites for validity and effectivity of
and cannot be allowed to exist upon a mere
regulations
vague implication or inference.
(1) Reasonable
(c) CIR v. CA [supra]: Refunds are in the
(2) Within the authority conferred
nature of exemption, and must be
construed strictly against the (3) Not contrary to law and the Constitution
grantee/taxpayer. [Art. 7, NCC]
(d) Comm. v. Kiener Co. Ltd. [G.R. No. L- (4) Must be published
24754 (1975)]: Taxation is the rule and
Tax regulations whose purpose is to enforce of
exemption the exception, and therefore, he
implement existing law must comply with the
who claims exemption must be able to
following requisites to be effective [RP v.
justify his claim or right thereto, by a grant
Pilipinas Shell Petroleum Corp., G.R. No.
expressed in terms “too plain to be
173918 (2008)]:
mistaken and too categorical to be
misinterpreted.” (1) Be published in a newspaper of general
circulation [Art. 2, NCC]; AND
Exceptions: (2) Filed with the UP Law Center Office of the
(a) When the law itself expressly provides for a National Administrative Register (ONAR)
liberal construction, that is, in case of [Ch 2, Book VII, EO 292]
doubt, it shall be resolved in favor of
Note: Administrative rules and regulations
exemption; and
must always be in harmony with the provisions
(b) When the exemption is in favor of the of the law. In case of conflict with the law or
government itself or its agencies, or of the Constitution, the administrative rules and
religious, charitable, and educational regulations are null and void. As a matter of
institutions because the general rule is that policy, however, courts will declare a
they are exempt from tax. regulation or provision thereof invalid only
when the conflict with the law is clear and
(c) When the exemption is granted under
unequivocal.
special circumstances to special classes of
persons.
Administrative interpretations and opinions
(d) If there is an express mention or if the
The power to interpret the provisions of the
taxpayer falls within the purview of the
Tax Code and other tax laws is under the
exemption by clear legislative intent, the
exclusive and original jurisdiction of the
rule on strict construction does not apply.
Commissioner of Internal Revenue subject to
[Comm. v. Arnoldus Carpentry Shop, Inc.,
review by the Secretary of Finance [Sec. 4,
G.R. No. 71122 (1988)].
par.1, NIRC].
Revenue regulations are the formal
M.3. TAX RULES AND REGULATIONS interpretation of the provisions of the NIRC
and other laws by the Secretary of Finance
General Rule: The Secretary of Finance, upon
upon the recommendation of the
recommendation of the CIR, shall promulgate
Commissioner of Internal Revenue.
all needful rules and regulations for the
effective enforcement of the provisions of the General rule: The Commissioner has the sole
NIRC. [Sec. 244, NIRC] authority to issue rulings but he also has the
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power to delegate said authority to his and the discretion of the court limited. [People
subordinates with the rank equivalent to a v. Purisima, G.R. No. L-42050-66 (1978)].
division chief or higher.
M.5. NON-RETROACTIVE APPLICATION OF
Exceptions: The Commissioner may not TAX LAWS TO TAXPAYERS
delegate the following:
General rule: Tax laws are prospective in
(a) The power to recommend the operation. The reason is that the nature and
promulgation of rules and regulations by amount of the tax could not be foreseen and
the Secretary of Finance; understood by the taxpayer at the time the
transaction which the law seeks to tax was
(b) The power to issue rulings of first
completed.
impression or to reverse, revoke, or modify
any existing ruling of the Bureau; Exception: Tax laws may be applied
retroactively provided it is expressly declared
(c) The power to compromise or abate any tax
or clearly the legislative intent. [Lorenzo v.
liability as provided by Sec. 204 and 205 of
Posadas, supra].
the NIRC
Exception to the exception: a tax law should
Exception to the exception: BUT assessments
not be given retroactive application when it
issued by RDOs involving (a) Php500,000 or
would be so harsh and oppressive for in such
less, and (b) minor criminal violations as
case, the constitutional limitation of due
determined by the Secretary of Finance as
process would be violated [Republic v.
recommended by the Commissioner, may be
Fernandez, supra].
compromised by a Regional Evaluation Board
(CHAIRMAN: Regional Director; MEMBERS:
Assistant Regional Director, heads of the
Legal, Assessment and Collection Divisions,
N. SOURCES OF TAX LAWS
and the Revenue District Officer having
jurisdiction over the taxpayer.) [Sec. 7, NIRC]. (a) Constitution of the Philippines
Decisions of the Supreme Court applying or A constitutional provision regarding taxation
interpreting existing tax laws are binding on is primarily intended to limit and regulate the
all subordinate courts and have the force and exercise of taxation power. The State can
effect of law. As provided for in Article 8 of the exercise the power to tax even if the
Civil Code, they “form part of the law of the Constitution is completely silent about
land”. taxation.

The same is also true with respect to decisions (b) Statutes


of the Court of Tax Appeals. However, by the The present tax statutes of the Philippines are
nature of its jurisdiction, the decisions of this embodied in R.A. 8424, which is not the
court are still appealable to the Supreme prevailing National Internal Revenue Code
Court by a petition for review on certiorari (NIRC) effective January 1, 1998, which was
(Rule 45). [Sec. 11, RA 9282] amended per R.A. 9337 (The VAT Reform Law).

M.4. PENAL PROVISIONS OF TAX LAWS (c) Judicial Decisions


These refer to the decisions for application
Penal provisions of tax laws must be strictly made concerning tax issues by the proper
construed. It is not legitimate to stretch the courts exercising judicial authority of
language of a rule, however beneficent its competent jurisdiction. These courts may be
intention, beyond the fair and ordinary the Supreme Court and the Court of Tax
meaning of its language. Appeals. Their decisions on tax laws comprise
A penal statute should be construed strictly the greater portion of tax jurisprudence. They
against the State and in favor of the accused. form part of the legal system of the Philippines.
The reason for this principle is the tenderness
of the law for the rights of individuals and the By the nature of its jurisdiction, the decisions
object is to establish a certain rule by of the Court of Tax Appeals are still
conformity to which mankind would be safe, appealable to the Supreme Court. The
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decision of the Supreme Court on any matter (g) BIR Revenue Memorandum Circulars and
is final and executory. Bureau of Customs Memorandum Orders
These are administrative rulings or opinions
(d) Executive Orders which are less general interpretations of tax
Executive Orders are regulations issued by the laws being issued from time to time by the
President or some administrative authority Commissioner of the Internal Revenue or
under his direction for the purpose of Commissioner of the Bureau of Customs, as
interpreting, implementing, or giving the case may be. They are primarily intended
administrative effect to a provision of the to maintain uniform application of tax laws
Constitution or of some law or treaty. within the department or area of authority.

(e) Tax Treaties and Conventions Memoranda have the status of advisory or sort
These refer to the treaties or international of information service. For this reason, they
agreements with foreign countries regarding can be reversed anytime.
tax enforcement and exemptions. They have
the force and effect of law. Note: The Courts generally respect the
interpretations made by the executive officer
(f) Revenue Regulations by the Department of whose duty is to enforce the law. However,
Finance such interpretations are not conclusive and
Revenue Regulations are rules or orders shall be disregarded if found erroneous by the
having force of law issued by executive Court. [Molina v. Rafferty, 37 Phil 545]
authority of the government to ensure uniform
application of the tax law. (h) BIR Rulings
BIR Rulings are expressed official
In order that administrative regulations may interpretations of the tax laws as applied to
be considered valid, all of the following specific transactions. Unlike a Revenue
requisites must be complied with: Regulation, it is more limited in application.
(1) The regulations must be useful, practical
and necessary for the enforcement of the BIR Rulings are not the final interpreations of
law; the tax laws. They are considered the best
(2) They must be reasonable in their opinion or advisory at the moment and are
provisions; considered sound law until chagned by the
(3) They must not be contrary to law; and court. [CIR v. Ledesma, (1970)]
(4) They must be duly published in the
Official Gazette. [Inter-provincial Auto (i) Local Tax Ordinances
Bus Co. v. Collector, 52 O.G. No. 2, p. 791; These are tax ordinances issued by the
Lim Hoa Ting v. Central Bank, L-10666, province, city, municipality and baranggay
(1958)] subjct to such limitations as provided by the
Local Government Code. [Valencia and Roxas]
Note: Ruling of the Secretary of Finance are
not binding on the courts because the duty or
power of interpreting laws is primarily a O. DOCTRINES IN TAXATION
function of the judiciary.
O.1. PROSPECTIVITY OF TAX LAWS
The Secretary of Finance is vested with General rule: Tax laws are prospective in
authority to revoke, repeal or abrogate acts or operation.
previous rulings of his predecessors in office
because these are not binding on their
Reason: Nature and amount of the tax under
tax laws enacted after the transaction could
successors. [Hilado v. Collector of Internal
not have been foreseen and understood by the
Revenue, et al., 100 Phil 295]
taxpayer at the time of the transaction.
Exception: Tax laws may be applied
retroactively provided it is expressly declared
or it is clearly the legislative intent (e.g.,

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increase taxes on income already earned) Prescriptions found in statutes


except when retroactive application would be
(1) National Internal Revenue Code - statute of
so harsh and oppressive. [Republic v.
limitations in the assessment and
Fernandez, G.R. No. L-9141 (1956)]
collection of taxes therein imposed.
It is a cardinal rule that laws shall have no
Summary of prescription on assessment and
retroactive effect, unless the contrary is
collection:
provided (Art. 4, Civil Code). [Hydro Resources
v. CA, G.R. No. 80276 (1990)] Prescription of assessment AND
collection from the:
The language of the statute must clearly
demand or press that it shall have a a. prescribed last day of filing of
retroactive effect. [Lorenzo v. Posadas, supra] 3 returns (even if return was filed
YEARS earlier than the deadline); OR
Exception to the exception:
b. the day when the return was
Collection of interest in tax cases is not penal
actually filed if filed later than the
in nature; it is but a just compensation to the
last day of filing [Sec. 203, NIRC]
State. The constitutional prohibition against
ex post facto laws is not applicable to the Prescription of assessment in
collection of interest on back taxes. [Central cases of:
Azucarera v. CTA, G.R. No. L-23236 (1967)]
a. false or fraudulent return with
10 intent to evade tax; OR
Non-retroactivity of rulings [Sec. 246, NIRC] YEARS b. failure to file a return [Sec. 222,
General rule: Rulings do not have retroactive NIRC]
application if the revocation, modification, or
From the discovery of the fraud,
reversal will be prejudicial to the taxpayer.
falsity, or omission.
Exceptions:
Prescription of collection of tax if:
(1) Taxpayer’s deliberate misstatement or
a. assessed within the 3-year and
omission of facts
10-year prescriptive periods
(2) BIR’s gathered facts is materially different
b. assessed within the extended
from the facts from which the ruling was 5 period agreed upon by the
based on YEARS Commissioner and taxpayer
(3) Taxpayer acted in bad faith (waiver of the prescriptive period)
Note: The rule on non-retroactivity of rulings Collected by distraint, levy or by a
may be applied only if the parties in the ruling proceeding in court. [Sec. 222,
involve the taxpayer himself/itself. The NIRC]
taxpayer cannot invoke the rulings granted in
favor of the other taxpayers.
Note: The prescriptive period from final
liquidation is three (3) years, except in cases
O.2. IMPRESCRIPTIBILITY OF TAXES of: (1) tentative liquidation; (2) payment under
Unless otherwise provided by law, taxes are protest; (3) fraud; and (4) compliance audit.
imprescriptible. [CIR v. Ayala Securities
Corporation G.R. No. L-29485 (1980)]
(2) Customs Modernization and Tariffs Act
The law on prescription, being a remedial (CMTA) – repealed the Tariff and Customs
measure, should be liberally construed in Code (TCC). Under Sec. 430, it provides that
order to afford such protection. As a corollary, “[i]n the absence of fraud and when the goods
the exceptions to the law on prescription have been finally assessed and released, the
should perforce be strictly construed. assessment shall be conclusive upon all
[Commissioner v. CA, G.R. No. 104171 (1999)] parties three (3) years from the date of final
payment or duties, or upon completion of the
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post-clearance audit. (Note: The same rule (b) Broad sense (Indirect Duplicate Taxation)
was provided under Sec. 1603 of the TCC, but There is double taxation in the broad sense or
it was worded differently). there is indirect duplicate taxation if any of the
elements for direct duplicate taxation is
absent.
(3) Local Government Code – prescribes
It extends to all cases in which there is a
prescriptive periods for the assessment from
burden of two or more pecuniary impositions.
the date they became due (5 years) and
For example, a tax upon the same property
collection (5 years) of taxes (including Real
imposed by two different states.
Property Taxes) from the date of assessment
by administrative or judicial action. The Double taxation, standing alone and not being
prescriptive period is 3 years if the tax accrued forbidden by our fundamental law, is not a
before the effectivity of the Local Government valid defense against the legality of a tax
Code. [Sec. 194 and 270, RA 7160 or the LGC]. measure [Pepsi Cola v. Mun. of Tanauan, G.R.
In case of fraud or intent to evade the payment No. L-31156 (1976)]. But from it might
of taxes, fees, or charges, the same may be emanate such defenses against taxation as
assessed from discovery of the fraud or intent oppressiveness and inequality of the tax.
to evade payment (10 years).
Constitutionality of double taxation
There is no constitutional prohibition against
The prescriptive period is tolled when:
double taxation in the Philippines. It is
(a) The treasurer is legally prevented from something not favored, but is permissible,
making the assessment or collection provided some other constitutional
(b) The taxpayer requests for a requirement is not thereby violated.
reinvestigation and executes a waiver [Villanueva v. City of Iloilo, G.R. No. L-26521
in writing before expiration of the (1968)]
period within which to assess or collect; If the tax law follows the constitutional rule on
and uniformity, there can be no valid objection to
(c) The taxpayer is out of the country or taxing the same income, business or property
otherwise cannot be located. twice. [China Banking Corp. v. CA, G.R. No.
146749 (2003)]
O.3. DOUBLE TAXATION Double taxation in its narrow sense is
undoubtedly unconstitutional but that in the
Means taxing twice the same taxpayer for the
broader sense is not necessarily so. (De Leon,
same tax period upon the same thing or
activity, when it should be taxed once, for the
citing 26 R.C.L 264-265). Where double
taxation (in its narrow sense) occurs, the
same purpose and with the same kind of
taxpayer may seek relief under the uniformity
character of tax.
rule or the equal protection guarantee. (De
(a) Strict sense (Direct Duplicate Taxation) Leon, citing 84 C.J.S.138).
(1) The same property must be taxed twice
when it should be taxed once;
International Double Taxation
(2) Both taxes must be imposed on the same Double taxation usually takes place when a
property or subject matter; person is resident of a contracting state and
(3) For the same purpose; derives income from, or owns capital in, the
(4) By the same State, Government, or taxing other contracting state and both states
authority; impose tax on that income or capital. In order
(5) Within the same territory, jurisdiction or to eliminate double taxation, a tax treaty
taxing district; resorts to several methods. [CIR v. SC Johnson
(6) During the same taxing period; and & Sons, Inc., G.R. No. 127105 (1999)]
(7) Of the same kind or character of tax.
The purpose of these international
agreements is to reconcile the national fiscal
legislations of the contracting parties in order
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to help the taxpayer avoid simultaneous be exercised fairly, equally and uniformly, lest
taxation in two different jurisdictions. More the tax collector kills the 'hen that lays the
precisely, the tax conventions are drafted with golden eggs.' And in order to maintain the
a view towards the elimination of international general public's trust and confidence in the
juridical double taxation, which is defined as government, this power must be used justly
the imposition of comparable taxes in two or and not treacherously." [Roxas v. Court of Tax
more states on the same taxpayer in respect of Appeals, 23 SCRA 276, App120, 1968; Philex
the same subject matter and for identical Mining Corp. vs. Comm. of Internal Revenue,
periods. The apparent rationale for doing 97 SCAD 777,294 SCRA 687 (Aug. 28, 1998)].
away with double taxation is to encourage the
free flow of goods and services and the Note: Justice Holmes once said: “The power to
movement of capital, technology and persons ta is not the power to destroy while this Court
between countries, conditions deemed vital in (the Supreme Court) sits.” The two limitations
creating robust and dynamic economies. on the power of taxation are the inherent and
Foreign investments will only thrive in a fairly constitutional limitations which are intended
predictable and reasonable international to prevent abuse on the exercise of the
investment climate and the protection against otherwise plenary and unlimited power. It is
double taxation is crucial in creating such a the Court’s role to see to it that the exercise of
climate. [CIR v. SC Johnson & Sons, Inc., supra] the power does not transgress these
limitations.
Modes of eliminating double taxation
(a) Allowing reciprocal exemption either by
O.5. ESCAPE FROM TAXATION
law or by treaty;
a. Shifting of tax burden
(b) Allowance of tax credit for foreign taxes Shifting - the transfer of the burden of a tax by
paid; the original payer or the one on whom the tax
(c) Allowance of deductions such as for was assessed or imposed to someone else.
foreign taxes paid, and vanishing What is transferred is not the payment of the
deductions in estate tax; OR tax but the burden of the tax. All indirect taxes
may be shifted; direct taxes cannot be shifted.
(d) Reduction of Philippine tax rate.
(i) Ways of shifting the tax burden
(1) Forward shifting - When the burden of
O.4. POWER TO TAX INVOLVES POWER TO the tax is transferred from a factor of
DESTROY production through the factors of
distribution until it finally settles on the
According to Chief Justice John Marshall, "the ultimate purchaser or consumer.
power to tax involves the power to destroy." Examples: VAT, percentage tax.
[McCulloch vs. Maryland, 17 U.S. [4 Wheat.]
316-428, 4L. ed. 579.] To say, however, that (2) Backward shifting - When the burden of
the power to tax is the power to destroy is to the tax is transferred from the consumer
describe not the purposes for which the taxing or purchaser through the factors of
power may be used but the extent to which it distribution to the factor of production.
may be employed in order to raise revenues. Example: Consumer or purchaser may
(see1 Cooley 178.) Thus, even if a tax should shift tax imposed on him to retailer by
destroy a business, such fact alone could not purchasing only after the price is
invalidate the tax. (84 C.J.S. 46.) reduced, and from the latter to the
wholesaler, and finally to the
Incidentally, our Constitution mandates that manufacturer or producer.
"the rule of taxation shall be uniform and (3) Onward shifting - When the tax is
equitable." In a case, our Supreme Court said: shifted two or more times either forward
"The power of taxation is sometimes called or backward.
also the power to destroy. Therefore, it should
be exercised with caution to minimize injury to
the proprietary rights of the taxpayer. It must

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(ii) Factors determining tax shifting the person who must pay the tax to the
government.
(1) Elasticity of demand and supply - The
more the elasticity, the lower the Incidence of taxation is that point on which the
incidence on the sales. The higher the tax burden finally rests or settles down. It
incidence on supply. takes place when shifting has been effected
(2) Nature of markets – In an oligopolistic from the statutory taxpayer to another.
market (i.e. sellers and many buyers)
tax shifting to buyers is high since few Impact Distinguished from Incidence
sellers can team up to determine the
market price. In a situation where (1) Impact refers to the initial burden of the
there are many buyers and sellers, a tax, while incidence refers to the ultimate
large portion of tax will be borne by burden of the tax.
sellers. For a monopolistic market, the (2) Impact is at the point of imposition,
entire tax burden falls on the incidence occurs at the point of settlement.
shoulders of the buyer. (3) The impact of a tax falls upon the person
(3) Government policy on pricing – In the from whom the tax is collected and the
case of government price control, the incidence rests on the person who pays it
supplier cannot increase prices, hence eventually.
cannot shift tax burden to buyers and Example: Suppose a tax — excise duty — is
vice versa. imposed on soap. Its impact is on the
(4) Geographical location – If taxes are producers, in the first instance, as they are
imposed on certain regions, it is hard liable to pay it to the government. But, the
to shift them to consumers because producers may succeed in collecting it
consumers will move to regions with from the consumers by raising the price of
low taxes. soap by the amount of tax. In that case,
(5) Nature of tax (Direct or Indirect tax) – consumers eventually pay the tax and so
Direct tax e.g. PAYE (pay-as-you- the incidence falls upon them.
earn) cannot be shifted whatsoever (4) Impact may be shifted but incidence
while indirect taxes can be shifted cannot. For, incidence is the end of the
through increase in prices. shifting process. Sometimes, however,
(6) Rate of tax – If too high, shifting can when no shifting is possible, as in the case
occur backwards or forwards, if too of income tax or such other direct taxes,
low, it may be absorbed by the the impact coincides with incidence on the
manufacturer. same person.
(7) Time available for adjustment – The
person who can adjust faster (buyer or Relationship between Impact, Shifting, and
seller) will be able to shift tax e.g. if Incidence of a Tax
the buyer cash shift to substitute The impact is the initial phenomenon, the
goods, the seller will bear the tax shifting is the intermediate process, and the
burden. incidence is the result.
(8) The tax point Impact is the imposition of the tax; shifting is
the transfer of the tax; while incidence is the
setting or coming to rest of the tax. (e.g.
(ii) Taxes that can be shifted
impact in VAT is on the producer who shifts
(a) Value-added Tax
the burden to the customer who finally bears
(b) Percentage Tax
the incidence of the tax)
(c) Excise Tax
b. Tax avoidance (Tax Minimization)
The exploitation by the taxpayer of legally
(iii) Meaning of impact and incidence of
permissible alternative tax rates or methods of
taxation
assessing taxable property or income in order
Impact of taxation is the point on which a tax
to avoid or reduce tax liability. It is politely
is originally imposed. In so far as the law is
concerned, the taxpayer, the subject of tax, is
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called “tax minimization” and is NOT Tax Tax Evasion


punishable by law. Avoidance
Example: A person refrains from engaging in Means Legal Illegal
some activity or enjoying some privilege in Outcome of Outcome of
order to avoid the incidental taxation or to tax planning tax fraud
lower his tax bracket for a taxable year. Punishable No Yes
?
Purpose Merely Entirely
c. Tax evasion (Tax Dodging) minimize escape
Tax Evasion - is the use by the taxpayer of payment of payment of
illegal or fraudulent means to defeat or lessen taxes (tax taxes
the payment of a tax. It is also known as “tax savings)
dodging.” It is punishable by law.
Example: Deliberate failure to report a taxable Other matter(s):
income or property; deliberate reduction of Transformation – method of escape in
income that has been received; overstatement taxation whereby the manufacturer or
of expenses. producer upon whom the tax has been
imposed pays the tax and endeavors to recoup
Elements of Tax Evasion himself by improving his process of production
(1) The end to be achieved. Example: the thereby turning out his units of products at a
payment of less than that known by the lower cost. The taxpayer escapes by a
taxpayer to be legally due, or in paying no transformation of the tax into a gain through
tax when such is due. the medium of production.

(2) An accompanying state of mind described


as being “evil,” “in bad faith,” “willful” or O.6. EXEMPTION FROM TAXATION
“deliberate and not accidental.”
(a) Meaning of exemption from taxation
(3) A course of action (or failure of action) The grant of immunity to particular persons or
which is unlawful. corporations or to person or corporations of a
Since fraud is a state of mind, it need not be particular class from a tax which persons and
proved by direct evidence but may be inferred corporations generally within the same state
from the circumstances of the case. Thus: or taxing district are obliged to pay. It is an
immunity or privilege; it is freedom from a
(1) The failure of the taxpayer to declare for financial charge or burden to which others are
taxation purposes his true and actual subjected. It is strictly construed against the
income derived from his business for two taxpayer.
consecutive years has been held as an
indication of his fraudulent intent to cheat Taxation is the rule; exemption is the
the government of its due taxes. [Republic exception. He who claims exemption must be
v. Gonzales, G.R. No. L-17962 (1965)] able to justify his claim or right thereto, by a
grant expressed in terms “too plain to be
(2) The substantial underdeclaration of mistaken and too categorical to be
income in the income tax returns of the misinterpreted.” If not expressly mentioned in
taxpayer for four (4) consecutive years the law, it must at least be within its purview
coupled with his intentional overstatement by clear legislative intent.
of deductions justifies the finding of fraud.
[Perez v. CTA and Collector, G.R. No. L-
10507 (1958)]. Grounds for Tax Exemption
(1) It may be based on contract.
(2) It may be based on some ground of public
Tax Avoidance v. Tax Evasion policy.
Tax Tax Evasion
(3) It may be created in a treaty on grounds of
Avoidance
reciprocity or to lessen the rigors of
Also called Tax Tax Dodging
international or multiple taxation.
as Minimization
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But equity is NOT a ground for tax exemption. Exemptions are not presumed, but when
Exemption from tax is allowable only if there public property is involved, exemption is
is a clear provision. While equity cannot be the rule, and taxation is the exception.
used as a basis or justification for tax
(iii) Contractual - The legislature of a State
exemption, a law may validly authorize the
may, in the absence of special restrictions
condonation of taxes on equitable
in its constitution, make a valid contract
considerations.
with a corporation in respect to taxation,
and that such contract can be enforced
against the State at the instance of the
(b) Nature of tax exemption
corporation [Casanovas v. Hord, G.R. No.
(1) Mere personal privilege - cannot be
3473 (1907)]. In the real sense of the term
assigned or transferred without the
and where the non-impairment clause of
consent of the legislature. The legislative
the Constitution can rightly be invoked, this
consent to the transfer may be given either
includes those agreed to by the taxing
in the original act granting the exemption
authority in contracts, such as those
or in a subsequent law
contained in government bonds or
(2) General rule: Revocable by the debentures, lawfully entered into by them
government. under enabling laws in which the
government, acting in its private capacity,
Exception: If founded on a contract which is
sheds its cloak of authority and waives its
protected from impairment. But the
governmental immunity.
contract must contain the essential
elements of other contracts. An exemption These contractual tax exemptions,
provided for in a franchise, however, may however, are not to be confused with tax
be repealed or amended pursuant to the exemptions granted under franchises. A
Constitution [Art. XII, Sec. 11, 1987 franchise partakes the nature of a grant
Constitution]. A legislative franchise is a which is beyond the purview of the non-
mere privilege. impairment clause of the Constitution.
[Manila Electric Company v. Province of
(3) Implies a waiver on the part of the
government of its right to collect taxes due Laguna, G.R. No. 131359 (1999)]
to it, and, in this sense, is prejudicial
thereto. Hence, it exists only by virtue of an
(d) Rationale of Tax Exemption
express grant and must be strictly
Such exemption will benefit the body of the
construed.
people and not particular individuals or
(4) Not necessarily discriminatory, provided it private interest and that the public benefit is
has reasonable foundation or rational basis. sufficient to offset the monetary loss entailed
Where, however, no valid distinction exists, in the grant of the exemption.
the exemption may be challenged as
violative of the equal protection guarantee
Principles of Tax Exemption:
or the uniformity rule.
(1) As the power of taxation is a high
prerogative of sovereignty, the relinquishment
(c) Kinds of tax exemption is never presumed and any reduction or
(i) Express or Affirmative - either entirely or in diminution thereof with respect to its mode or
part, may be made by provisions of the its rate, must be strictly construed, and the
Constitution, statutes, treaties, ordinances, same must be couched in clear and
franchises, or contracts. unmistakable terms in order that it may be
applied. [Floro Cement v. Gorospe, G.R. No. L-
(ii) Implied or Exemption by Omission - when a
46787 (1991)]
tax is levied on certain classes without
mentioning the other classes. Every tax (2) When granted, they are strictly construed
statute, in a very real sense, makes against the taxpayer [Luzon Stevedoring Co. v.
exemptions since all those not mentioned CTA, G.R. No. L-30232 (1988)]
are deemed exempted. The omission may
be either accidental or intentional.
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(3) Tax exemptions are strictly construed O.9. COMPROMISE AND TAX AMNESTY
against the taxpayer, they being highly
COMPROMISE
disfavored and may almost be said “to be
odious to the law.” [Manila Electric Company v. (a) A contract whereby the parties, by making
Vera, G.R. No. L-29987 (1975)] reciprocal concessions avoid litigation or
put an end to one already commenced. (Art.
2028, Civil Code). It involves a reduction of
(e) Revocation of Tax Exemption the taxpayer’s liability.
General Rule: Revocable by the government. (b) Requisites of a tax compromise:
Exception: Contractual tax exemptions may (1) The taxpayer must have a tax liability.
not be unilaterally so revoked by the taxing
(2) There must be an offer (by the taxpayer
authority without thereby violating the non-
or Commissioner) of an amount to be
impairment clause of the Constitution.
paid by the taxpayer.
(3) There must be acceptance (by the
O.7. DOCTRINE OF EQUITABLE Commissioner or the taxpayer, as the
RECOUPMENT case may be) of the offer in settlement of
the original claim.
A claim for refund barred by prescription may
be allowed to offset unsettled tax liabilities.
The doctrine finds NO application in this TAX AMNESTY
jurisdiction.
(a) Definition
A tax amnesty partakes of an absolute
O.8. COMPENSATION AND SET-OFF forgiveness or waiver by the Government of its
right to collect what otherwise would be due it,
General rule: Internal revenue taxes cannot be
and in this sense, prejudicial thereto,
the subject of set-off or compensation
particularly to give tax evaders, who wish to
[Republic v. Mambulao Lumber, G.R. No. L-
relent and are willing to reform a chance to do
17725 (1962)]
so and become a part of the new society with
Reasons: a clean slate. [Republic v. IAC, G.R. No. L-
(1) This would adversely affect the 69344 (1991)]
government revenue system [Philex Mining A tax amnesty, much like a tax exemption, is
v. CA, G.R. No. 125704 (1998)]. never favored nor presumed in law. If granted,
(2) Government and the taxpayer are not the terms of the amnesty, like that of a tax
creditors and debtors of each other. The exemption, must be construed strictly against
payment of taxes is not a contractual the taxpayer and liberally in favor of the taxing
obligation but arises out of a duty to pay. authority. The State cannot strip itself of the
[Republic v. Mambulao Lumber, supra] most essential power of taxation by doubtful
words. He who claims an exemption (or an
Exception: If the claims against the amnesty) from the common burden must
government have been recognized and an justify his claim by the clearest grant of
amount has already been appropriated for organic or state law. It cannot be allowed to
that purpose. Where both claims have already exist upon a vague implication. If a doubt
become (1) due and (2) demandable as well as arises as to the intent of the legislature, that
(3) fully liquidated, compensation takes place doubt must be resolved in favor of the state.
by operation of law under Art. 1200 in relation [CIR v. Marubeni Corp., G.R. No. 137377
to Articles 1279 and 1290 of the NCC, and both (2001)].
debts are extinguished to the concurrent
amount. [Domingo v. Garlitos, G.R. No. L-
18994 (1963)] (b) Amnesty distinguished from tax exemption
Tax amnesty is immunity from all criminal and
civil obligations arising from non-payment of
taxes. It is a general pardon given to all
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taxpayers. It applies to past tax periods, hence The doctrine of locus standi is the right of
of retroactive application. [People v. appearance in a court of justice. The doctrine
Castañeda, G.R. No. L-46881 (1988)] requires a litigant to have a material interest
in the outcome of a case. In private suits, locus
Tax exemption is immunity from all civil
standi requires a litigant to be a "real party in
liability only. It is an immunity or privilege, a
interest," which is defined as "the party who
freedom from a charge or burden of which
stands to be benefited or injured by the
others are subjected. [Greenfield v. Meer, C.A.
judgment in the suit or the party entitled to the
No.-156 (1946)]. It is generally prospective in
avails of the suit."
application (Dimaampao, 2005, p. 111).
In public suits, this Court recognizes the
difficulty of applying the doctrine especially
Tax Amnesty v. Tax Exemption when plaintiff asserts a public right on behalf
Tax of the general public because of conflicting
Tax Amnesty
Exemption public policy issues. On one end, there is the
Immunity Immunity right of the ordinary citizen to petition the
from civil, from civil courts to be freed from unlawful government
criminal, liability (relief intrusion and illegal official action. At the
administrative from paying other end, there is the public policy precluding
Benefit
liability taxes) excessive judicial interference in official acts,
arising from which may unnecessarily hinder the delivery of
non-payment basic public services.
of taxes
The Court has adopted the "direct injury test"
Past tax Future tax to determine locus standi in public suits. In
Coverage
liability liability People v. Vera, it was held that a person who
Actual Yes None impugns the validity of a statute must have "a
Revenue personal and substantial interest in the case
Loss such that he has sustained, or will sustain
direct injury as a result." the "direct injury test"
O.10. TAXPAYER’S SUIT in public suits is similar to the "real party in
interest" rule for private suits under section 2,
a. Nature and Concept Rule 3 of the 1997 Rules of Civil Procedure.
Taxpayer’s suit – refers to a case where the act [Planter’s Products, Inc. v. Fertiphil
complained of directly involves the illegal Corporation, G.R. no. 166006, (March 14,
disbursement of public funds derived from 2008)]
taxation. [Kilosbayan v. Guingona, Jr. (1994)]
As applied to taxation:
b. As distinguished from a citizen’s suit It is well-stated that the validity of a statute
The plaintiff in a taxpayer's suit is in a different may be contested only by one who will sustain
category from the plaintiff in a citizen's suit. In a direct injury in consequence of its
the former, the plaintiff is affected by the enforcement. Yet, there are many decisions
expenditure of public funds, while in the latter, nullifying, at the instance of taxpayers, laws
he is but the mere instrument of the public providing for the disbursement of public funds,
concern. [De Castro v. Judicial and Bar Council upon the theory that "the expenditure of
(2010)] public funds by an officer of the state for the
purpose of administering an unconstitutional
c. Requisites of a taxpayer’s suit challenging act constitutes a misapplication of such
the constitutionality of a tax measure or act of funds," which may be enjoined at the request
a taxing authority; concept of locus standi, of a taxpayer. [Pascual v. Secretary of Public
doctrine of transcendental importance and Works (1960)]
ripeness for judicial determination A taxpayer is allowed to sue where there is a
claim that public funds are illegally disbursed,
(1) Concept of locus standi as applied in or that the public money is being deflected to
taxation any improper purpose, or that there is wastage
of public funds through the enforcement of an
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invalid or unconstitutional law. A person suing issue as the final arbiter of all justiciable
as a taxpayer, however, must show that the act controversies. The doctrine of standing, being
complained of directly involves the illegal a mere procedural technicality, should be
disbursement of public funds derived from waived, if at all, to adequately thresh out an
taxation. He must also prove that he has important constitutional issue.
sufficient interest in preventing the illegal
expenditure of money raised by taxation and
that he will sustain a direct injury because of (3) Ripeness for judicial determination
the enforcement of the questioned statute or
“Ripeness for judicial determination” means
contract. In other words, for a taxpayer’s suit
that litigation is inevitable or there is no
to prosper, two requisites must be met:
adequate relief available in any other form or
(1) public funds derived from taxation are proceeding.
disbursed by a political subdivision or
instrumentality and in doing so, a law is
violated or some irregularity is committed and CJH Development Corp. V. BIR (2008):
However, CJH is not left without recourse. The
(2) the petitioner is directly affected by the
tariff and customs code provides for the
alleged act. [Mamba v. Lara, G.R. no. 165109,
administrative and judicial remedies available
(Dec. 14, 2009)]
to a taxpayer who is minded to contest an
assessment, subject of course to certain
reglementary periods. The TCC provides that a
(2) Doctrine of transcendental importance
protest can be raised provided that payment
Recognizing that a strict application of the first be made of the amount due. The decision
"direct injury" test may hamper public interest, of the Collector can be reviewed by the
this court relaxed the requirement in cases of Commissioner of Customs who can approve,
"transcendental importance" or with "far modify or reverse the decision or action of the
reaching implications." being a mere Collector. If the party is not satisfied with the
procedural technicality, it has also been held ruling of the Commissioner, he may file the
that locus standi may be waived in the public necessary appeal to the Court of Tax Appeals.
interest. [Ibid] Afterwards, the decision of the Court of Tax
Appeals can be appealed to this Court.
Planters Products, Inc. v. Fertiphil Corp.: even
assuming arguendo that there is no direct
injury, We find that the liberal policy
consistently adopted by this court on locus
standi must apply. The issues raised by
Fertiphil are of paramount public importance.
It involves not only the constitutionality of a
tax law but, more importantly, the use of taxes
for public purpose. Former President Marcos
issued LOI no. 1465 with the intention of
rehabilitating an ailing private company. This
is clear from the text of the LOI. PPI is
expressly named in the LOI as the direct
beneficiary of the levy. Worse, the levy was
made dependent and conditional upon ppi
becoming financially viable. The LOI provided
that "the capital contribution shall be
collected until adequate capital is raised to
make PPI viable."

The constitutionality of the levy is already in


doubt on a plain reading of the statute. It is our
constitutional duty to squarely resolve the
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II. National Taxation material to be used, the manner in which the


process of denaturing shall be effected, so as
to render the alcohol suitably denatured and
A. ORGANIZATION AND FUNCTIONS OF unfit for oral intake, the bonds to be given, the
THE BUREAU OF INTERNAL REVENUE books and records to be kept, the entries to be
made therein, the reports to be made to the
CIR, and the signs to be displayed in the
A.1. RULE-MAKING AUTHORITY OF THE
business ort by the person for whom such
SECRETARY OF FINANCE
denaturing is done or by whom, such alcohol
a. Authority of the Secretary of Finance to is dealt in; 

promulgate rules and regulations (Sec. 244,
(g) The manner in which revenue shall be
NIRC)
collected and paid, the instrument, document
The Secretary of Finance, upon or object to which revenue stamps shall be
recommendation of the CIR, shall promulgate affixed, the mode of cancellation of the same,
all needful rules and regulations for effective the manner in which the proper books,
enforcement of the provisions of the Code. records, invoices and other papers shall be
kept and entries therein made by the person
subject to the tax, as well as the manner in
b. Specific provisions to be contained in rules which licenses and stamps shall be gathered
and regulations (Sec. 245, NIRC) up and returned after serving their purposes;
(a) The time and manner in which Revenue (h) The conditions to be observed by revenue

 Regional Director shall canvass their officers respecting the enforcement of Title III
respective Revenue Regions for the purpose of imposing a tax on estate of a decedent, and
discovering persons and property liable to other transfers mortis causa, as well as on
national internal revenue taxes, and the gifts and such other rules and regulations
manner in which their lists and records of which the CIR may consider suitable for the
taxable persons and taxable objects shall be enforcement of the said Title III; 

made and kept; 

(i) The manner in which tax returns,
(b) The forms of labels, brands or marks to be information and reports shall be prepared and
required on goods subject to an excise tax, and reported and the tax collected and paid, as
the manner in which the labelling, branding or well as the conditions under which evidence of
marking shall be effected; 
 payment shall be furnished the taxpayer, and
(c) The conditions under which and the the preparation and publication of tax
manner in which goods intended for export, statistics;
which if not exported would be subject to an (j) The manner in which internal revenue taxes,
excise tax, shall be labelled, branded or such as income tax, including withholding tax,
marked; estate and donor's taxes, value-added tax,
(d) The conditions to be observed by revenue other percentage taxes, excise taxes and
officers respecting the institutions and documentary stamp taxes shall be paid
conduct of legal actions and proceedings; 
 through the collection officers of the Bureau of
Internal Revenue or through duly authorized
(e) The conditions under which goods agent banks which are hereby deputized to
intended for storage in bonded warehouses receive payments of such taxes and the
shall be conveyed thither, their manner of returns, papers and statements that may be
storage and the method of keeping the entries filed by the taxpayers in connection with the
and records in connection therewith, also the payment of the tax:
books to be kept by Revenue Inspectors and
the reports to be made by them in connection Provided, however, That notwithstanding the
with their supervision of such houses; 
 other provisions of this Code prescribing the
place of filing of returns and payment of taxes,
(f) The conditions under which denatured the CIR may, by rules and regulations, require
alcohol may be removed and dealt in, the that the tax returns, papers and statements
character and quantity of the denaturing
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that may be filed by the taxpayers in prescribing the place of filing of returns and
connection with the payment of the tax. payments of taxes by large taxpayers.
Provided, however, That notwithstanding the
other provisions of this Code prescribing the
A.2. JURISDICTION, POWER AND
place of filing of returns and payment of taxes,
FUNCTIONS OF THE COMMISSIONER OF
the CIR may, by rules and regulations require
INTERNAL REVENUE
that the tax returns, papers and statements
and taxes of large taxpayers be filed and paid,
respectively, through collection officers or
a. Powers and duties of the Bureau of Internal
through duly authorized agent banks:
Revenue (Sec. 2, NIRC)
Provided, further, That the CIR can exercise
(1) To assess and collect national internal
this power within six (6) years from the
taxes, fees, and charges;
approval of Republic Act No. 7646 or the
completion of its comprehensive (2) To enforce all forfeitures, penalties and
computerization program, whichever comes fines connected therewith;
earlier: (3) To execute judgment in all cases decided in
Provided, finally, That separate venues for the its favor by the CTA and the ordinary courts;
Luzon, Visayas and Mindanao areas may be and
designated for the filing of tax returns and (4) To effect and administer the supervisory
payment of taxes by said large taxpayers. and police powers conferred upon it by the Tax
For the purpose of this Section, 'large Code or other special laws.
taxpayer' means a taxpayer who satisfies any
of the following criteria:
b. Power of the Commissioner to interpret tax
(1) Value-Added Tax (VAT) - Business laws and to decide tax cases
establishment with VAT paid or payable of at
least P100,000 for any quarter of the (1) Shall be under the exclusive and original
preceding taxable year; jurisdiction of the CIR, subject to review by the
Secretary of Finance. (Sec. 4, NIRC)
(2) Excise tax - Business establishment 
 with
excise tax paid or payable of at least (2) A ruling by the BIR Commissioner shall be
P1,000,000 for the preceding taxable year; 
 presumed valid unless modified, reversed or
superseded by the Secretary of Finance. 

(3) Corporate Income Tax - Business
establishment with annual income tax paid or (3) A taxpayer who receives an adverse ruling
payable of at least P1,000,000 for the from the CIR may, within thirty (30) days from
preceding taxable year; and 
 the date of receipt of such ruling, seek its
review by the Secretary of Finance, either by
(4) Withholding tax - Business establishment himself/itself or though his/its duly
with withholding tax payment or remittance of authorized representative. 

at least P1,000,000 for the preceding taxable
year. 
 (4) A reversal or modification of the BIR ruling
shall terminate its effectivity upon 
 the
Provided, however, That the Secretary of receipt by the taxpayer or the BIR of written
Finance, upon recommendation of the CIR, notice of reversal or modification, whichever
may modify or add to the above criteria for came earlier.
determining a large taxpayer after considering
such factors as inflation, volume of business, **The Secretary of Finance may now also
wage and employment levels, and similar review the rulings MOTU PROPRIO. (DOF
economic factors. ORDER 7-02)
The penalties prescribed under Section 248
shall be imposed on any violation of the rules c. Non-retroactivity of rulings (Sec. 246, NIRC)
and regulations issued by the Secretary of
Finance, upon recommendation of the CIR, General Rule: No retroactive application if the
revocation, modification or reversal of rules
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and regulations, rulings or circulars will be business within the Philippines [Sec. 24 (A),
prejudicial to the taxpayers. Sec. 25 (A), Sec. 27 (A), Sec. 28 (A), NIRC]. It is
also imposed on the gross income of
Exceptions:
nonresident aliens and foreign corporations
(a) Where the taxpayer deliberately misstates not doing business in the Philippines [Sec. 25
or omits material facts from his return or any (B), (C), (D), Sec. 28 (B), NIRC]. It is further
document required of him by the BIR; imposed as a final tax on certain passive
income (interests, royalties, prizes, and other
(b) Where the facts subsequently gathered
winnings), cash and property dividends,

 by the BIR are materially different from 
 the
capital gains from the sale of domestic shares
facts on which the ruling is based; or 

of stock and real property classified as capital
(c) Where the taxpayer acted in bad faith. 
 assets located in the Philippines (Sec. 24 (B),
Sec. 25 (A) (2), (3), Sec. 27 (D), Sec. 28 (A),
NIRC).
B. NATIONAL INTERNAL REVENUE
Income Tax Law aims to mitigate the evils
CODE (NIRC) OF 1997, AS AMENDED arising from the inequalities of wealth by a
progressive scheme of taxation which places
the burden of taxation on those best able to
B.1. INCOME TAXATION pay [Madrigal v. Rafferty & Concepcion, G.R.
a. DEFINITION, NATURE AND GENERAL No. L-12287 (1918)].
PRINCIPLES
a.1. Income Tax Systems
Definition (a) Global Tax System
Income Tax is defined as a tax on all yearly Under a global tax system, it did not matter
profits arising from property, professions, whether the income received by the taxpayer
trades, or offices, or as a tax on the person’s is classified as compensation income,
income, emoluments, profits and the like business or professional income, passive
[Fisher v. Trinidad, G.R. No. L-2118643 (1924)]. investment income, capital gain, or other
It may be succinctly defined as a tax on income. All items of gross income, deductions,
income, whether gross or net, realized in one and personal and additional exemptions, if
taxable year. any, are reported in one income tax return, and
one set of tax rates are applied on the tax base.
Nature
Income tax is generally classified as an excise (b) Schedular Tax System
tax. It is not levied upon persons, property, Different types of incomes are subject to
funds or profits but upon the right of a person different sets of graduated or flat income tax
to receive income or profits. rates. The applicable tax rate(s) will depend
on the classification of the taxable income and
General Principles the basis could be gross income or net income.
Separate income tax returns (or other types of
In the Philippines, income tax is imposed on
return applicable) are filed by the recipient of
the net income of citizens, resident aliens,
income for the particular types of income
domestic corporations, and nonresident aliens
received.
and foreign corporations engaged in trade or

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Global System Schedular System


It is a personal tax based on the income of the Tax on income producing activities.
taxpayer.
Emphasizes the burden allocation aspects. Emphasizes on revenue and administrative
aspects.

Most equitable system yet developed for Because of its multiple rates, the tax burden of a
distributing tax burden. The burden of an person does not correspond to his income but
individual is closely d related to his resources and rather fall fortuitously on the type of his income. It
his ability to pay. is fixed and final.
It serves as a means for redistributing income and This function is alien to schedular system where in
wealth. Big income earners are subject to higher times of plenty or in times of need, people pay the
taxes than small income earners it serves as an same fixed tax on their income.
automatic counter-cyclical device to generate
more revenues from people in times of expanding
economies and at the same time to collect less
from them in times of depression.
It serves as a supplementary device to accomplish The schedular system cannot perform any of these
non-fiscal goals of the government, such as, to functions.
encourage desired activities. By adjusting the
rates, for instance, it can promote saving or
consumer's demand, or encourage donations
worthy causes.
Administration is not quite as easy as schedular The administration is simple, being confined to
because one has to consider all income from each transaction or activity.
whatever source.

(2) Progressive – The tax rate increases as the


(c) Semi-schedular or Semi-global Tax System tax base increases. It is founded on the ability
to pay principle and is consistent with Sec. 28,
All compensation income, business or
Art. VI, 1987 Constitution.
professional income, capital gain and passive
income not subject to final tax, and other (3) Comprehensive – The Philippines has
income are added together to arrive at the adopted the most comprehensive system of
gross income, and after deducting the sum of imposing income tax by adopting the
allowable deductions, the taxable income is citizenship principle, the residence principle,
subjected to one set of graduated tax rates or and the source principle. Any of the three
normal corporate income tax. With respect to principles is enough to justify the imposition of
such income the computation is global. income tax on the income of a resident citizen
For those other income not mentioned above, and a domestic corporation that are taxed on
they remain subject to different sets of tax a worldwide income.
rates and covered by different returns.
(4) Semi-Schedular or Semi-Global Tax System
Note: The Philippines, under EO 37 (1986) and – The Philippines follows the semi-schedular
RA 8424 (1998), follows a semi-schedular and or semi-global system of income taxation,
semi-global tax system. although certain passive investment incomes
and capital gains from sale of capital assets
(namely: (a) shares of stock of domestic
a.2. Features of the Philippine Income Tax Law
corporations, and (b) real property) are subject
(1) Direct Tax – The tax burden is borne by the to final taxes at preferential tax rates.
income recipient upon whom the tax is
imposed.
a.3. Criteria in Imposing Philippine Income Tax
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(1) Citizenship or Nationality Principle (6) Capital gains tax on sale or exchange of
real property classified as capital asset
A citizen of the Philippines is subject to
Philippine income tax: (7) Final withholding tax on certain passive
investment income paid to residents
(a) On his worldwide income, if he resides in (8) Final withholding tax on income payments
the Philippines; or made to non-residents
(b) Only on his income from sources within the (9) Fringe benefits tax on fringe benefits of
Philippines, if he qualifies as a nonresident supervisory or managerial employees
citizen. (10) Branch profit remittance tax
(11) Tax on improperly accumulated earnings
of corporations
(b) Residence Principle
A resident alien is liable to pay Philippine
income tax on his income from sources within a.5. Taxable Period
the Philippines but is exempt from tax on his
The accounting periods used in determining
income from sources outside the Philippines.
the taxable income of taxpayers are:
(1) Calendar Year - Accounting period of 12
(c) Source of Income Principle months ending on the last day of
An alien is subject to Philippine income tax December. Instances when the Calendar
because he derives income from sources Year is used for the computation of income:
within the Philippines. Thus, a non-resident
i. If the taxpayer's annual accounting
alien or non-resident foreign corporation is
period is other than a fiscal year; or
liable to pay Philippine income tax on income
from sources within the Philippines, such as ii. If the taxpayer has no annual
dividend interest, rent, or royalty, despite the accounting period; or
fact that he has not set foot in the Philippines. iii. If the taxpayer does not keep books of
accounts; or
The income tax law adopts the most
iv. If the taxpayer is an individual [Sec. 43,
comprehensive tax situs of nationality and
NIRC].
residence of the taxpayer and of the generally
accepted and internationally recognized (2) Fiscal Year - Accounting period of 12
income tax base [Tan v. De Rosario, G.R. No. months ending on the last day of any
109289 (1994)]. Resident citizens and month other than December [Sec. 22(Q),
domestic corporations are subjected to NIRC].
income tax liability on their income from all (3) Short Period - Accounting period which
sources within and without the Philippines. starts after the first month of the tax year or
The law adopts the source rule with respect to ends before the last month of the tax year
income received by taxpayers other than (less than 12 months). Instances whereby
resident citizens and domestic corporations. short accounting period arises:
i. When a corporation is newly
a.4. Types of Philippine Income Tax organized.
ii. When a corporation is dissolved.
(1) Graduated income tax on individuals
iii. When a corporation changes
(2) Normal corporate income tax on accounting period.
corporations
iv. When the taxpayer dies.
(3) Minimum corporate income tax on
"Taxable year" means the calendar year, or the
corporations
fiscal year ending during such calendar year,
(4) Special income tax on certain corporations upon the basis of which the net income is
(5) Capital gains tax on sale or exchange of computed under Title II (Tax on Income).
shares of stock of a domestic corporation
classified as capital assets Taxable year includes, in the case of return
made for a fractional part of a year under the

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provisions of Title II, the period for which such


return is made [Sec. 22 (P), NIRC].

a.6. Kinds of Taxpayers


Taxpayer – any person subject to tax imposed
by Title II of the Tax Code [Sec. 22(N), NIRC].
Person – means an individual, a trust, estate
or corporation [Sec. 22(A), NIRC].
For income tax purposes, taxpayers are
classified generally as follows:
(1) Individuals;
(2) Corporations ;
(3) Partnerships (Ordinary and General
Professional Partnerships);
(4) Estates and Trusts;
(5) Co-ownerships

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Primary
Sub-Classification(s)
Classification
Citizens of the Residents citizens
Philippines Non-resident citizens
Residents
Engaged in Trade or Business in the
Aliens Philippines
Individuals Non-residents
Not Engaged in Trade or Business in the
Philippines

Special Classes of
Minimum Wage Earner
Individuals

Domestic Corporations
Corporations Resident Corporations
Foreign Corporations
Non-resident Corporations
Estates and
Trusts
General Business Partnership
Partnerships
General Professional Partnership
Co-
ownerships

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(a) Individual Taxpayers (1) Engaged in trade or business within the


Philippines - If the aggregate period of his stay in
(i) Citizens
the Philippines is more than 180 days during any
(a) Resident Citizens (RC) calendar year.
(b) Non-resident Citizens (NRC) (2) Not engaged in trade or business within the
Philippines - If the aggregate period of his stay in
(a) Citizen of the Philippines who establishes
the Philippines does not exceed 180 days.
to the satisfaction of the Commissioner the
fact of his physical presence abroad with a
definite intention to reside therein.
(iii) Special class of individual employees
(b) Citizen who leaves the Philippines during
(a) Minimum Wage Earner
the taxable year to reside abroad, either as
an immigrant or for employment on a a. A worker in the private sector paid the
permanent basis. statutory minimum wage;
(c) Citizen of the Philippines who works and b. An employee in the public sector with
derives income from abroad and whose compensation income of not more than the
employment thereat requires him to be statutory minimum wage in the non-
physically present abroad most of the time agricultural sector where he/she is assigned.
during the taxable year (183 DAYS).
(d) Citizen previously considered as non-
(b) Corporations
resident citizen and who arrives in the
Philippines at any time during the taxable Includes all types of corporations,
year to reside permanently in the partnerships (no matter how created or
Philippines  Treated as NRC with respect organized), joint stock companies, joint
to his income derived from sources abroad accounts, associations, or insurance
until the date of his arrival in the companies, whether or not registered with
Philippines the SEC.
Excludes general professional partnerships
(GPP), joint venture or consortium formed for
(ii) Aliens
the purpose of undertaking construction
(a) Resident Alien projects, joint venture or consortium
engaging in petroleum, coal, geothermal and
An alien actually present in the Philippines who is
other energy operations pursuant to an
not a mere transient or sojourner is a resident for
operating or consortium agreement under a
income tax purposes.
service contract with the government.
No/Indefinite Intention = RESIDENT: If he lives in
(i) Domestic corporations – A corporation
the Philippines and has no definite intention as to
created and organized under its laws (the
his stay, he is a resident. A mere floating intention
law of incorporation test).
indefinite as to time, to return to another country
is not sufficient to constitute him a transient. (ii) Foreign corporations – A corporation
which is not domestic.
Definite Intention = TRANSIENT: One who comes
to the Philippines for a definite purpose, which in (a) Resident foreign corporations – Foreign
its nature may be promptly accomplished, is a corporation engaged in trade or business
transient. within the Philippines.
Exception: Definite Intention but such cannot be Doing business – The term implies a continuity
promptly accomplished; If his purpose is of such of commercial dealings and arrangements,
nature that an extended stay may be necessary and contemplates, to that extent, the
for its accomplishment, and thus the alien makes performance of acts or works or the exercise of
his home temporarily in the Philippines, then he some of the functions normally incident to,
becomes a resident. and in progressive prosecution of commercial
gain or for the purpose and object of the
(b) Non-resident Alien
business organization (RA 7042, Foreign
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Investments Act). the property owned in common by them in their


individual tax returns for the year and the co-
In order that a foreign corporation may be
ownership is not considered as a separate taxable
regarded as doing business within a State,
entity or a corporation.
there must be continuity of conduct and
intention to establish a continuous business,
such as the appointment of a local agent, and INCOME TAX
not one of a temporary character [CIR v. British
Overseas Airways Corporation, G.R. No. b.1. Definition, Nature and General Principles
65773-74 (1987)].
(b) Non-resident foreign corporations –
Definition
Foreign corporation not engaged in trade or
business within the Philippines Income Tax is defined as a tax on all yearly profits
arising from property, professions, trades, or
(iii) Joint venture and consortium – Essential
offices, or as a tax on the person’s income,
factors of a joint venture or consortium:
emoluments, profits and the like [Fisher v.
(a) Each party must make a contribution, not Trinidad, supra]
necessarily of capital but by way of services,
skill, knowledge, material or money;
Nature
(b) Profits must be shared among the parties;
Income tax is generally classified as an excise tax.
(c) There must be a joint proprietary interest
It is not levied upon persons, property, funds or
and right of mutual control over the subject
profits but upon the right of a person to receive
matter of the enterprise;
income or profits.
(d) There is a single business transaction.

General Principles
(c) Partnerships
(a) A resident citizen of the Philippines is taxable
The Tax Code mandates that every other type of on all income derived from sources within and
business partnership (Ordinary Partnerships) is without the Philippines;
subject to income tax in the same manner and at
(b) A nonresident citizen is taxable only on
the same rate as an ordinary corporation.
income derived from sources within the
General Professional Partnerships (GPP) Philippines;
A general professional partnership is a
(c) An individual citizen of the Philippines who is
partnership formed by persons for the sole
working and deriving income from abroad as
purpose of exercising their common profession,
an overseas contract worker is taxable only on
no part of the income of which is derived from
income derived from sources within the
engaging in any trade or business.
Philippines:
Not considered as a taxable entity for income tax
Provided, That a seaman shall be treated as
purposes. The partners themselves, not the
an overseas contract worker if he is a:
partnership, are liable for the payment of income
tax in their individual capacities. (1) citizen of the Philippines; and
(2) receives compensation for services
rendered abroad as a member of the
(d) Estates and Trusts
complement of a vessel engaged
Taxable estates and trusts are taxed in the same exclusively in international trade
manner and on the same basis as an individual.
(d) An alien individual, whether a resident or not
of the Philippines, is taxable only on income
(e) Co-ownership derived from sources within the Philippines;
For income tax purposes, the co-owners in a co-
ownership report their share of the income from
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(e) A domestic corporation is taxable on all i. Existence of Income


income derived from sources within and (1) There is INCOME, gain or profit
without the Philippines; and
(2) RECEIVED or REALIZED during the taxable
(f) A foreign corporation, whether engaged or not year
in trade or business in the Philippines, is
(3) NOT EXEMPT from income tax
taxable only on income derived from sources
within the Philippines. [Sec. 23, NIRC] (a) "The fact is that property is a tree, income is
the fruit; labor is a tree, income the fruit;
capital is a tree, income the fruit." A tax on
Taxpayer Within Without income is not a tax on property. "Income," as
Resident Citizen   here used, can be defined as "profits or gains."
[Madrigal v. Rafferty, supra]
Non-resident Citizen and  X
OCW (b) A mere increase in the value of property is not
income, but merely unrealized increase in
Resident and Non-resident  X capital. (1 Mertens, Sec. 5.06) The increase in
Alien the value of property is also known as
Domestic Corporation   appraisal surplus or revaluation increment.

Foreign Corporation  X
Income v. Capital {Madrigal v. Rafferty, supra]

B.2. INCOME Income Capital


Denotes a flow of Fund or property
wealth during a existing at one
b.2.1. Definition and Nature definite period of distinct point in time.
Definition time.

(a) Income means all wealth which flows to the Service of wealth Wealth itself
taxpayer other than a mere return of capital. It Subject to tax Return of capital is
includes gain derived from the sale or other not subject to tax
disposition of capital assets. Income is a gain
derived from labor or capital, or both labor Fruit Tree
and capital; and includes the gain derived
from the sale or exchange of capital assets.
ii. Realization of Income
(b) It is an amount of money coming to a person Income is realized when there is a gain or profit
within a specified time, whether as payment derived from a closed and completed transaction.
for services, interest or profit from investment.
Unless otherwise specified. It means cash or Actual vis-à-vis Constructive receipt
its equivalent. Income can also be thought of (1) Actual receipt – Income is actually reduced to
as a flow of the fruits of one's labor. [Conwi v. possession. The realization of gain may take
CTA , G.R. No. 48532 (1992)] the form of actual receipt of cash.
(c) Income may be received in the form of cash, (2) Constructive receipt – An income is
property, service, or a combination of the three. considered constructively received when it is
credited to the account of, or segregated in
favor of a person. The person may withdraw
Nature the said account credited in his favor anytime
Income includes earnings, lawfully or unlawfully without any substantial limitations or
acquired, without consensual recognition, conditions upon which payment or enjoyment
express or implied, of an obligation to repay and is to be made or exercised.
without restriction as their disposition. [James v.
US, 366 US 213(1961)]
Examples:
b.2.2. When Income is Taxable
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(a) Interest credited on savings bank deposit (3) Wages due to workers but remaining
unpaid
(b) Matured interest coupons not yet collected
by the taxpayer Generally, trade and manufacturing businesses
use accrual method while servicing businesses
(c) Dividends applied by the corporation
use cash method. If the service business opted to
against the indebtedness of a stockholder
report on accrual basis, such method can only be
(d) Share in the profit of a partner in a general applied when it comes to reporting of expense. To
professional partnership, although not yet prevent tax evasion, individual taxpayers whose
distributed, is regarded as constructively business consists of the sale of inventories cannot
received; or use cash method. [Valencia and Roxas]
(e) Intended payment deposited in court
(consignation). iv. Cash Method of Accounting versus Accrual
The doctrine of constructive receipt is Method of Accounting
designed to prevent the taxpayer using the Cash method generally reports income upon cash
cash basis from deferring or postponing the collection and reports expenses upon payment. If
actual receipt of taxable income. Without the earned from rendering of services, income is to be
rule, the taxpayer can conveniently select the reported in the year when collected, whether
year in which he will report the income. earned or unearned.
(Dimaampao)
Accrual method generally reports income when
For a taxpayer using the accrual method, the earned and reports expense when incurred. If
determinative question is, when do the facts earned from sale of goods, income is to be
present themselves in such a manner that the reported in the year of sale, irrespective of
taxpayer must recognize income or expense? The collection.
accrual of income and expense is permitted when
the all-events test has been met. This test
Methods of accounting in reporting income and
requires: (1) fixing of a right to income or liability
expenses
to pay; and (2) the availability of the reasonable
[N.B. Not in syllabus; Additional matter]
accurate determination of such income or liability
[CIR v. Isabela Cultural Corporation, G.R. No.
135210 (2001) ].
Installment method vis-à-vis Deferred method
The “As If” Theory of Constructive Income is vis-à-vis Percentage of completion method (in
designed to prevent a cash basis taxpayer to long- term contracts)
delay reporting of income. It also resumes the
Installment Method is a special method of
existence of income on transactions supposedly
accounting whereby income on installment sales
not subject to tax. [Valencia and Roxas]
of property during the year is allowed to be
reported in installments in proportion to the
installment payments actually received in that
iii. Recognition of Income
year, which the gross profit realized or to be
Income realized pertains to the accrual basis of
realized when payment is completed, bears to the
accounting.
total contract price (Sec. 49, NIRC).
Recognition of income in the books is when it is
realized and expenses are recognized when
incurred. It is the right to receive and not the Income may be reported on the installment basis
actual receipt that determines the inclusion of in the following cases:
the amount in gross income
Examples:
Sales of personal property by a dealer
(1) Interest or rent income earned but not
A dealer who regularly sells or otherwise disposes
yet received
of personal property on the installment plan
(2) Rent expense accrued but not yet paid
Sales of real property (inventory) and casual sales
of personalty
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(1) casual sale or other casual disposition of basis. In computing his income for the year of
personal property (not of a kind which would change or any subsequent year, amounts actually
be includible in the inventory of the taxpayer if received during any such year on account of sales
on hand at the close of the taxable year) or other dispositions of property made in any prior
where the selling price > P1,000 and the initial year shall not be excluded. [see Sec. 49(D), NIRC].
payments do not exceed 25% of the selling
price, or
Deferred Payment
(2) sale or other disposition of real property
(inventory), if the initial payments do not (a) If the initial payments exceed 25% of the
exceed 25% of the selling price. Note: This sale selling price, the gain realized may be
is subject to creditable withholding tax and reported on a deferred payment method.
normal tax which is 30% for corporate
(b) The taxable gain or income returnable during
taxpayer or 5% to 32% for individual taxpayer.
the year of sale is the difference between the
selling or contract price and the cost of the
property, even though the entire purchase
Sales of real property considered as capital asset
price has not been actually received in the year
by individuals
of sale.
An Individual who sells or disposes of real
(c) The obligations of the purchaser received by
property, considered as capital asset, if initial
the vendor are to be considered as equivalent
payments do not exceed 25% of the selling price,
of cash.
may pay the capital gains tax in installments (Sec.
49(C), NIRC). Note: This sale is subject to a
capital gains tax of 6% based on the selling price
Personal Property Real Property
or zonal value, whichever is higher.
Dealer
Note: Initial payments are the total payments Dealer in personal Installment
received in cash or property (other than evidences property who method; Provided,
of indebtedness such as promissory notes, regularly sells in initial payments do
mortgages given) by the seller upon or before the installment plan: not exceed 25% of
execution of the instrument of sale during the Installment method selling price
taxable year of the disposition of the real property. *held as ordinary If exceeds 25%--
Considered as initial payments are the asset regardless of Deferred payment
downpayment and all other payments received amount of method
by the seller during the year of sale, including percentage of initial *held as inventory
excess mortgage assumed by the buyer over the payments
basis or cost of the property sold. It contemplates Casual Sale
at least one other payment in addition to the Installment
initial payment. If the entire purchase price is to method; Provided:
be paid in a lump sum in a later year, there being (1) Selling price
no payment during the first year, the income may exceeds
not be returned on the installment basis. php1,000
Selling price is the total amount or price of the (2) Initial
sale including the cash or property received and payments do not
all notes of the buyer or mortgages assumed by exceed 25% of
him. selling price
If either of 2 or both
Contract price is the amount which the purchaser conditions not
contracts to pay the seller in cash. It includes the met—Deferred
excess of the mortgages assumed over the cost or payment method
other basis of the property sold. *personal property
Change from accrual to installment basis not considered
A taxpayer entitled to the benefits of a dealer in inventory
personal property may elect for any taxable year Sale by Individuals
to report his taxable income on the installment
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Installment ii. Claim of right doctrine (or Doctrine of


method; Provided, Ownership, command, or control) – a taxable
initial payments do gain is conditioned upon the presence of a claim
not exceed 25% of of right to the alleged gain and the absence of a
selling price definite unconditional obligation to return or
*held as capital repay that which would otherwise constitute a
asset gain. To collect a tax would give the government
an unjustified preference as to the part of the
money that rightfully and completely belongs to
Percentage of completion (in long-term contracts)
the victim. The embezzler’s title is void.
Income from long-term construction contracts
refers to the earnings derived from construction
of a building, installation or other construction iii. Economic benefit test, Doctrine of Pro\prietary
contract usually covering a period in excess of Interest – any economic benefit to the employee
one year. When income is derived from long-term that increases his net worth, whatever may have
construction contracts, it is generally reported on been the mode by which it is effected, is taxable.
the basis of percentage of completion made every Thus, in stock options, the difference between the
year that will be evidence by the certificates of fair market value of the shares at the time the
engineers or architects. The reportable income is option is exercised and the option price
calculated by deducting from the contract price constitutes additional compensation income to
the actual cost of construction. the employee at the time of exercise (not upon
the grant or vesting of the right).
In recognizing realized revenue for long-term
construction contracts, accountants usually
follow two methods:
iv. Severance Test – under the doctrine of
(a) Completed contract method – requires severance test of income, in order that income
recognition of revenue only when the contract may exist, is necessary that there be a separation
is finally completed; and from capital of something of exchangeable value.
The income required a realization of gain.
(b) Percentage of completion method – requires
recognition of income based on the progress
of work.
v. All Events Test – Under the accrual method of
Long-term contracts are no longer allowed to accounting, expenses are deductible in the
be reported based on the completed contract taxable year in which: (1) all events have occurred
method basis beginning January 1, 1998 which determine the liability; and (2) the amount
pursuant to RA 8424; hence, all long-term of liability can be determined with reasonable
contracts must be reported using the accuracy.
percentage of completion method.
“All events test” requires:
(a) Fixing a right to income or liability to pay;
b.2.3. Tests in Determining Whether Income is and
Earned for Tax Purposes
(b) The availability of reasonably accurate
i. Realization test – no taxable income until there determination of such income or liability.
is a separation from capital of something of
All of the above tests are followed in the
exchangeable value, thereby supplying the
Philippines for purposes of determining whether
realization or transmutation which would result
income is received by the taxpayer or not during
in the receipt of income [Eisner v. Macomber, 252
the year (Mamalateo).
U.S. 189, 190 (1920)]. Thus, stock dividends are
not income subject to income tax on the part of
the stockholder when he merely holds more
b.2.4. Classification of Income
shares representing the same equity interest in
the corporation that declared stock dividends Income may be classified as follows:
[Fisher v Trinidad, supra].
(1) Compensation Income
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The gain derived from labor, especially Income Situs


employment (earned form employer-employee (b) Intangible
relationship) such as salaries and commissions,.
General rule: Place of Sale
These earnings are subject to normal tax.
Exception: Shares of stock of
(2) Profession or Business Income domestic corporations: Place
The value derived from an exercise of profession, of incorporation
business or utiliation of capital including profit
Shares of Place of incorporation
and gain derived from sale or converstion of
Stock of
assets.
Domestic
Corporation
Examples are net income from business and gain
from the sale of assets used in trade or business.
These earnings are subject to normal tax.
B.3. GROSS INCOME
b.3.1. Definition
(3) Passive Income
An income in which the taxpayer merely waits for Gross Income [Sec. 32(A)] – CG2IR2DAP3
the amount to come in. Examples are royalty,
Gross Income means all income derived from
interest, prizes, and winnings. Generally, passive
whatever source, including (but not limited to)
income is subject to final tax.
the following items:
(4) Capital Gain (1) Compensation for services in whatever
An income derived from sale of assets not used in form paid, including, but not limited to
trade or business. Examples are sale of family fees, salaries, wages, commissions, and
home and other sales of shares of stocks which similar items;
are subject to final taxes. Other sales of capital (2) Gross income derived from the conduct of
assets are subject to normal tax. [Valencia and trade or business or the exercise of a
Roxas] profession;
(3) Gains derived from dealings in property;
b.2.5. Situs of Income Taxation (4) Interests;
Income Situs (5) Rents;
Interest Residence of the debtor (6) Royalties;
(7) Dividends;
Dividends Residence of the corporation
(8) Annuities;
Services Place of performance (9) Prizes and winnings;
Rentals Location of the property (10) Pensions; and
(11) Partner's distributive share from the net
Royalties Place of exercise
income of the general professional
Sale of Real Location of realty partnership.
Property The list here is NOT exclusive
Sale of (a) Tangible The term “gross income” whenever used without
Personal qualification is comprehensive, as defined above,
Purchase and sale: Location of
Sale and is different from the limited meaning of gross
income for purposes of minimum corporate
Manufactured w/in and sold income tax or the gross income tax of
w/o: Partly w/in and partly corporations. Gross income includes gross profit
w/o from ordinary business and other income not
Manufactured w/o and sold subject to passive income tax or final withholding
w/in: Partly w/in and partly tax.
w/o Gross income means income, gain, or profit
subject to income tax. It includes the
compensation for personal services, business
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income, profits, and income derived from any the Philippines; and gains, profits and income
source whatever (whether legal or illegal), unless from sale of real property as well as from
it is exempt from income tax under the personal property in the Philippines. As a rule,
Constitution, tax treaty, or statute or it is subject incomes earned within the Philippines are
to final withholding income tax in accordance taxable.
with the semi-global or semi-schedular tax
system adopted by the Philippines.
(ii) Derived entirely from sources without the
It is the difference between gross sales/revenue
Philippines [Sec. 42(C), NIRC]. Examples:
and the cost of goods sold/services. The
compensation for labor or service rendered by
definition of gross income is broad and
overseas contract workers; interest on bonds,
comprehensive to include proceeds from sales of
notes, deposits and the like earned abroad;
transport documents. (Mamalateo)
dividends declared by nonresident foreign
corporation; rental and royalties from property
located outside the Philippines; and gains, profits
b.3.2. Concept of Income From Whaterver Source
and income from sale of real property as well as
Derived
from personal property located outside the
“Income derived from whatever source” means Philippines. As a rule, income earned from
inclusion of all income not expressly exempted outside the Philippines are not taxable except for
within the class of taxable income under the laws resident citizens and domestic corporations.
irrespective of the voluntary or involuntary action
of the taxpayer in producing the gains, and
whether derived from legal or illegal sources (i.e. (iii) Derived from sources partly within or partly
gambling, extortion, smuggling, etc.) without the Philippines. Examples: gains, profits
and income from transportation or other services
rendered partly within and partly outside, and
b.3.3. Gross Income vis-à-vis Net Income vis-à-vis dividend received by a resident citizen from a
Taxable Income resident foreign corporation. (Sec. 43(E), NIRC).
In general, when an income is earned partly from
Gross income – means income, gain or profit
within and partly from without, only income
subject to tax.
within is taxable in the Philippines, except if the
Taxable income – means the pertinent items of taxpayer is a resident citizen or a domestic
gross income specified in the Tax Code, less the corporation. A Filipino citizen or a domestic
deductions and/or personal and additional corporation whose income is derived from within
exemptions, if any, authorized for such types of and without the Philippines is generally subject
income by the Tax Code or other special laws (Sec. to tax.
31, NIRC).

b.3.5. Classification of Income Subject to Tax


b.3.4. Sources of Income Subject to Tax
i. Compensation Income
Source is ascribed to the place wherein the
Income arising from an employer-employee (ER-
income is earned. It is governed by the situs of
EE) relationship. It means all remuneration for
taxation. This classification of income is
services performed by an EE for his ER, including
necessary to determine whether such income is
the cash value of all remuneration paid in any
subject to tax or not. Income may be:
medium other than cash [Sec. 78(A)], unless
specifically excluded by the Tax Code.
(i) Derived entirely from sources within the It includes, but is not limited to, salaries and
Philippines [Sec. 42(A), NIRC]. Examples: wages, honoraria and emoluments, allowances
compensation for labor or service derived from (e.g., transportation, representation,
Philippine sources; interest on bonds, notes, entertainment), commissions, fees (including
deposits and the like earned in the Philippines; directors’ fees, if the director is, at the same time,
dividends declared by domestic corporations; an employee of the payor-corporation), tips,
rentals and royalties from property located within taxable bonuses, fringe benefits except those
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subject to Fringe Benefit Tax (FBT) under Section for services performed as a private secretary, even
33 of the Tax Code, and taxable pensions and if they are performed in the employer’s home is
retirement pay (e.g., retirement benefits earned considered as compensation.
without meeting the conditions for exemption
The term “casual labor” includes labor which is
thereof, such as retirement of less than 50 years
occasional, incidental or regular. “Not in the
of age.)
course of the employer’s trade or business”
includes labor that does not promote or advance
the trade or business of the employer.
General Rule: every form of compensation
income is taxable regardless of how it is earned, The term “remuneration paid for services
by whom it is paid, the label by which it is performed as an employee of a foreign
designated, the basis upon which it is determined, government or an international organization”
or the form in which it is received. The basis upon includes not only remuneration paid for services
which remuneration is paid is immaterial. It may performed by ambassadors, ministers and other
be paid on the basis of piece of work, percentage diplomatic officers and employees but also
of profits, hourly, weekly, monthly, or annually. remuneration paid for services performed as
consular or other officer or employee of a foreign
Exception: The term wages does NOT include
government or as a non-diplomatic
remuneration paid:
representative of such government.
a) For agricultural labor paid entirely in
Compensation income including overtime pay,
products of the farm where the labor is
holiday pay, night shift differential pay, and
performed
hazard pay, earned by MINIMUM WAGE
b) For domestic service in a private home EARNERS (MWE) who has no other returnable
income are NOT taxable and not subject to
c) For casual labor not in the course of the
withholding tax on wages [RA 9504]; Provided,
employer's trade or business
however, that an employee shall not enjoy the
d) For services by a citizen or resident of the privilege of being a MWE and, therefore, his/her
Philippines for a foreign government or entire earning are not exempt from income tax
an int’l organization. [Sec. 78(A), NIRC] and, consequently, from withholding tax if he
receives/earns additional compensation such as
commissions, honoraria, fringe benefits, benefits
The term “remuneration for domestic services” in excess of the allowable statutory amount of
refers to remuneration paid for services of a P82,000 [RA 10653], taxable allowance, and
household nature performed by an employee in other taxable income other than the statutory
or about the private home of the person whom he minimum wage (SMW), holiday pay, overtime pay,
is employed. The services of household personnel hazard pay and night shift differential pay.
furnished to an employee (except rank and file
employees) by an employer shall be subject to the MWEs receiving other income, such as income
fringe benefits tax pursuant to Sec. 33 of the Tax from the conduct of trade, business, or practice of
Code. A private home is the fixed place of abode profession, except income subject to final tax, in
of an individual or family. If the home is utilized addition to compensation income are not
primarily for the purpose of supplying board or exempted from income tax on their income
lodging to the public as a business enterprise, it earned during the taxable year.
ceases to be a private home and remuneration This rule, notwithstanding, the SMW, Holiday Pay,
paid for services performed therein is not overtime pay, night differential pay and hazard
exempted. Services of the household nature in or pay shall still exempt from withholding tax.
about a private home include services rendered
by cooks, maids, butlers, valets, laundresses,
gardeners, chauffeurs of automobiles for family Forms of compensation and how they are
use. The remuneration paid for the services which assessed
are performed in or about rooming or lodging
Cash – If compensation is paid in cash, the full
houses, boarding houses, clubs, hotels, hospitals
amount received is the measure of the income
or commercial officer or establishments is
subject to tax.
considered as compensation. Remuneration paid
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Medium other than money – If services are paid under Section 32 (b)(7)(e) of the Tax Code,
for in a medium other than money (e.g., shares of Provided, that the excess of the ‘de minimis’
stock, bonds, and other forms of property), the benefits over their respective ceilings prescribed
fair market value (FMV) of the thing taken in by these regulations shall be considered as part
payment is the amount to be included as of “other benefits” and the employee receiving it
compensation subject to tax. If the services are will be subject to tax only on the excess over the
rendered at a stipulated price, in the absence of P82,000 ceiling, Provided, further, that MWEs
evidence to the contrary, such price will be receiving, ‘other benefits’ exceeding the P82,000
presumed to be the FMV of the remuneration limit shall be taxable on the excess benefits, as
received. well as on his salaries, wages, and allowances,
just like an employee receiving compensation
income beyond the SMW. Any amount given by
Living quarters or meals the employer as benefits to its employees,
whether classified as “de minimis” benefits or
General Rule: The value to the employee of the
fringe benefits, shall constitute as deductible
living quarters and meals given by the employer
expense upon such employer. Where
shall be added to his compensation subject to
compensation is paid in property other than
withholding.
money, the employer shall make necessary
Exception: If living quarters/meals are furnished arrangements to ensure that the amount of the
to an employee for the convenience of the tax required to be withheld is available for
employer, the value need NOT be included as payment to the BIR.
part of compensation income.
Facilities and privileges of a relatively small value
Classification of Gross Compensation Income
- Facilities and privileges (such an entertainment,
medical services, or so called “courtesy” Basic salary or wage
discounts on purchases), otherwise known as
Salary – earnings received periodically for a
“de minimis benefits” furnished or offered by an
regular work other than manual labor, e.g.,
employer to his employees generally, are NOT
monthly salary of an employee
considered as compensation subject to income
tax and therefore withholding tax if such facilities Wages – earnings received usually according to
are offered or furnished by the employer merely specified intervals of work, as by the hour, day, or
as means of promoting the health, goodwill, week, e.g., a carpenter’s wage.
contentment, or efficiency of his employees.
Backwages are subject to income tax and
withholding tax on wages [BIR Ruling No. DA-
073-2008]

Honoraria – payments given in recognition for


Convenience of the Employer Rule
services performed for which the established
Allowances in kind furnished to the employee for practice discourages charging a fixed fee, e.g.,
and as necessary incident to the performance of honorarium of a guest lecturer
his duties are not taxable [Valencia and Roxas].
If meals, living quarters, and other facilities and
Fixed or variable allowances, i.e. Transportation,
privileges are furnished to an employee for the
Representation, and other allowances such as
convenience of the employer, and incidental to
Cost of Living Allowances (COLA)
the requirement of the employee’s work or
position, the value of that privilege need not be General Rule: Fixed or variable transportation,
included as compensation [Henderson v. representation or other allowances that are
Collector] received by a public officer or employee of a
private entity, in addition to the regular
The amount of “de minimis” benefits confirming
compensation fixed for his position or office is
to the ceiling prescribed shall not be considered
COMPENSATION subject to withholding tax.
in determining the P82,000 [RA 10653] ceiling of
(Rev. Regs. 2-98)
“other benefits” excluded from gross income
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Exception: Any amount paid specifically, either as basic salary together with the overtime pay and
advances or reimbursements for travelling, night differential to arrive at gross salary.
representation and other bona fide ordinary and
necessary expenses incurred or reasonably
expected to be incurred by the employee in the Retirement Pay – a lump sum payment received
performance of his duties are NOT by an employee who has served a company for a
COMPENSATION subject to withholding tax, considerable period of time and has decided to
provided the following conditions are satisfied: withdraw from work into privacy. [RR 6-82, Sec.
2b]
a) It is for ordinary and necessary traveling
and representation or entertainment
expenses paid or incurred by the
In general, retirement pay is taxable except in the
employee in the pursuit of the employer’s
following instances:
trade, business or profession; and
a) SSS or GSIS retirement pays.
b) The employee is required to account or
liquidate for the foregoing expenses. b) Retirement pay (R.A. 7641) due to old age
provided the following requirements are
The excess of actual expenses over advances
met:
made shall constitute taxable income if such
amount is not returned to the employer. The i. The retirement program is
employee is required to account/liquidate for the approved by the BIR
expenses in accordance with the specific Commissioner;
requirements of substantiation for each category ii. It must be a reasonable benefit
of expenses pursuant to Sec.34 of the Tax Code. plan. (Its implementation must be
Note: Reasonable amounts of fair and equitable for the benefit of
reimbursements/advances for traveling and all employees)
entertainment expenses which are pre-computed iii. The retiree should have been
on a daily basis and are paid to an employee employed for 10 years in the said
while he is on an assignment or duty are NOT company;
subject to withholding tax on wages and
substantiation requirements. iv. The retiree should have been 50
years old or above at the time of
retirement; and
Commission – usually a percentage of total sales v. It should have been availed of for
or on certain quota of sales volume attained as the first time.
part of incentive such as sales commission.
Separation pay – taxable if VOLUNTARILY
Fees – received by an employee for the services availed of. It shall not be taxable if involuntary,
rendered to the employer including a director’s i.e., death, sickness, disability, reorganization/
fee of the company, fees paid to the public merger of company and company at the brink of
officials such as clerks of court or sheriffs for bankruptcy or for any cause beyond the control of
services rendered in the performance of their the said official or employee.
official duty over and above their regular salaries.

“For any cause beyond the control.” – Connotes


Tips and Gratuities – those paid directly to the involuntariness on the part of the official or
employee (usually by a customer of the employer) employee. The separation from the service of the
which are not accounted for by the employee to official or employee must not be asked for or
the employer (taxable income but not subject to initiated by him or it was not of his own making.
withholding tax) [RR NO. 2-98, Sec. 2.78.1] Such fact shall be duly established by the
employer by competent evidence which should
be attached to the monthly return for the period
Hazard or Emergency Pay – additional payment
in which the amount paid due to the involuntary
received due to the workers’ exposure to danger
separation was made.
or harm while working. It is normally added to the
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Amounts received by reason of involuntary Fringe Benefits – any good, service, or other
separation remain EXEMPT from income tax even benefit furnished or granted by an employer, in
if the official or the employee, at the time of cash or in kind, in addition to basic salaries of an
separation, had rendered less than ten (10) years individual employee [Sec. 33, NIRC]
of service and/or is below fifty (50) years of age.
De Minimis – privileges of relatively small value
Any payment made by an employer to an as given by the employer to his employees.
employer to an employee on account of dismissal,
Fringe Benefits and De Minimis are not
constitutes compensation regardless of whether
considered compensation subject to income tax
the employer is legally bound by contract, statute,
and withholding tax.
or otherwise, to make such payment.

Overtime Pay – premium payment received for


Pension – a stated allowance paid regularly to a
working beyond regular hours of work which is
person on his retirement or to his dependents on
included in the computation of gross salary of
his death, in consideration of past services,
employee. It constitutes compensation.
meritorious work, age, loss, or injury. Pension is
taxable unless the law states otherwise, OR
unless the BIR approves the pension plan of a
Profit Sharing – the proportionate share in the
private company.
profits of the business received by the employee
in addition to his wages.
Vacation and sick leave – rules in determining
whether money received for vacation and sick
Awards for special services – awards for past
leave is taxable or not:
services or suggestions to employers resulting in
If paid or availed of as salary of an employee who the prevention of theft or robbery, etc. are also
is on vacation or on sick leave notwithstanding his compensations.
absence from work, it constitutes TAXABLE
compensation income. [RR 6-82, 2d]
Beneficial Payments – such as where employer
Monetized value of unutilized VACATION leave
pays the income tax owed by an employee are
credits of ten (10) days or less which were paid to
additional compensation income.
private employees during the year, and the
monetized value of vacation and sick leave
credits paid to government officials and Other forms of compensation – other forms
employees are NOT subject to income tax and to received due to services rendered are
the withholding tax. These are ‘de minimis’ compensation paid in kind, e.g., insurance
benefits.’ [RR no. 5-2011, Sec 2.78.1(A)(7)] Note: premium paid by the employer for insurance
Monetization of sick leave credits of private coverage where the heirs of the employee are the
employees even if not exceeding 10 days is not beneficiaries is the employee’s income.
exempt from income tax and withholding tax on
wages. Note: Any amount which is required by law to be
deducted by the employer from the
Terminal leave or money value of accumulated compensation of an employee including the
vacation and sick leave benefits received by heir withheld tax is considered as part of the
upon death of employee is not taxable. employee’s compensation and is deemed to be
paid to the employee as compensation at the
time the deduction is made. (This also applies to
Thirteenth month pay and other benefits - Not
deductions not required by law.)
taxable if the total amount received is P82,000
[RA 10653] or less. Any amount exceeding
P82,000 is taxable. [Sec. 32(7)e, NIRC] Withholding Tax on Compensation Income
The income recipient (i.e., EE) is the person liable
Fringe Benefits and De Minimis to pay the tax on income, yet to improve the
collection of compensation income of EEs, the
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State requires the ER to withhold the tax upon (c) Vehicle of any kind
payment of the compensation income.
(d) Household personnel, such as maid,
driver and others
ii. Fringe Benefits (e) Interest on loan at less than market rate
to the extent of the difference between
(a) Special treatment of fringe benefits
the market rate and actual rate granted.
Persons liable: The Employer (as a withholding
(f) Membership fees, dues and other
agent), whether individual, professional
expenses borne by the employer for the
partnership or a corporation, regardless of
employee in social and athletic clubs and
whether the corporation is taxable or not, or the
similar organizations
government and its instrumentalities, is liable to
remit the fringe benefit tax to the BIR once fringe (g) Expenses for foreign travel
benefit is given to a managerial or supervisory
(h) Holiday and vacation expenses
employee.
(i) Educational assistance to the employee
The fringe benefit tax (FBT) is a final tax on the
or his dependents; and
employee’s income to be withheld by the
employer. The withholding and remittance of (j) Life or health insurance and other non-
FBT shall be made on a calendar quarterly basis. life insurance premiums or similar
amounts on excess of what the law
Managerial employee: one who is vested with the
allows.[Sec. 33(B)]
powers or prerogatives to lay down and execute
management policies and/or to hire, transfer,
suspend, lay-off, recall, discharge, assign or
Tax Rate and Tax Base
discipline employees.
Tax base is based on the grossed-up monetary
Supervisory employees: those who, in the interest
value (GMV) of fringe benefits. Rate is generally
of the employer, effectively recommend such
32%.
managerial actions if the exercise of such
authority is not merely routinary or clerical in GMV represents: (a) the whole amount of income
nature but requires the use of independent realized by the employee which includes the net
judgment. amount of money or net monetary value of
property that has been received; and (b) the
All employees not falling within any of the above amount of fringe benefit tax due from the
definitions are considered rank-and-file
employee which has been withheld and paid by
employees.
the employer for and in behalf of his employee..
Fringe benefit tax is imposed on fringe benefits
received by supervisory and managerial
employees. The fringe benefits of rank and file How GMV is determined
employees are treated as part of compensation GMV is determined by dividing the actual
income subject to income tax and withholding tax monetary value of the fringe benefit by 68%
on compensation. [100% - tax rate of 32%]. For example, the actual
monetary value of the fringe benefit is P1,000.
The GMV is equal to P1,470.59 [P1,000 / 0.68].
(b) Definition
The fringe benefit tax, therefore, is P470.59
Fringe benefit means any good, service, or other [P1470.59 x 32%].
benefit furnished or granted by an employer, in
Special Cases:
cash or in kind, in addition to basic salaries, to an
individual employee (except rank and file a) For fringe benefits received by non-
employees) such as, but not limited to the resident alien not engaged in trade of
following: business in the Philippines (NRANETB),
the tax rate is 25% of the GMV. The GMV
(a) Housing
is determined by dividing the actual
(b) Expense Account monetary value of the fringe benefit by
75% [100% - 25%].
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b) For fringe benefits received by alien c) Benefits given to the rank-and-file


individuals and Filipino citizens employees, whether granted under a
employed by regional or area collective bargaining agreement or not;
headquarters, regional operating and
headquarters, offshore banking units
d) Fringe benefits granted for the
(OBUs), or foreign service contractor or by
convenience of the employer;
a foreign subcontractor engaged in
petroleum operations in the Philippines, e) De minimis benefits
or by any of their Filipino individual
employees who are employed and
occupying the same positions as those The exemption of any FB from the FBT shall not
occupied by the alien employees, the tax be interpreted to mean exemption from any other
rate is 15% of the GMV. The GMV is income tax imposed under the Tax Code except if
determined by dividing the actual the same is likewise expressly exempt from any
monetary value of the fringe benefit by other income tax imposed under the Tax Code or
85% [100% - 15%]. under any other existing law. Thus, if the FB is
exempted from the FBT, the same may, however,
What is the tax implication if the employer gives
still form of the employee’s gross compensation
‘fringe benefits’ to rank-and-file employees?
income which is subject to income tax; hence,
Fringe benefits given to a rank-and-file employee
likewise subject to withholding tax on
are treated as part of his compensation income
compensation income payment.
subject to normal tax rate and withholding tax on
compensation income, except de minimis
benefits and benefits provided for the De Minimis Benefits
convenience of the employer. Exempt from income tax and withholding tax on
Payor of Fringe Benefit Tax (FBT): The employer compensation income of both managerial and
withholds and pays the FBT but the law allows rank and file EEs. [as provided by R.R. No. 5-2011
him to deduct such tax from his gross income. / R.R. No. 8-2012 and R.R. No. 1-2015]:
(1) Monetized unused vacation leave credits of
employees not exceeding ten (10) days during
the year; (RR No. 5-2011)
(c) Taxable and non-taxable fringe benefits
(2) Monetized value of vacation and sick leave
Fringe Benefits NOT subject to Tax credits paid to government officials and
employees; (RR No. 5-2011)
i. Fringe benefits not considered as gross
income – if it is required or necessary to (3) Medical cash allowance to dependents of
the business of employer; if it is for the employees, not exceeding P750 per
convenience or advantage of employer employee per semester or P125 per month;
(RR No. 5-2011)
ii. Fringe Benefit that is not taxable under
Sec. 32 (B) – Exclusions from Gross (4) Rice subsidy of P1,500 or one (1) sack of 50 kg.
Income rice per month amounting to not more than
P1,500; (RR No. 5-2011)
(5) Uniform and Clothing allowance not
Fringe benefits not subject to Fringe Benefit Tax:
exceeding P5,000 per annum; (RR No. 8-
a) Fringe Benefits which are authorized and 2012)
exempted from income tax under the
(6) Actual medical assistance, e.g. medical
Code or under special laws;
allowance to cover medical and healthcare
b) Contributions of the employer for the needs, annual medical/executive check-up,
benefit of the employee for retirement, maternity assistance, and routine
insurance and hospitalization benefit consultations, not exceeding P10,000.00 per
plans; annum; (RR No. 5-2011)

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(7) Laundry allowance not exceeding P300 per Fringe Benefit Tax
month; (RR No. 5-2011) Housing Privilege Base (Monetary
Value)
(8) Employees achievement awards, e.g., for
length of service or safety achievement, Purchase of residential MV= 5% x
which must be in the form of a tangible property in installment acquisition cost
personal property other than cash or gift basis for the use of the exclusive of
employee interest x 50%
certificate, with an annual monetary value
not exceeding P10,000 received by the Purchase of residential MV= FMV or ZV,
employee under an established written plan property and ownership whichever is
which does not discriminate in favor of highly is transferred in the higher
paid employees; (RR No. 5-2011) name of the employee
(9) Gifts given during Christmas and major ZV = Zonal Value = value of the land or
anniversary celebrations not exceeding improvement, as declared in the Real Property
P5,000 per employee per annum; (RR No. 5- Declaration Form
2011)
FMV = Fair Market Value = FMV as determined by
(10) Daily meal allowance for overtime work and the Commissioner of Internal Revenue
night/graveyard shift not exceeding twenty-
five percent (25%) of the basic minimum
wage on a per region basis; (RR No. 5-2011) Non-taxable housing fringe benefit:
(11) Benefits received by an employee by virtue of a) Housing privilege of the Armed Forces of
a collective bargaining agreement (CBA) and the Philippines (AFP) officials – i.e, those
productivity incentive schemes provided that of the Philippine Army, Philippine Navy,
the total monetary value received from both or Philippine Air Force
CBA and productivity incentive schemes
b) A housing unit, which is situated inside or
combined do not exceed P10,000.00 per
adjacent to the premises of a business or
employee per taxable year. (RR No 1-2015)
factory – maximum of 50 meters from
perimeter of the business premises
All other benefits given by employers which are
c) Temporary housing for an employee who
not included in the above enumeration shall NOT
stays in housing unit for three months or
be considered as "de minimis" benefits and hence,
less
shall be subject to withholding tax on
compensation (rank and file employees) and FBT
(managerial/supervisory employees).

Housing
Motor Vehicle
Fringe Benefit Tax
Fringe Benefit Tax
Housing Privilege Base (Monetary Motor Vehicle
Base
Value)
Purchased in the name MV= acquisition
LEASE of residential MV= 50% of lease
of the employee cost
property for the payments
residential use of Cash given to employee MV= cash received
employees to purchase in his own by employee
where MV = name
monetary value of
the FB Purchase on installment, MV= acquisition
in the name of employee cost exclusive of
Assignment of residential MV= [5% (FMV or interest
property owned by ZV, whichever is
employer for use of higher) x 50%] Employee shoulders part MV= amount
employees of the purchase price, shouldered by
employer

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ownership in the name Doing business: The term implies a continuity of


of employee commercial dealings and arrangements, and
contemplates, to that extent, the performance of
Employer owns and MV= (AC/5) x 50%
acts or works or the exercise of some of the
maintains a fleet of
functions normally incident to, and in progressive
motor vehicles for use of
prosecution of, the purpose and object of its
the business and of
organization.
employees
Employer leases and MV= 50% of rental v. Income from Dealings in Property
maintains a fleet for the payment
use of the business and Dealings in property such as sales or exchanges
of employees may result in gain or loss. The kind of property
involved (i.e., whether the property is a capital
asset or an ordinary asset) determines the tax
Pure Compensation Earner implication and income tax treatment, as follows:
(Minimum Wage Earner, Rank & File, Executive) Taxable Ordinary Net Capital
Minimum Net Net Gains (other
Managerial or = +
Wage Rank and File Income Income than those
Supervisory subject to final
Earner
Basic Compensation CGT)
Exempt Taxable Taxable Ordinary Asset Capital Asset
Compensation Compensation Gain from sale, exchange or other disposition
Holiday Pay, OT, Nightshift Pay, Hazard Pay Ordinary Gain (part of
Capital Gain
Gross Income)
Exempt Taxable Taxable
Compensation Compensation Loss from sale, exchange, or other disposition
13th Month Pay up to P82,000 Ordinary Loss (part of
Allowable Deductions Capital Loss
Exempt Exempt Exempt from Gross Income)
Other Benefit in Excess of P82,000 Excess of Gains over Losses
N/A (with Taxable Taxable Part of Gross Income Net Capital Gain
caveat) Compensation Compensation
Excess of Losses over Gains
Fringe Benefit
Part of Allowable
N/A Taxable Subject to Deductions from Net Capital Loss
Compensation Fringe Benefit Gross Income
Tax
(a) Types of Properties
De Minimis Benefit
Capital v. Ordinary Asset
Exempt Exempt Exempt
Ordinary Assets Capital Assets
(1) Stock in trade of the Property held by the
iii. Professional Income taxpayer/ other taxpayer, whether or
Refers to fees received by a professional from the property of a kind not connected with
practice of his profession, provided that there is which would properly his trade or business
NO employer-employee relationship between be included in the which is not an
him and his clients. inventory of the ordinary asset.
taxpayer if on hand at
the close of the
iv. Income from Business taxable year. Generally, they
- Any income derived from doing business include:
(2) Property held by
the taxpayer primarily
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Ordinary Assets Capital Assets  100% if the capital asset has


for sale to customers (1) stocks and been held for not more than 12
in the ordinary course securities held by months; and
of his trade or taxpayers other than
business. dealers in securities  50% of the capital asset has been
held for more than 12 months
(3) Property used in (2) real property not
the trade or business used in trade or b) If the taxpayer is a corporation –
of a character which is business, such as  100%, regardless of the holding
subject to the residential house period of the capital asset (Sec.
allowance for and lot, idle or 39(B), NIRC)
depreciation, or vacant land or
building The tax rules for the gains or losses from sales or
(4) Real property used exchanges of capital assets over ordinary assets
in the trade or (3)investment are as follows:
business of the property, such as
taxpayer, including interest in a a) Net capital gain is added to ordinary gain
property held for rent. partnership, stock but net capital loss is not deductible from
investment ordinary gain.
(4)Personal or non- b) Net ordinary loss is deductible from
business properties, ordinary gain.
such as family car, c) Capital losses are deductible only to the
home appliances, extent of the capital gain.
jewelry.
d) There is a net capital loss carry-over on
the net capital asset’s loss in a taxable
(b) Types of Gains from dealings in property year which may be deducted as a short-
term capital loss from the net capital gain
(1) Ordinary income vis-à-vis Capital gain. – of the subsequent taxable year; provided
If the asset involved is classified as ordinary, the that the following conditions shall be
entire amount of the gain from the transaction observed:
shall be included in the computation of gross e) The taxpayer is other than a corporation;
income [Sec 32(A)], and the entire amount of the
loss shall be deductible from gross income. [Sec f) The amount of loss does not exceed the
34(D)]. (See Allowable Deductions from Gross income before exemptions at the year
Income - Losses when the loss was sustained; and
If the asset involved is a capital asset, the rules on g) The holding period should not exceed 12
capital gains and losses apply in the months. (Valencia)
determination of the amount to be included in When a capital gain or capital loss is sustained by
gross income. (See Capital Gains and Losses). a corporation, the following rules shall be
These rules do not apply to: (a) real property with observed:
a capital gains tax (final tax), or (2) shares of stock
of a domestic corporation with a capital gains tax a) There is no holding period; hence, there is
(final tax). Also, sale of shares of stock of a no net capital loss carry-over.
domestic corporation, held as capital assets, b) Capital gains and losses are recognized
through the stock exchange by either individual to the extent of their full amount.
or corporate taxpayers, is subject to ½ of 1%
percentage tax based on gross selling price. c) Capital losses are deductible only to the
extent of capital gains.
The following percentages of the gain or loss
recognized upon the sale or exchange of a capital d) Net capital losses are not deductible
asset shall be taken into account in computing from ordinary gain or income but ordinary
net capital gain, net capital loss, and net income: losses are deductible from net capital
gains.
a) If the taxpayer is an individual –

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Note: For sale, barter, exchange or other forms of price to measure the gain or loss from the sales
disposition of shares of stock subject to the 5% or transaction (Sec. 40, NIRC).
10% capital gains tax on the net capital gain
during the taxable year, the capital losses
realized from this type of transaction during the (3) Long term capital gain vis-à-vis Short term
taxable year are deductible only to the extent of capital gain
capital gains from the same type of transaction
Long-term capital gain: Capital asset is held for
during the same period. If the transferor of the
more than twelve months before it is sold. Only
shares is an individual, the rule on holding period
50% of the gain is recognized.
and capital loss carry-over will not apply,
notwithstanding the provisions of Section 39 of Short-term capital gain: Capital asset is held for
the Tax Code. (RR 6-2008, c.4) 12 months or less, 100% of the gain is subject to
tax.
(2) Actual gain vis-à-vis Presumed gain
Presumed Gain: In the sale of real property
located in the Philippines, classified as capital (4) Net Capital Gain vis-à-vis Net Capital Loss
asset, the tax base is the gross selling price or fair Net Capital Gain: Excess of the gains over the
market value, whichever is higher. The law losses on sales or exchange of capital assets
presumes that the seller makes a gain from such during the taxable year.
sale. Thus, whether or not the seller makes a
profit from the sale of real property, he has to pay Net Capital Loss: Excess of the losses over the
6% capital gains tax. In fact, he has to pay the tax, gains on sales or exchanges of capital assets
even if he incurs an actual loss from the sale during the taxable year. [Sec. 39A, NIRC]
thereof. (However, when the buyer is the
government, the individual seller has the option
whether to be taxed at the graduated income tax (5) Income tax treatment of capital loss
rates or at 6% capital gains tax.) (a) Capital loss limitation rule (applicable to both
Actual Gain: The tax base in the sale of real corporations and individuals)
property classified as an ordinary asset is the General Rule: Losses from sales or exchanges of
actual gain. If the seller incurs a loss from the sale, capital assets shall be allowed only to the extent
such loss may be deducted from his gross income of the gains from such sales or exchanges (Sec.
during the taxable year. The ordinary gain shall 39(C), NIRC).
be added to the operating income and the net
taxable income shall be subject to the graduated Exception for Banks and Trust Companies: If a
rates from 5% to 32% (if an individual) or to 30% bank or trust company incorporated under the
corporate tax or to 2% MCIT (if a corporation). laws of the Philippines, a substantial part of
whose business is the receipt of deposits, sells
any bond, debenture, note, certificate or other
Computation of the amount of gain or loss evidence of indebtedness issued by any
corporation (including one issued by a
Amount realized from sale or other government or political subdivision thereof) with
disposition of property interest coupons or in registered form, any loss
Less: Basis or Adjusted Basis resulting from such sale shall not be subject to
the foregoing limitation and shall not be included
NET GAIN (LOSS) in determining the applicability of such limitation
to other losses (Sec. 39(C), NIRC).
Note: Amount realized from sale or other (b) Net loss carry-over rule (applicable only to
disposition of property = sum of money received individuals)
+ fair market value of the property (other than If an individual sustains in any taxable year a net
money) received capital loss, such loss (in an amount not in excess
of the net income for the year) shall be treated in
the succeeding taxable year as a loss from the
Note: When a taxpayer sells a real or personal
property, he should deduct its cost from its selling
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sale or exchange of a capital asset held for not (a) Shares listed and traded through the stock
more than 12 months (Sec. 39(D), NIRC). exchange other than sale by a dealer in securities:
½ of 1% of the gross selling price of the stock or
gross value in money of the shares of stock sold,
(6) Dealings in real property situated in the
bartered, exchanged or otherwise disposed which
Philippines
shall be assumed and paid by the seller or
Persons Liable and Transactions Affected: transferor through the remittance of the stock
transaction tax by the seller or transferor’s broker.
(a) Individual taxpayers, estates and trusts
Note: In the nature of percentage tax and not
(b) Sale or exchange or other disposition of
income tax; exempt from income tax per Section
real property considered as capital assets.
127 (d):
(c) Includes "pacto de retro sale" and other
“Any gain derived from the sale, barter, exchange
conditional sale.
or other disposition of share of stock under this
(d) Domestic Corporation section shall be exempt from taxes imposed in
(e) Sale or exchange or disposition of lands Sections 24(C), 27(D)(2), 28(A)(8)(c), and
and/or building which are not actually 28(B)(5)(c) of this Code and from the regular
used in business and are treated as individual or corporate income tax.”
capital asset. Note: Percentage tax under Sec. 127 is NOT
Rate and Basis of Tax DEDUCTIBLE for income tax purposes.

A final withholding tax of 6% is based on the


gross selling price or fair market value or zonal (b) Shares not listed and traded through the stock
value whichever is higher. exchange
Note: Gain or loss is immaterial, there being a Net capital gains derived during the taxable year
conclusive presumption of gain. from sale, exchange, or transfer shall be taxed as
follows (on a per transaction basis):

(7) Dealings in shares of stock of Philippine


corporations Amount of Capital Tax Rate
Persons Liable to the Tax: Gain
Not over P 100,000 5%
(a) Individual taxpayer, whether citizen or On any amount in 10%
alien; excess of P 100,000
(b) Corporate taxpayer, whether domestic or
foreign; and (8) Sale of principal residence
(c) Other taxpayers not falling under (a) and Principal residence: the family home of the
(b) above, such as estate, trust, trust individual taxpayer (RR 14-2000)
funds and pension funds, among others.
Disposition of principal residence (capital asset)
Persons not liable: is exempt from Capital Gains Tax, provided:
(a) Dealers in securities (1) Sale or disposition of the old principal
(b) Investor in shares of stock in a mutual residence;
fund company (2) By natural persons - citizens or aliens
(c) All other persons who are specifically provided that they are residents taxable
exempt from national internal revenue under Sec. 24 of the Code (does not
taxes under existing investment include an estate or a trust);
incentives and other special laws. (3) The proceeds of which is fully utilized in
(a) acquiring or (b) constructing a new
principal residence within eighteen (18)
months from date of sale or disposition;
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(4) Notify the Commissioner within thirty and a non-resident foreign corporation from a
(30) days from the date of sale or domestic corporation is exempt from income tax.
disposition through a prescribed return of
his intention to avail the tax exemption;
Cash dividend is the most common form of
(5) Can only be availed of onlyonce every ten
dividend, valued at the amount of money
(10) years;
received by the stockholder. Cash dividends and
(6) The historical cost or adjusted basis of his property dividends are subject to income tax.
old principal residence shall be carried
over to the cost basis of his new principal
residence (2) Stock dividends
(7) If there is no full utilization, the portion of Stock dividend is generally exempt from income
the gains presumed to have been realized tax, EXCEPT:
shall be subject to capital gains tax. (a) If a corporation cancels or redeems stock
(8) Portion of presumed gains subject to issued as a dividend at such time and in
CGT: (Unutilized/GSP) x (higher of GSP such manner as to make the distribution
or FMV) and cancellation or redemption, in whole
or in part, essentially equivalent to the
distribution of a taxable dividend, the
vi. Passive Investment Income amount so distributed in redemption or
cancellation of the stock shall be
Under Sec 24(B) of the Tax Code, a final tax is
considered as taxable income to the
imposed upon gross passive income of citizen
extent that it represents a distribution of
and resident aliens. An income is considered
earnings or profits (Sec. 73(B), NIRC); or
passive if the taxpayer merely waits for it to be
realized. (b) Where there is an option that some
stockholders could take cash or property
dividends instead of stock dividends;
(a) Interest Income some stockholders exercised the option
to take cash of property dividends; and
An earning derived from depositing or lending of
the exercise of option resulted in a
money, goods or credits [Valencia and Roxas] e.g.,
interest income from government securities such change of the stockholders’
proportionate share in the outstanding
as Treasury Bills.
share of the corporation.
Unless exempted by law, interest income
(3) Property dividends
received by the taxpayer, whether or not usurious,
is subject to income tax. Property dividends or dividends in the form of
property are subject to tax at preferential rate
under the NIRC.
(b) Dividend Income
A form of earnings derived from the distribution
made by a corporation out of its earnings or (4) Liquidating dividends
profits and payable to its stockholders, whether Represents distribution of all the property or
in money or in property. assets of a corporation in complete liquidation or
dissolution. It is strictly not dividend income, but
In general, dividends are subject to final tax
rather is treated in effect, a return of capital to the
under the Tax Code.
extent of the shareholder’s investment. The
difference between the cost or other basis of the
(1) Cash dividends stock and the amount received in liquidation of
the stock is a capital gain or a capital loss. Where
Dividends are subject to final tax under the NIRC. property is distributed in liquidation, the amount
However, dividends received by a domestic received is the FMV of such property. The income
corporation from another domestic corporation, is subject to ordinary income tax rates. It is

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subject neither to the FWT on dividends nor to the Rent income may be in the following forms:
CGT on sale of shares.
(1) Cash, at the stipulated price
(2) Obligations of the lessor to third persons
paid or assumed by the lessee in
consideration of the contract of lease,
e.g., real estate tax on the property
leased assumed by the lessee
(3) Advance payment
If the advance payment is actually a loan to the
lessor, or an option money for the property, or a
security deposit for the faithful performance of
certain obligations of the lessee, such advance
payment is not income to the lessor.
However, a security deposit that is applied to
rental is taxable income to the lessor.
If the advance payment is, in fact, a pre-paid
rental, received by the lessor under a claim of
right and without restriction as to its use, then
such payment is income to the lessor.
Pre-paid rent must be reported in full in the year
of receipt, regardless of the accounting method
used by the lessor.

(1) Lease of personal property


Rental income on the lease of personal property
located in the Philippines and paid to a non-
(c) Royalty Income resident taxpayer shall be taxed as follows:
Royalty is a valuable property that can be NRA-
developed and sold on a regular basis for a NRFC
NETB
consideration; in which case, any gain derived Vessel 4.5% 25%
therefrom is considered as an active business
income subject to the normal corporate tax. Aircraft, 7.5% 25%
machineries and
Where a person pays royalty to another for the other Equipment
use of its intellectual property, such royalty is
generally a passive income of the owner thereof Other assets 30% 25%
subject to withholding tax.
(2) Lease of real property
(d) Rental Income Lessor Tax Rate
Refers to earnings derived from leasing real Citizen
estate as well as personal property. Aside from Resident Alien Net taxable income
the regular amount of payment for using the shall be subject to the
property, it also includes all other obligations Non-resident alien
graduated income tax
assumed to be paid by the lessee to the third engaged in trade or
rates
party in behalf of the lessor (e.g., interest, taxes, business in the
loans, insurance premiums, etc.) [RR 19-86] Philippines
Non-resident alien Rental income from
not engaged in trade real property located
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Lessor Tax Rate extent of the value of such buildings or


or business in the in the Philippines improvements when he became entitled to such
Philippines shall be subject to possession exceeds the amount already reported
25% final as income on account of the erection of such
withholding tax building or improvement. No appreciation in
unless a lower rate is value due to causes other than the premature
imposed pursuant to termination of lease shall be included (Sec. 49,
an effective tax treaty Rev. Reg. No. 2).
Domestic Corporation Net taxable income If the building or other leasehold improvement is
shall be subject to destroyed before the expiration of the lease, the
Resident Foreign
30% corporate lessor is entitled to deduct as a loss for the year
Corporation
income tax or its when such destruction takes place, the amount
gross income will be previously reported as income because of the
subject to 2% MCIT erection of the improvement, less any salvage
value, to the extent that such loss was not
Non-resident Foreign Gross rental income compensated by insurance (Sec. 49, Rev. Reg. No.
Corporation from real property 2),
located in the
Philippines shall be
subject to 30% (b) VAT added to rental/paid by the lessee
corporate income tax, If the lessee is VAT-registered, treat VAT paid as
such tax to be input VAT;
withheld and
remitted by the lessee If the lessee is not VAT-registered OR not liable
in the Philippines to VAT, treat VAT paid as additional rent expense
deductible from gross income.

(3) Tax treatment of: (c) Advance Rental/ Long Term Lease
Pre-paid rent must be reported in full in the year
(a) Leasehold improvements by lessee of receipt, regardless of the accounting method
used by the lessor.
Rent Income from leasehold improvements:
(i) Outright method- lessor shall report as vii. Annuities, Proceeds from Life insurance or
income FMV of the buildings or Other Types of Insurance
improvements subject to the lease in the
year of completion. Annuities are installment payments received for
life insurance sold by insurance companies.
(ii) Spread-out method- lessor shall spread
over the remaining term of the lease the The aleatory contract of life annuity binds the
estimated depreciated (book) value of debtor to pay an annual pension or income
such buildings or improvements at the during the life of one or more determinate
termination of the lease, and reports as persons in consideration of a capital consisting of
income for each remaining term of the money or other property, whose ownership is
lease an aliquot part thereof. transferred to him at once with the burden of the
estimated BV at the end of the lease income. [Art. 2021, New Civil Code]
contract/ remaining lease term = Income The annuity payments represent a part that is
per year taxable and not taxable. If part of annuity
If for any reason than a bona fide purchase from payment represents interest, then it is a taxable
the lessee by the lessor, the lease is terminated, income. If the annuity is a return of premium, it is
so that the lessor comes into possession or not taxable.
control of the property prior to the time originally
fixed, lessor receives additional income for the viii. Prizes and Awards
year which the lease is so terminated to the

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A prize is a reward for a contest or a competition. a creditor, who, in consideration thereof, cancels
It represents remuneration for an effort reflecting the debt, income in that amount is realized by the
one’s superiority. debtor as compensation for personal services.
Contest prizes and awards received are generally It may amount to a gift. If a creditor wishes merely
taxable. Such payment constitutes gain derived to benefit the debtor, and without any
from labor. consideration therefore, cancels the debt, the
amount of the debt is a gift to the debtor and
The EXCEPTIONS are as follows:
need not be included in the latter’s report of
(a) Prizes and awards made primarily in income.
recognition of religious, charitable,
It may amount to a capital transaction. If a
scientific, educational, artistic, literary or
corporation to which a stockholder is indebted
civic achievements are EXCLUSIONS
forgives the debt, the transaction has the effect of
from gross income if:
a payment of dividend.
(b) The recipient was selected without any
action on his part to enter a contest or
proceedings; and (b) Tax Benefit Rule
(c) The recipient is not required to render This is a general principle in taxation which states
substantial future services as a condition that is a taxpayer deducted an item on his income
to receiving the prize or award. tax return and enjoyed a tax benefit (reduced his
income tax) thereby, and in a subsequent year
(d) Prizes and awards granted to athletes in
recovers all or part of that item, he will recognize
local and international sports
gross income in the year the deducted item is
competitions and tournaments held in
recovered. The rule has both an inclusionary and
the Philippines and abroad and
an exclusionary component, i.e., the recovery is
sanctioned by their national associations
included in the taxpayer’s gross income to the
shall be EXEMPT from income tax.
extent that the taxpayer obtained a tax benefit
from the prior year’s deduction, and the recovery
ix. Pensions, Retirement Benefit, or Separation is excluded to the extent that the prior year’s
Pay deduction did not provide a tax benefit.
Paid for past employment services rendered.
3 deductions in Sec. 34 which makes reference to
A stated allowance paid regularly to a person on
Tax Benefit Rule are the following:
his retirement or to his dependents on his death,
in consideration of past services, meritorious • Taxes [ Sec 34(C)(1)]
work, age, loss or injury. It is generally taxable • Abandonment Losses [Sec 34 (D)(7)(b)]
unless the law states otherwise. [VALENCIA, • Bad Debts [Sec 34(E)(1)]
Income Taxation 5th ed. (2009)]
(c) Recovery of accounts previously written-off
x. Income from Any Source Whatever
Bad debts claimed as a deduction in the
Inclusion of all income not expressly exempted preceding year(s) but subsequently recovered
within the class of taxable income under the laws shall be included as part of the taxpayer’s gross
irrespective of the voluntary or involuntary action income in the year of such recovery to the extent
of the taxpayer in producing the gains, and of the income tax benefit of said deduction. There
whether derived from legal or illegal sources is an income tax benefit when the deduction of
the bad debt in the prior year resulted in lesser
(a) Forgiveness of indebtedness income and hence tax savings for the company.
(Sec. 4, RR 5-99)
The cancellation or forgiveness of indebtedness Illustration:
may have any of three possible consequences:
Case A Case B Case C
It may amount to payment of income. If, for Year 1
example, an individual performs services to or for
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Gross General rule: A refund of a tax related to the


Income 500,000 400,000 500,000 business or the practice of profession, is taxable
Less: income (e.g., refund of fringe benefit tax) in the
Allowable year of receipt to the extent of the income tax
Deductions benefit of said deduction (i.e., the tax benefit rule
(before
applies).
write-off of
Uncollectibl Exceptions: However, the following tax refunds
e are not to be included in the computation of gross
Accounts/D income:
ebts) (200,000) (480,000) (495,000)
Taxable (1) Philippine income tax, except the fringe
Income (Net benefit tax
Loss) before
write-off 300,000 (60,000) 5,000 (2) Income tax imposed by authority of any
Deduction foreign country, if the taxpayer claimed a
for Accounts credit for such tax in the year it was paid
Receivable or incurred.
written off (2,000) (2,000) (6,000)
(3) Estate and donor’s taxes
Taxable
Income (Net (4) Taxes assessed against local benefits of a
Loss) after kind tending to increase the value of the
write-off 298,000 (62,000) (1,000) property assessed (Special assessments)
Year 2
Recovery of (5) Value Added Tax
Amounts
(6) Fines and penalties due to late payment
Written Off 2,000 2,000 6,000
Taxable of tax
Income on (7) Final taxes
the
Recovery 2,000 - 5,000 (8) Capital Gains Tax
Note: The enumeration of tax refunds that are not
In Case A, the entire amount recovered (P2,000) taxable (income) is derived from an enumeration
is included in the computation of gross income in of tax payments that are not deductible from
Year 2 because the taxpayer benefited by the gross income.
same extent. Prior to the write-off, the taxable If a tax is not an allowable deduction from gross
income was P300,000; after the write-off, the income when paid (no reduction of taxable
taxable income was reduced to P298,000. income, hence no tax benefit), the refund is not
In Case B, none of the P2,000 recovered would be taxable.
recognized as gross income in Year 2. Note that
even without the write-off, the taxpayer would
not have paid any income tax anyway. The (e) income from any source whatever
“taxable income” before the write-off was
actually a net loss. (f) Source rules in determining income from within
In Case C, only P5,000 of the P6,000 recovered and without
would be recognized as gross income in Year 2. It
was only to this extent that the taxpayer The following items of gross income shall be
benefited from the write-off. The taxpayer did not treated as gross income from sources WITHIN the
benefit from the extra P1,000 because at this Philippines:
point, the P1,000 was already a net loss.
(1) Interests
Derived from sources within the Philippines,
(d) Receipt of tax refunds or credit and interests on bonds, notes or other
interest-bearing obligation of residents.

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Ultimately, the situs of interest income is the (c) The supply of scientific, technical,
residence of the debtor. industrial or commercial knowledge or
information;
(2) Dividends
(d) The supply of any assistance that is
Dividends received: ancillary and subsidiary to, and is
from a domestic corporation; and furnished as a means of enabling the
application or enjoyment of, any such
from a foreign corporation, UNLESS less than property or right as is mentioned in (a),
50% of its gross income for the previous 3-year any such equipment as is mentioned in
period was derived from sources within the (b) or any such knowledge or information
Philippines [in which case it will be treated as as is mentioned in (c);
income partly from within and partly from (e) The supply of services by a nonresident
without]. person or his employee in connection
with the use of property or rights
belonging to, or the installation or
The income which is considered as derived from operation of any brand, machinery or
within the Philippines is obtained by using the other apparatus purchased from such
following formula: nonresident person;
Philippine Gross Income* x Dividend = Income (f) Technical advice, assistance or services
Within Worldwide Gross Income* rendered in connection with technical
management or administration of any
NOTE: * of the corporation giving the dividend
scientific, industrial or commercial
As a rule, the situs of dividend income is the undertaking, venture, project or scheme;
residence of the corporation declaring the and
dividend. (g) The use of or the right to use:
(1) Motion picture films;
(3) Services (2) Films or video tapes for use in
connection with television; and
Compensation for labor or personal services (3) Tapes for use in connection with
performed in the Philippines: As a rule, the situs radio broadcasting.
of compensation is the place of performance of As a rule, the situs of rental income is the place
the services. where the property is located. The situs of royalty
income is where the rights are exercised.

(5) Sale of Real Property


As a rule, the situs of the income from sale of real
property is where the realty is located.
(4) Rentals and Royalties
From property located in the Philippines or from
any interest in such property, including rentals or (6) Sale of Personal Property
royalties for – General Rule: Gains, profits and income from the
(a) The use of or the right or privilege to use sale of personal property, subject to the following
in the Philippines any copyright, patent, rules:
design or model, plan, secret formula or
process, goodwill, trademark, trade
brand or other like property or right; Place of Place of
Treatment**
(b) The use of, or the right to use in the PURCHASE SALE
Philippines any industrial, commercial or Philippines Abroad Income from
scientific equipment; Without

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Abroad Philippines Income from The exclusion of income should not be confused
Within with the reduction of gross income by the
application of allowable deductions. While
** in other words, the situs of the income from the
exclusions are simply not taken into account in
sale of personal property is the place of sale.
determining gross income, deductions are
subtracted from gross income to arrive at net
income. [De Leon]
Exceptions:
(a) Gain from the sale of shares of stock in a
domestic corporation Items of Exclusions representing return of capital
(b) Treated as derived entirely from sources Amount of capital is generally recovered through
within the Philippines regardless of deduction of the cost or adjusted basis of the
where the said shares are sold. property sold from the gross selling price or
(c) Gains from the sale of (manufactured) consideration, or through the deduction from
personal property: gross income of depreciation relating to the
(d) produced (in whole or in part) by the property used in trade or business before it is sold.
taxpayer within and sold without the
It may also related to indemnities, such as
Philippines, or
proceeds of life insurance paid to the insured’s
(e) produced (in whole or in part) by the beneficiaries and return of premiums paid by the
taxpayer without and sold within the insurance company to the insured under a life
Philippines insurance, endowment or annuity contract.
(f) Treated as derived partly from sources
within and partly from sources without Damages, in certain instances, may also be
the Philippines. exempt because they represent return of capital.

Place of Place of Items of Exclusion because it is subject to another


Treatment
PRODUCTION SALE internal revenue tax
Philippines Abroad Partly within, The value of property acquired by gift, bequest,
partly without devise or descent is exempt from income tax on
the part of the recipient because the receipt of
Abroad Philippines Partly within, such property is already subject to transfer taxes
partly without (estate tax or donor’s tax)

(8) Shares of Stock of Domestic Corporation Items of Exclusions because they are expressly
Treated as derived entirely from sources within exempt from income tax
the Philippines regardless of where the said (1) Under the Constitution
shares are sold.
(2) Under a tax treaty
(3) Under special laws
i. Rationale for the Exclusions
B.3.6. Exclusions from gross income
The term “exclusions” refers to items that are not
Exclusions from gross income refer to income included in the determination of gross income
received or earned but is not taxable as income because:
because it is exempted by law or by treaty. Such
tax-free income is not to be included in the (a) They represent return of capital or are not
income tax return unless information regarding it income, gain or profit;
is specifically called for. Receipts which are not in (b) They are subject to another kind of
fact income are, of course, excluded from gross internal revenue tax;
income.
(c) They are income, gain or profit expressly
exempt from income tax under the
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Constitution, tax treaty, Tax Code, or a v. Exclusions Under the Tax Code (Sec. 32(b),
general or special law. [Mamalateo] NIRC)
(a) Proceeds of life insurance policies.—
ii. Taxpayers Who May Avail of the Exclusions General rule: The proceeds of life insurance
policies paid to his estate or to any beneficiary
Exclusion Taxpayer
(but not a transferee for a valuable consideration),
Return of capital All taxpayers since directly or in trust, upon the death of the insured,
there is no income. are excluded from the gross income of the
beneficiary. However, if such amounts are held
Already subject to All taxpayers unless
by the insurer under an agreement to pay interest
internal revenue tax provided that income
thereon, the interest payments received by the
is to be included.
insured shall be included in gross income. The
Express exclusion As expressly provided. interest income shall be taxed at the graduated
income tax rates.

iii. Exclusions Distinguished from Deductions and


Tax Credit (b) Return of premium paid.—
Exclusions from gross income refer to flow of General rule: The amount received by the insured
wealth to the taxpayer which are not treated as as a return of premiums paid by him under life
part of gross income for purposes of computing insurance, endowment, or annuity contracts,
the taxpayer’s taxable income, due to the either during the term or at the maturity of the
following reasons: (1) it is exempted by the term mentioned in the contract or upon surrender
Constitution or a statute; or (2) it does not come of the contract is a return of capital and not
within the definition of income. income.
Deductions, on the other hand, are the amounts This refers to the cash surrender value of the
which the law allows to be subtracted from gross contract.
income in order to arrive at net income. Exception: If the amounts received by the insured
Exclusions pertain to the computation of gross (when added to the amounts already received
income, while deductions pertain to the before the taxable year under such contract)
computation of net income. exceed the aggregate premiums or
considerations paid (whether or not paid during
Exclusions are something received or earned by the taxable year), then the excess shall be
the taxpayer which do not form part of gross included in gross income.
income while deductions are something spent or
paid in earning gross income.
Tax Credit refers to amounts subtracted from the (c) Amounts received under life insurance,
computed tax in order to arrive at taxes payable. endowment or annuity contracts.— Amounts
received (other than amounts paid by reason of
the death of the insured and interest payments
iv. Exclusions Under the Constitution on such amounts) under a life insurance,
endowment or annuity contracts are excluded
a) Income derived by the government or its from gross income, but if such amounts (when
political subdivisions from the exercise of added to amounts already received before the
any essential governmental function
taxable year under such contract) exceed the
b) Also, all assets and revenues of a non- aggregate premiums of considerations paid
stock, non-profit private educational (whether or not paid during the taxable year),
institution used directly, actually and then the excess shall be included in gross income.
exclusively for private educational However, in the case of a transfer for valuable
purposes shall be exempt from taxation. consideration, by assignment or otherwise, of a
life insurance, endowment , or annuity contract,
or any interest therein, only the actual value of
such consideration and the amount of the
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premiums and other sums subsequently paid by or reimbursement of


the transferee are exempt from taxation. expenses

(d) Value of property acquired by gift, bequest,


devise or descent.— Gifts, bequests and devises (f) Income exempt under tax treaty.— Income of
(which are subject to estate or gift taxes) are any kind, to the extent required by any treaty
excluded from gross income, BUT not the income obligation binding upon the Government of the
from such property. If the amount received is on Philippines.
account of services rendered, whether
constituting a demandable debt or not, or the use
or opportunity to use of capital, the receipt is (g) Retirement benefits, pensions, gratuities,
income [Pirovano v. Commissioner G.R. No. L- etc.— These are:
19865, July 31, 1965] (1) Retirement benefits under RA 7641, RA
4917, and Section 60(B) of the NIRC
(2) Terminal pay
(e) Amount received through accident or health
insurance (Compensation for damages).— As a (3) Retirement Benefits from foreign
rule, amounts received through accident or government agencies
health insurance or under workmen’s (4) Veterans benefits
compensation acts, as compensation for (5) Benefits under the Social Security Act
personal injuries or sickness, plus the amount of (6) GSIS benefits
any damages received, whether by suit or
agreement, on account of such injuries or
sickness are excluded from gross income. Retirement benefits received under RA 7641(The
Retirement Pay Law) and those received by
officials and employees of private firms under a
Examples of nontaxable and taxable damages reasonable private benefit plan (RPBP)
recoveries are: maintained by the employer under RA 4917 (now
Nontaxable – Taxable – Section 32(B)(6)(a) of NIRC) are excluded from
compensation for compensation for gross income subject to income tax.
damages on account of damages on account
of
RA 7641 RPBP
Personal (physical) Actual damages for Retiring employee Retiring official or
injuries or sickness loss of anticipated must be in the service employee must have
profits of same employer been in the service of
Any other damages .Moral and CONTINUOUSLY for the same employer
recovered on account exemplary damages at least five (5) years for at least ten (10)
of personal injuries or awarded as a result years.
sickness of break of contract Retiring employee Retiring official or
must be at least sixty employee must be at
Exemplary and moral Interest for non- (60) years old but not least fifty (50) years
damages for out-of- taxable damages more than 65 years of old at the time of
court settlement, above age at the time of retirement
including attorney’s retirement
fees
Availed of only once, Retiring employee
Alienation of Any damages as and only when there shall not have
affection, or breach of compensation for is no RPBP previously availed of
promise to marry unrealized income the privilege under a
retirement benefit
Any amount received plan of the same or
as a return of capital another employer

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Plan must be BIR Ruling 143-98: The “terminal leave pay”


reasonable. Its (amount paid for the commutation of leave
implementation must credits) of retiring government employees is
be fair and equitable considered not part of the gross salary, and is
for the benefit of all exempt from taxes. The government recognizes
employees (e.g. from that for most public servants, retirement pay is
president to laborer) always less than generous if not meager and
scrimpy. Terminal leave payments are given not
Plan must be only at the same time but also for the same policy
approved by BIR considerations governing retirement benefits.
(Commissioner v. Castaneda, 203 SCRA 72).
A 'reasonable private benefit plan' means a
pension, gratuity, stock bonus or profit-sharing Retirement BENEFITS from foreign government
plan maintained by an employer for the benefit of agencies – The social security benefits,
some or all of his employees wherein retirement gratuities, pensions and other similar
contributions are made by such employer, or benefits received by resident or non-resident
employees, or both for the purpose of distributing citizens or aliens who come to reside
to such employees the earnings and principal of permanently in the Philippines from foreign
the fund thus accumulated by the trust in government agencies and other institutions,
accordance with such plan (trust fund) private or public;
Further, it should be provided in the plan that at
no time prior to the satisfaction of all liabilities
with respect to employees under any trust, shall Payments of VETERANS benefits under U.S.
any part of the corpus or income of the fund be Veterans Administration – Payments of benefits
used for, or be diverted to, any purpose other than due or to become due to any person residing in
for the exclusive benefit of his employees. the Philippines under the laws of the United
States administered by the United States
Veterans Administration
Terminal pay/Separation pay
Any amount received by an employee or by his Social Security Act benefits – Payments of
heirs from the employer as a consequence of benefits received under the Social Security Act of
separation of such official or employee from the 1954 (RA 8282), as amended, e.g., Maternity
service of the employer because of death, Benefits
sickness, other physical disability or for any cause
beyond the control of the employee. The phrase GSIS benefits – Benefits received from GSIS
“for any cause beyond the control of the said under the GSIS Act of 1937, as amended, and the
official or employee” means that the separation retirement gratuity received by government
of the employee must be involuntary and not officials and employees are not taxable. [Sec.
initiated by him. 32B6., NIRC; Sec. B1, RR 2-98]
The separation must not be of his own making.
(h) Winnings, prizes and award, including those
in sports competitions.—All prizes and awards
Notes: granted to athletes:
Sickness must be life-threatening or one which in local and international sports competitions
renders the employee incapable of working and tournaments whether held in the Philippines
Retrenchment of the employee due to or abroad, AND
unfavorable business conditions or financial sanctioned by their national sports associations
reverses is considered as involuntary. However,
resignation or availment of an optional early shall not be included in gross income and shall be
retirement plan is voluntary and bars a claim tax exempt. [Sec. 32 B7d, NIRC]
under this provision.

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Prizes and awards made primarily in recognition to arrive at net income subject to tax. [Sec. 65,
of charitable, literary, educational, artistic, Rev. Reg. No. 2]
religious, scientific, or civic achievement are not
Deductions are in the nature of an exemption
taxable, provided:
from taxation; they are strictly construed against
Recipient was selected without any action on his the claimant, who must point to a specific
part to enter the contest or proceeding; and provision allowing them and who has the burden
of proving that they falls within the purview of
Recipient is not required to render substantial
such provision. Thus, all deductions must be
future services as a condition to receiving the
substantiated, except when the law dispenses
prize or award
with the records, documents or receipts to
support the deductions.
vi. Exclusions Under Special Laws If the exemption is not expressly stated in the law,
(a) Personal Equity and Retirement Account the taxpayer must at least be within the purview
of the exemption by clear legislative intent
Under R.A. 6657 (Comprehensive Agrarian [Commissioner of Customs v. Philippine
Reform Package Law), gain arising from the Acetylene Co., G.R. No. L-22443 May 29, 1971]
transfer of agricultural property covered by the
However, if there is an express mention in the law
law shall be exempt from capital gains tax.
or if the taxpayer falls within the purview of the
Under R.A. 6938 (Cooperative Code of the exemption by clear legislative intent, the rule on
Philippines), as amended by R.A. 9520, strict construction will not apply. [Commissioner
cooperatives transacting business with both v. Anoldus Caprentry Shop, G.R. No. 71122 March
members and non-members shall not be subject 25, 1988]
to tax on their transactions with members. In
The purpose of deductions from gross income is
relation to this, the transactions of members with
to provide the taxpayer a just and reasonable tax
the cooperative shall not be subject to any taxes
amount as the basis of income tax. It is because
and fees, including but not limited to final taxes
many taxpayers spend adequate expenditures in
on members' deposits.
order to obtain a legitimate income.
Under R.A. 7916 (PEZA Law), as amended, PEZA-
registered enterprises are given income tax
holidays of six or four years from the date of Types of deductions
commercial operations, depending on whether There are three (3) types of deductions from gross
their activities are considered pioneer or non- income:
pioneer.
itemized deductions in Section 34(A) to (J) and
Under R.A. 9178 (Barangay Micro Business (M) available to all kinds of taxpayers engaged in
Enterprises Act of 2002), BMBEs shall be exempt trade or business or practice of profession in the
from income tax for income arising from the Philippines;
operation of the enterprise.
optional standard deduction in Section 34(L)
available only to individual taxpayers deriving
business, professional, capital gains and passive
income not subject to final tax, or other income;
and
B.4. DEDUCTIONS FROM GROSS INCOME the special deductions in Sections 37 and 38 of
the NIRC, and in special laws like the BOI law (E.O.
Deductions are items or amounts which the law 226).
allows to be deducted from the gross of income
of a taxpayer in order to arrive at taxable income. B.4.1. General rules
In general, deductions or allowable deductions (a) Deductions must be paid or incurred in
are business expenses and losses incurred which connection with the taxpayer’s trade,
the law allows to reduce gross business income business or profession

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(b) Deductions must be supported by by a dealer in securities are provided for in


adequate receipts or invoices (except Section 38 of the NIRC. Other itemized
standard deduction) deductions could be granted under general
(c) Additional requirement relating to or special laws, e.g. additional training
withholding expenses are allowed to enterprises
registered with PEZA, BOI, and SBMA.

B.4.2. Return of captial


Income tax is levied by law only on income; Timing of Claiming Deductions
hence, the amount representing return of A taxpayer has the right to deduct all authorized
capital should be deducted from proceeds allowances for the taxable year. As a rule, if he
from sales of assets and should not be does not within any year deduct certain of his
subject to income tax. expenses, losses, interest, taxes or other charges,
Costs of goods purchased for resale, with he cannot deduct them from the income of the
proper adjustment for opening and closing next of any succeeding year [Sec. 76, Income Tax
inventories, are deducted from gross sales in Regulations]
computing gross income (Sec. 65, Rev. Reg.
2) (a) Expenses
(a) Sale of inventory of goods by manufacturers
and dealers of properties: Business expenses deductible from gross income
include the ordinary and necessary expenditures
In sales of goods representing inventory, the directly connected with or pertaining to the
amount received by the seller consists of taxpayer’s trade or business. The cost of goods
return of capital and gain from sale of goods purchased for resale, with proper adjustment for
or properties. That portion of the receipt opening and closing inventories, is deducted
representing return of capital is not subject to from gross sales in computing gross income.
income tax. Accordingly, cost of goods
manufactured and sold (in the case of Includes:
manufacturers) and cost of sales (in the case (i) Salaries, wages, and other forms of
of dealers) is deducted from gross sales and compensation for personal services
is reflected above the gross income line in a actually rendered, including the grossed-
profit and loss statement. up monetary value of fringe benefits
(b) Sale of stock in trade by a real estate dealer furnished or granted by the employer to
and dealer in securities: the employee
(ii) Travel expenses
Real estate dealers and dealers in securities
(iii) Rentals
are ordinarily not allowed to compute the
amount representing return of capital (iv) Entertainment, recreation and
through cost of sales. Rather they are amusement expenses
required to deduct the total cost specifically (v) Other expenses such as repairs or those
identifiable to the real property or shares of incurred by farmers and other persons in
stock sold or exchanged. agribusiness
(c) Sale of services:
(1) Requisites for deductibility of business
Their entire gross receipts are treated as part
expenses.—
of gross income.

(a) Ordinary AND necessary;


B.4.3. Itemized Deductions
ORDINARY - normal and usual in relation to the
These are enumerated in Section 34 of the taxpayer's business and surrounding
NIRC. Additional deductions are granted to circumstances; need not be recurring
insurance companies in Section 37, while
NECESSARY - appropriate and helpful in the
losses from wash sales of stock or securities
development of taxpayer's business or are proper
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for the purpose of realizing a profit or minimizing CONNECTION or relation of the expense being
a loss deducted to the development, management,
operation and/or conduct of the trade, business
Paid or incurred during the taxable year;
or profession of the taxpayer.
Others: (not in the SC syllabus)
When to ACCRUE expenses: “all–events test”
(b) Paid or incurred in carrying on or which are states that under the accrual method of
directly attributable to the development, accounting, expenses are deductible in the
management, operation and/or conduct of the taxable year in which: (1) all events have occurred
trade, business or exercise of profession; which determine the liability; and (2) the amount
of liability can be determined with reasonable
accuracy.
(c) Substantiated by adequate proof –
documented by official receipts or adequate
Kinds of business expenses
records, which reflect the amount of expense
deducted and the connection or relation of the These are:
expense to the business/trade of the taxpayer); (a) Salaries, wages and other forms of
Legitimately paid (not a BRIBE, kickback, or compensation for personal services
otherwise contrary to law, morals, public policy); actually rendered, including the grossed-
up monetary value of the fringe benefit
If subject to withholding tax, the tax required to subjected to fringe benefit tax which tax
be withheld on the expense paid or payable is should have been paid (Compensation
shown to have been properly withheld and for
remitted to the BIR on time; (b) Travelling expenses
Amount must be reasonable. (c) Cost of materials
(d) Rentals and/or other payments for use or
Note: The expenses allowable to a non-resident possession of property
alien or a foreign corporation consist of only such (e) Repairs and maintenance
expenses as are incurred in carrying on any (f) Expenses under lease agreements
business or trade conducted within the (g) Expenses for professionals
Philippines exclusively. [Sec. 77 RR 2] (h) Entertainment expenses
(i) Political campaign expenses
COHAN Rule: This relief will apply if the taxpayer (j) Training expenses
has shown that it is usual and necessary in the (k) Others
trade to entertain and to incur similar kinds of
expenditures, there being evidence to show the
amounts spent and the persons entertained, (2) Salaries, wages and other forms of
though not itemized. In such a situation, compensation for personal services actually
deduction of a portion of the expenses incurred rendered, including the grossed-up monetary
might be allowed even if there are no receipts or value of the fringe benefit subjected to fringe
vouchers. Absence of invoices, receipts or benefit tax which tax should have been paid
vouchers, particularly lack of proof of the items
Given for personal services must be actually
constituting the expense is fatal to the allowance
rendered and reasonable.
of the deduction [Gancayco v. Collector, G.R. No.
L-13325, (1961)] For income payment to be allowed as deduction,
the withholding tax must have been paid [RR No.
12-2013].
Substantiation requirement – Sec. 34(A)(1)(b),
NIRC: No deduction from gross income shall be
allowed unless the taxpayer shall substantiate Bonuses are deductible when:
with sufficient evidence, such as official receipts (1) made in good faith
or other adequate records: (1) the AMOUNT of the (2) given as additional compensation for
expense being deducted, and (2) the DIRECT personal services actually rendered
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(3) such payments, when added to the period of use. On cash basis, rent is deductible
stipulated salaries, do not exceed a when it is incurred and paid.
reasonable compensation for the services
If the advance payment is a prepaid rental, such
rendered
payment is taxable income to the lessor in the
year when it was received. However, an advance
(3) Traveling expenses payment is not deductible expense of the lessee
until the period is used. [Valencia and Roxas]
This include transportation expenses and meals
and lodging [Sections 65 and 66, Rev. Reg. No.
2] (6) Repairs and maintenance
(1) Expenses must be reasonable and Incidental or ordinary repairs are deductible.
necessary. Repairs which neither materially add to the value
(2) Must be incurred or paid “while away of the property nor appreciably prolong its life,
from home” but keep it in an ordinarily efficient working
condition, may be deducted as expenses,
(3) Tax home is the principal place of
provided the plant or property account is not
business, when referring to “away from
increased by the amount of such expenditure.
home”
The life of the asset referred to is the probable,
(4) Incurred or paid in the conduct of trade or normal, useful life for the purpose of the
business. allowance for the return of the capital investment
– not what the life that would have been if no
Note: However, necessary transportation repairs had been made after the property was
expenses of the taxpayer (which are different damaged by a casualty. Since the repairs
from the transportation expenses included in the prolonged the lives of the said vessels of
term “travel expenses”) in its “tax home” are petitioners, the disallowance must be sustained.
deductible. Thus, a taxpayer operating its [Visayan Transportation Co. v. CTA, CTA Case No.
business in Manila is allowed transportation 1119, (1964)]
expenses from its office to its customers’ place of
business and back. But the transportation
expenses of an employee from his residence to its Extraordinary repairs are not deductible – they
office and back are not deductible as they are are capital expenditures
considered personal expenses. Repairs which add material value to the property
or appreciably prolong its life
(4) Cost of materials Repairs in the nature of replacement, to the
Deductible only to the amount that they are extent that they arrest deterioration and
actually consumed and used in operation during appreciably prolong the life of the property,
the year for which the return is made, provided should be charged against the depreciation
that their cost has not been deducted in reserves if such account is kept. [Sec. 68, Rev.
determining the net income for any previous year. Regs. 2]
All maintenance expenses on account of non-
(5) Rentals and/or other payments for use or depreciable vehicles for taxation purposes are
possession of property disallowed in its entirely. [RR No. 12-2012]

Required as a condition for continued use or


possession of property. (7) Expenses under lease agreements
For purposes of trade business or profession. Requisites for deductibility:
Taxpayer has not taken or is not taking title to the (1) Required as a condition for continued use
property or has no equity other than that of lessee, or possession;
user, or possessor. (2) For purposes of the trade, business or
On the accrual basis, rent is deductible as possession;
expense when liability is incurred during the
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(3) Taxpayer has not taken or is not taking 10-02, in no case to exceed 0.50% of net
title to the property or has no equity other sales for sellers of goods or properties or
than that of lessee, user, or possessor. 1% of net revenues for sellers of services,
including taxpayers engaged in the
exercise of profession and use or lease of
(8) Expenses for professionals properties)
Deductible in the year the professional services (5) Not incurred for purposes contrary to law,
are rendered, not in the year they are billed, morals, public policy or public order.
provided that the “all events” is present.
(6) Must be substantiated with sufficient
“All events test” requires: evidence such as receipts and/or
Fixing a right to income or liability to pay; and adequate records.
The availability of reasonably accurate
determination of such income or liability. Exclusions from EAR expenses:
The “all-events test” does not demand that the (a) Expenses which are treated as
amount of income or liability be known compensation or fringe benefits for
absolutely; it only requires that a taxpayer has at services rendered under an employer-
its disposal the information necessary to employee relationship
compute the amount with reasonable accuracy,
which implies something less than an exact or (b) Expenses for charitable or fund raising
completely accurate amount. [Commissioner v. events
Isabela Cultural Corporation, GR. 172231, Feb. 12, (c) Expenses for bona fide business meeting
2007] of stockholders, partners or directors
A professional may claim as deductions the cost (d) Expenses for attending or sponsoring an
of supplies used by him in the practice of his employee to a business league or
profession, expenses paid in the operation and professional organization meeting
repair of transportation equipment used in
making professional calls, dues to professional (e) Expenses for events organized for
societies and subscriptions to professional promotion marketing and advertising,
journals. [Mamalateo] including concerts, conferences,
seminars, workshops, conventions and
other similar events; and
(9) Entertainment/Representation expenses (f) Other expenses of a similar nature.
These are entertainment, amusement and
recreation (EAR) expenses incurred or paid
during the year that are directly connected to the (10) Political campaign expenses
development, management and operation of the Amount expended for political campaign
trade, business or profession of the taxpayer. purposes or payments to campaign funds are
NOT deductible either as business expenses or as
contribution [CTA Case No. 695, April 30, 1969,
Requisites for deductibility: citing Mertens]
(1) Reasonable in amount.
(2) Paid or incurred during the taxable (11) Training expenses
period.
Under Section 30 of the Tax Code, as
(3) Directly connected to the development, implemented by Sec. 20 of the Revenue
management, and operation of the trade, Regulations No. 2, organization and pre-
business or profession of the taxpayer, or operating expenses of a corporation (including
that are directly related to or in training expenses) are considered as capital
furtherance of the conduct thereof. expenditures and are therefore, not deductible in
(4) Not to exceed such ceiling as the the year they are paid or incurred. But taxpayers
Secretary of Finance prescribe (under RR who incur these expenses and subsequently enter
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the trade or business to which the expenditures (3) The indebtedness is connected with the
relate can elect to amortize these expenditures taxpayer‘s trade, profession, or business.
over a period not less than sixty (60) months. [BIR
(4) The interest must be legally due.
Ruling 102-97, Sept. 29, 1997]
(5) The interest must be stipulated in writing.
(6) The taxpayer is LIABLE to pay interest on
This rule, however, does not apply to a situation
the indebtedness.
where an existing corporation incurs these same
expenditures for the purpose of expanding its (7) The indebtedness must have been paid or
business in a new line of trade, venture or activity. accrued during the taxable year.
(8) The interest payment arrangement must
not be between related taxpayers
(12) Others
(9) The interest must not be incurred to
Expenses Allowable to Private Educational
finance petroleum operations.
Institutions:
(10) In case of interest incurred to acquire
In addition to the expenses allowable as
property used in trade, business or
deductions under the NIRC, a private proprietary
exercise of profession, the same was not
educational institution may at its OPTION, elect
treated as a capital expenditure,
either:
To deduct expenditures otherwise considered as
capital outlays or depreciable assets incurred Limitation: The taxpayer's allowable deduction
during the taxable year for the expansion of for interest expense shall be reduced by an
school facilities, OR amount equal to 33% of the interest income
subjected to final tax (see chapter on taxation of
To deduct allowances for depreciation thereof.
passive income for interest income); effective
January 1, 2009.
Thus, where the expansion expense has been
claimed as a deduction, no further claims for
(2) Non-deductible interest expense.—
yearly depreciation of the school facilities are
allowed. (a) Interest paid in advance by the taxpayer who
reports income on cash basis shall only be
allowed as deduction in the year the
Advertising Expenses indebtedness is paid.
The media advertising expenses which were (b) If the indebtedness is payable in periodic
found to be inordinately large and thus, not amortizations, only the amount of interest which
ordinary, and which were incurred in order to corresponds to the amount of the principal
protect the taxpayer’s brand franchise which is amortized or paid during the year shall be
analogous to the maintenance of goodwill or title allowed as deduction in such taxable year.
to one’s property, are not ordinary and necessary
(c)Interest payments made between related
expenses but are capital expenditures, which
taxpayers.
should be spread out over a reasonable period of
time. [CIR v. General Foods Phils. Inc, GR No. (d) Interest on indebtedness incurred to finance
143672, April 24, 2003] petroleum exploration.

(b) Interest Related Taxpayers


(a) Between members of the family, i.e.
(1) Requisites for deductibility.—
brothers and sisters (whether by the
(1) There is a valid and existing indebtedness. whole or half-blood), spouse, ancestor,
and lineal descendants; or
(2) The indebtedness is that of the taxpayer

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(b) Except in case of distributions in A capital expenditure for which the taxpayer may
liquidation, between an individual and a claim only as a deduction the periodic
corporation, where the individual owns amortization of such expenditure.
directly or indirectly more than 50% of
Should the taxpayer elect to deduct the interest
the outstanding stock of the corporation
payments against its gross income, the taxpayer
(c) Except in the case of distributions in cannot at the same time capitalize the interest
liquidation, between two corporations payments. In other words, the taxpayer is not
where: entitled to both the deduction from gross income
and the adjusted (increased) basis for
(i) Either one is a personal holding
determining gain or loss and the allowable
company of a foreign personal
depreciation charge. [Paper Industries Corp. v.
holding company with respect to
Commissioner, 250 SCRA 434]
the taxable year preceding the
date of the sale of exchange; and
(ii) More than 50% of the (d) Reduction of interest expense/interest
outstanding stock of each is arbitrage
owned, directly or indirectly, by or
The taxpayer's allowable deduction for interest
for the same individual; or
expense shall be reduced by an amount equal to
(d) Between parties to a trust – Grantor and 33% of the interest income subjected to final tax;
Fiduciary; or effective January 1, 2009. [RA 9337]
(e) Fiduciary of a trust and fiduciary of This limitation is apparently intended to counter
another trust if the same person is a the tax arbitrage scheme where a taxpayer
grantor with respect to each trust; or obtains an interest-bearing loan and places the
proceeds of such loan in investments that yield
(f) Fiduciary and Beneficiary
interest income subject to preferential tax rate of
20% final withholding tax. [Valencia and Roxas]
(3) Interest subject to special rules.
(a) Interest paid in advance (c) Taxes
No deduction shall be allowed if within the
taxable year an individual taxpayer reporting Taxes Proper: Refers to national and local taxes;
income on cash basis incurs an indebtedness on
(1) Requisites for deductibility
which an interest is paid in advance through
discount or otherwise. Such tax must be:
But the deduction shall be allowed in the year the (1) Paid or incurred within the taxable year;
indebtedness is paid
(2) Paid or incurred in connection with the
(b) Interest periodically amortized taxpayer‘s trade, profession or business;
If the indebtedness is payable in periodic (3) Imposed directly on the taxpayer;
amortizations, the amount of interest which
(4) Not specifically excluded by law from
corresponds to the amount of the principal
being deducted from the taxpayer‘s gross
amortized or paid during the year shall be
income.
allowed as deduction in such taxable year
The following taxes are deductible:
a) Import duties;
(c)Interest expense incurred to acquire property
for use in trade/business/profession b) Business tax;
At the option of the taxpayer, interest expense on c) Professional/occupation tax;
a capital expenditure may be allowed as:
d) Privilege and excise tax;
A deduction in full in the year when incurred; e) DST;

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f) Motor vehicle registration fees; Tax credit – amount allowed by law to reduce the
Philippine income tax due, subject to limitations,
g) Real property tax;
on account of taxes paid or accrued to a foreign
h) Electric energy consumption tax; and country
i) Interest on delinquent taxes.
Tax Credit Tax Deduction
(2) Non-deductible taxes Taxes are deductible Taxes are deductible
from the Phil. Income from gross income in
General Rule: All taxes, national or local, paid or tax itself computing the
incurred during the taxable year in connection taxable income
with the taxpayer's profession, trade or business,
are deductible from gross income Effect: Reduces Effect: Reduces
Philippine income tax taxable income upon
Exceptions: liability which the tax liability
a) Philippine income tax, except Fringe is calculated
Benefit Taxes; Sources: Only foreign Sources: Deductible
b) Income tax imposed by authority of any income taxes may be taxes (e.g. business
foreign country, if taxpayer avails of the claimed as credits tax, excise tax)
Foreign Tax Credit (FTC) against Philippine
income tax.
Exception to exception: When the taxpayer does
NOT signify his desire to avail of the tax credit for
taxes of foreign countries, the amount may be An amount subtracted from an individual's or
allowed as a deduction from gross income of entity's tax liability to arrive at the total tax
citizens and domestic corporations subject to the liability. A tax credit reduces the taxpayer's
limitations set forth by law. liability, compared to a deduction which reduces
taxable income upon which the tax liability is
calculated. A credit differs from deduction to the
(3) Treatments of surcharges/interests/fines for extent that the former is subtracted from the tax
delinquency while the latter is subtracted from income before
The amount of deductible taxes is limited to the the tax is computed. [CIR v. Bicolandia Drug Corp.
basic tax and shall not include the amount for any G.R. No. 148083, (2006)]
surcharge or penalty on delinquent taxes.
However, interest on delinquent taxes, although
not deductible as tax, can be deducted as interest The following may claim tax credits:
expense at its full amount. [CIR v Palanca, 18 (a) Resident citizens
SCRA 496]
(b) Domestic corporations, which include all
Although interest payment for delinquent taxes is partnerships except general professional
not deductible as tax, the taxpayer is not partnerships
precluded thereby from claiming said interest
payment as deduction as such. [CIR v. Vda. de (c) Members of general professional
Prieto, 1960] partnerships
(d) Beneficiaries of estates or trusts
(4) Treatment of special assessment.
Special assessments and other taxes assessed The following may NOT claim tax credits:
against local benefits of a kind tending to (a) Non-resident citizens
increase the value of the property assessed are
non-deductible from gross income. (b) Aliens, whether resident or non-resident
(c) Foreign corporations, whether resident
on non-resident
(5) Tax credit vis-à-vis deduction.—
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Note: Tax credits for foreign taxes are allowed (a) Actual FTC
only for income derived from sources outside the (b) For taxes paid to one foreign country
Philippines. The above taxpayers are not entitled (c) For taxes paid to 2 or more foreign
to tax credit; they are taxable only on income countries
derived from Philippine sources.
Limitations on Tax Credit. (d) Losses
(a) [Per Country Limit] The amount of tax
(1) Requisites for deductibility.—
credit shall not exceed the same
proportion of the tax against which such (1) Loss must be that of the taxpayer (e.g.,
credit is taken, which the taxpayer's losses of the parent corp. cannot be
taxable income from sources within such deducted by its subsidiary);
country bears to his entire taxable (2) Actually sustained and charged off within
income for the same taxable year; and the taxable year;
(b) [Worldwide Limit] The total amount of (3) Incurred in trade, business or profession;
the credit shall not exceed the same (4) Of property connected with the trade,
proportion of the tax against which such business, or profession, if the loss arises
credit is taken, which the taxpayer's from fires, storms, shipwreck or other
taxable income from sources without the casualties, or from robbery, theft, or
Philippines taxable bears to his entire embezzlement;
taxable income for the same taxable year. (5) Sustained in a closed and completed
transaction;
Formula: (6) Not compensated for by insurance or
other form of indemnity;
Limit #1
(7) Not claimed as a deduction for estate tax
Taxable Limit on purposes;
Income Per amount (8) In case of casualty loss, filing of notice of
Foreign of tax loss with the BIR within 45 days from the
Phil.
Country x Income = credit date of the event that gave rise to the
Tax casualty; and
Worldwide (Per
Country (9) The taxpayer must prove the elements of
Taxable the loss claimed, such as the actual
Income Limit)
nature and occurrence of the event and
amount of the loss.
Limit #2 In case a non-depreciable vehicle is sold at a loss,
the loss incurred from the sale of non-
Taxable Limit on depreciable vehicle is not allowed as a deduction.
Income For amount [RR No. 2-2013]
all Foreign of tax
Phil.
Countries x Income = credit
No loss is recognized in the following.—
Tax (World
Worldwide (a) Merger, consolidation, or control
Taxable Wide
Limit) securities (where no gains are recognized
Income either);
(b) Exchanges not solely in kind;
Note: Computation of FTC: Limit #2 applies (c) Related taxpayers (see above – (c)
where taxes are paid to two or more foreign Interest expense incurred to acquire
countries. Allowable tax credit is the lower property for use in
between the tax credit computed under Limit #1 trade/business/profession)
and that computed under Limit#2. (d) Wash sales;
(e) Illegal transactions
FTC Limitations – lowest of the 3:

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(2) Other types of losses.—


(e) Net Operating Loss Carry Over (NOLCO)
(a) Capital losses
Net operating loss (NOL) is the excess of
Incurred in the sale or exchange of capital assets
allowable deductions over gross income for any
(allowable only to the extent of capital gains,
taxable year immediately preceding the current
except for banks and trust companies under
taxable year.
conditions in Sec. 39 of NIRC where loss from
such sale is not subject to the foregoing NOLCO: The NOL of the business or enterprise
limitation); which had not been previously offset as
deduction from gross income shall be carried
Resulting from securities becoming worthless
over as a deduction from gross income for the
and which are capital assets (considered loss
next three (3) consecutive taxable years
from sale or exchange) on last day of the taxable
immediately following the year of such loss,
year;
provided however, that any net loss incurred in a
Losses from short sales of property; taxable year during which the taxpayer was
exempt from income tax shall not be allowed as
Losses due to failure to exercise privileges or
a deduction. [Sec. 34(3)(D), NIRC]
options to buy or sell property.
Exception: Mines other than oil and gas wells,
where a net operating loss without the benefit of
(b) Securities becoming worthless
incentives provided for under EO No. 226
Loss in shrinkage in value of stock through (Omnibus Investments Code) incurred in any of
fluctuation in the market is not deductible from the first ten (10) years of operation may be carried
gross income. (To be deductible, the loss must be over as a deduction from taxable income for the
actually suffered when the stock is disposed of.) next five (5) years immediately following the year
Exception: If the stock of the corporation becomes of such loss.
worthless, the cost or other basis may be Requisites for NOLCO:
deducted by its owner in the taxable year in which
(1) The taxpayer was not exempt from
the stock became worthless, provided a
income tax the year the loss was incurred;
satisfactory showing of its worthlessness be
made, as in the case of bad debts. (2) There has been no substantial change in
the ownership of the business or
enterprise wherein:
(c) Losses on wash sales of stocks or securities (3) AT LEAST 75% of nominal value of
Wash Sale - a sale or other disposition of stock or outstanding issued shares is held by or on
securities where substantially identical securities behalf of the same persons; or
(substantially the same as those disposed of) are (4) AT LEAST 75% of the paid up capital of
acquired or purchased (or there was an option to the corporation is held by or on behalf of
acquire, and the acquisition or option should be the same persons.
by purchase or exchange upon which gain or loss
is recognized under the income tax law) within a
61-day period, beginning 30 days before the sale Taxpayers Entitled to NOLCO
and ending 30 days after the sale (a) Individuals engaged in trade or business
General rule: Not deductible from gross income or in the exercise of his profession
(including estates and trusts);
Exception: If by a dealer in securities in the course
of ordinary business, it is deductible. Note: An individual who avails of 40%
OSD shall not simultaneously claim
deduction of NOLCO. However, the
(d) Wagering losses three-year reglementary period shall
Losses from wagering (gambling) are deductible continue to run during such period
only to the extent of gains from such transactions. notwithstanding the fact that the
A wager is made when the outcome depends aforesaid taxpayer availed of OSD during
upon CHANCE. the said period.

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(b) Domestic and resident foreign (3) Debt was not sustained in a transaction
corporations subject to the normal entered into between related parties;
income tax (e.g., manufacturers and
(4) Actually ascertained to be worthless and
traders) or preferential tax rates under
uncollectible as of the end of the taxable
the Code (e.g., private educational
year (taxpayer had determined with
institutions, hospitals, and regional
reasonably degree of certainty that the
operating headquarters) or under special
claim could not be collected despite the
laws (e.g., PEZA-registered companies)
fact that the creditor took reasonable
Note: Domestic and resident foreign steps to collect); and
corporations taxed during the taxable
(5) Actually charged off the books of
year with Minimum Corporate
accounts of the taxpayer as of the end of
Income Tax cannot enjoy the benefit of NOLCO. the taxable year
However, the three-year period for the expiry of
General rule: Taxpayer must ascertain and
the NOLCO is not interrupted by the fact that the
demonstrate with reasonable certainty the
corporation is subject to MCIT during such three-
uncollectibility of debt
year period.
Exceptions:
Other Losses: (a) Banks as creditors – BSP Monetary Board
shall ascertain the worthlessness and
(a) Abandonment losses in petroleum
uncollectibility of the debt and shall
operation and producing well.
approve the writing off
(b) Losses due to voluntary removal of
building incident to renewal or (b) Receivables from an insurance or surety
replacements are deductible from gross company (as debtor) may be written off
income. as bad debts only when such company is
(c) Loss of useful value of capital assets due declared closed due to insolvency or
to charges in business conditions is similar reason
deductible only to the extent of actual The taxpayer must show that the debt is indeed
loss sustained (after adjustment for uncollectible even in the future. He must prove
improvement, depreciation and salvage that he exerted diligent efforts to collect:
value)
(1) Sending of statement of accounts
(d) Losses from sales or exchanges of
property between related taxpayers are (2) Collection letters
not recognized, but the gains are taxable. (3) Giving the account to a lawyer for
(e) Losses of farmers incurred in the collection
operation of farm business are deductible.
(4) Filing the case in court [Phil. Refining
Corp. v. CA, G.R. No. 118794, May 8, 1996]
(e) Bad debts
In ascertaining the debt to be worthless, it is not
Debts resulting from the worthlessness or enough that the taxpayer acted in good faith. He
uncollectibility, in whole or in part, of amounts must show that he had reasonably investigated
due the taxpayer actually ascertained to be the relevant facts from which it became evident,
worthless and the corresponding receivable in the exercise of sound, objective business
should have been written off or charged off within judgment, that there remained no practical, but
the taxable year. only a vague prospect that the debt would be
paid [Collector v. Goodrich, G.R. No. L-22265
(1) Requisites for deductibility.— (1967)]

(1) Valid and legally demandable debt due


to the taxpayer Rev. Reg. No. 5-1999:
(2) Debt is connected with the taxpayer's “Actually ascertained to be worthless” –
trade, business or practice of profession;
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Determination of worthlessness must depend (1) Requisites for Deductibility. –


upon the particular facts and circumstances of
(1) It must be reasonable.
the case. A taxpayer may not postpone a bad
debt deduction on the basis of a mere hope of (2) It must be charged off during the year.
ultimate collection or because of a continuance of
(3) The asset must be used in profession,
attempts to collect, where there is no showing
trade or business.
that the surrounding circumstances differ from
those relating to other notes which were charged (4) The asset must have a limited useful life.
off in a prior year. The depreciable asset must be located in the
Accounts receivable may be written off as bad Philippines if the taxpayer is a nonresident alien
debts even without conclusive evidence that they or a foreign corporation. [Valencia and Roxas]
had definitely become worthless when: No depreciation shall be allowed for yachts,
(a) the amount is insignificant; and helicopters, airplanes and/or aircrafts, and land
vehicles which exceed the threshold amount of
(b) collection through court action may be
P2,400,000, unless the taxpayer’s main line of
more costly to the taxpayer.
business is transport operations or lease of
“Actually charged off from the taxpayer’s book of transportation equipment and the vehicles
accounts” purchased are used in the operations. [RR No. 12-
2012]
Receivable which has actually become worthless
at the end of the taxable year has been cancelled
and written off. Mere recording in the books of
Methods of computing depreciation allowance.—
account of estimated uncollectible accounts does
not constitute a write-off. (a) Straight-line cost- salvage value
estimated life
(2) Effect of recovery of bad debts.— (b) Declining balance (cost – depreciation)
x Rate
Tax Benefit Rule on Bad Debts
estimated life
Bad debts claimed as deduction in the preceding
year(s) but subsequently recovered shall be (c)Sum-of-the-year- nth period x cost-
included as part of the taxpayer‘s gross income in digit (SYD) salvage
the year of such recovery the extent of the income
SYD
tax benefit of said deduction. Also called the
equitable doctrine of tax benefit. Any other method
Requisites: which may be
prescribed by the
(1) Allowance must be reasonable Secretary of Finance
(2) Charged off during the taxable year from upon the
the taxpayer‘s books of accounts. recommendation of
the CIR
(3) Does not exceed the acquisition cost of
the property.
(g) Charitable and other contributions

(f) Depreciation (1) Requisites for deductibility.—

An annual reasonable allowance to reduce the Actually PAID or made to the ENTITIES or
wasteful value of the tangible fixed assets institutions specified by law;
resulting from wear and tear and normal Made within the TAXABLE year.
obsolescence
It must be EVIDENCED by adequate receipts or
For intangible assets, the annual allowance to records.
rduce their useful value is called amortization.

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For Contributions Other than Money: The amount (i) scientific,


shall be BASED on the acquisition cost of the
(ii) research,
property (i.e., not the fair market value at the time
of the contribution). (iii) educational,
For Contributions subject to the statutory (iv) character-building and youth and
limitation: It must NOT EXCEED 10% (individual) sports development,
or 5% (corporation) of the taxpayer‘s taxable
(v) health,
income before charitable contributions
(vi) social welfare,
(vii) cultural or
(2) Amount that may be deducted.—
(viii) charitable purposes, or
Kinds of Contributions:
(ix) a combination thereof,
(a) Contributions deductible in full;
No part of the net income of which inures to the
(b) Contributions subject to the statutory benefit of any private individual
limit.
Directly utilizes contributions for the active
Contributions Deductible in Full:
conduct of the activities constituting the purpose
(a) Donations to the Government of the or function for which it is organized, not later
Philippines, or to any of its agencies, or than 15th day of the month following the close of
political subdivisions, including fully its taxable year in which contributions are
owned government corporations – received, unless an extended period is granted by
the Secretary of Finance, upon recommendation
(b) Exclusively to finance, provide for, or to
of the CIR
be used in undertaking priority activities
in Administrative expense ,on an annual basis,
must not exceed 30% of total expenses for the
(c) Education
taxable year
(d) Health
Upon dissolution, its assets would be distributed
(e) Youth and sports development to another accredited NGO organized for a
similar purpose or purposes, OR to the State for
(f) Human settlements
public purpose, OR would be distributed by a
(g) Science and culture, and competent court of justice to another accredited
(h) Economic development NGO to be used in such manner as in the
judgment of said court shall best accomplish the
(i) in accordance with a National Priority general purpose for which the dissolved
Plan determined by NEDA (otherwise, organization was organized.
subject to statutory limit)
(j) Donations to Certain Foreign Institutions
Contributions subject to the Statutory Limit
or International Organizations which are
fully deductible in compliance with These contributions are not deductible in full as
agreements, treaties or commitments specified by the law or such deduction has not
entered into by the Government of the met the requirements to be deducted in full.
Philippines and the foreign institutions or
international organizations or in
pursuance of special laws Those made to:
(k) Donations to Accredited Non- (a) Government or any of its agencies or
government Organizations subject to political subdivisions exclusively for
conditions set forth in RR No. 13-98 – public purposes (contributions for non-
NGO means a non-stock non-profit priority activities)
domestic corporation or organization:
(b) Accredited domestic corporation or
(l) Organized and operated exclusively for: associations organized exclusively for
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(c) Religious employees shall be allowed as a deduction, a


reasonable amount transferred or paid into such
(d) Charitable
trust in excess of the contributions to such trust
(e) Scientific made during the taxable year.
(f) youth and sports development
(g) cultural (1) Requisites for deductibility of payments to
pension trusts.—
(h) educational purposes or
There must be a pension or retirement plan
(i) rehabilitation of veterans
established to provide for the payment of
(j) Social welfare institutions reasonable pensions to employees;
(k) Non-government organizations: No part The pension plan is reasonable and actuarially
of the net income of which inures to the sound;
benefit of any private stockholder or
individual It must be funded by the employer;
The amount contributed must no longer be
subject to the employer’s control or disposition;
Statutory Limit: and
(a) 10% in the case of an individual The payment has not theretofore been allowed
(individual donor), and before as a deduction.
(b) 5% in the case of a corporation (corporate
donor), of the taxpayer's/donor’s income
(i) Deductions under special laws
derived from trade, business or
profession computed before the
Special deductions for productivity bonus and
deduction for contributions and
manpower training under the Productivity
donations
Incentives Act of 1990
The amount deductible is the actual contribution
Deductions for training expenses of qualified
or the statutory limit computed, whichever is
jewelry enterprises (Jewelry Industry
lower
Development Act of 1998)
Deductions under the Adopt-a-School Act of
1998
Deductions under the Expanded Senior Citizens
(h) Contributions to pension trusts Act of 2003. [Domondon]
B.4.4. Optional Standard Deduction
Contribution to a pension trust may be claimed as (a) Individuals, except non-resident aliens
deduction as follows:
May be taken by an individual in lieu of itemized
(a) Amount contributed for the deductions except those earning purely
present/normal service cost – 100% compensation income.
deductible
If an individual opted to use OSD, he is no longer
(b) Amount contributed for the past service allowed to deduct cost of sales or cost of services.
cost – 1/10 of the amount contributed is
Amount: 40% of gross sales or gross receipts
deductible in year the contribution is
(under RA 9504, effective July 6, 2008)
made, the remaining balance will be
amortized equally over nine consecutive Requisites:
years
(1) Taxpayer is a citizen or resident alien;
General Rule: An employer establishing or
(2) Taxpayer’s income is not entirely from
maintaining a pension trust to provide for the
compensation;
payment of reasonable pensions to his
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(3) Taxpayer signifies in his return his deducted not from his gross income but from his
intention to elect this deduction; gross sales/receipts; and,
otherwise he is considered as having
The OSD being in lieu of the itemized deductions
availed of the itemized deductions;
allowed in computing taxable income as defined
(4) Election is irrevocable for the year in under Section 32 of the Tax Code, it will answer
which made; however, he can change to for both the items of deduction allowed to the
itemized deductions in succeeding years. GPP and its partners.
Since one-layer of income tax is imposed on the
income of the GPP and the individual partners
(b) Corporations, except non-resident foreign
where the law had placed the statutory incidence
corporations
of the tax in the hands of the latter, the type of
The option to elect Optional Standard Deduction deduction chosen by the GPP must be the same
granted is now granted to corporations (domestic type of deduction that can be availed of by the
and resident foreign corporations) by virtue of RA partners. Accordingly, if the GPP claims itemized
9504. The OSD is 40% of its gross income. deductions, all items of deduction allowed under
Sec. 34 can be claimed both at the level of the
The domestic and resident foreign corporation
GPP and at the level of the partner in order to
shall keep such records pertaining to his gross
determine the taxable income. On the other
income as defined in Sec. 32 of the NIRC during
hand, should the GPP opt to claim the OSD, the
the taxable year, as may be required by the rules
individual partners are deemed to have availed
and regulations promulgated by the Secretary of
also of the OSD because the OSD is in lieu of the
Finance upon recommendation of the CIR.
itemized deductions that can be claimed in
Corporations availing of OSD are still required to computing taxable income.
submit their financial statements when they file
If the partner also derives other gross income
their annual ITR and to keep such records
from trade, business or practice of profession
pertaining to its gross income. (RR 2-2010).
apart and distinct from his share in the net
income of the GPP, the deduction that he can
(c) Partnerships claim from his other gross income would follow
the same deduction availed of from his
General Co-Partnership partnership income as explained in the foregoing
For purposes of taxation, the Code considers rules. Provided, however, that if the GPP opts for
general co-partnerships as corporations. Hence, the OSD, the individual partner may still claim
rules on OSD for corporations are applicable to 40% of its gross income from trade, business or
general co-partnerships. practice of profession but not to include his share
from the net income of the GPP. (RR 2-2010)
General Professional Partnerships (GPP)
If the GPP availed of itemized deductions, the B.4.5. Personal and additional exemptions
partners are not allowed to claim the OSD from
their share in the net income because the OSD is
a proxy for all the items of deductions allowed in (a) Basic personal exemptions
arriving at taxable income. This means that the According to RA 9504 (Minimum Wage Earner
OSD is in lieu of the items of deductions claimed Law, effective July 6, 2008) basic personal
by the GPP and the items of deduction claimed by exemption is Fifty thousand pesos (P50,000) for
the partners. each individual taxpayer, regardless of status, i.e.,
If the GPP avails of OSD in computing its net whether single, married or head of the family.
income, the partners comprising it can no longer But note Sec 35(A) of NIRC – In the case of
claim further deduction from their share in the married individuals where only one of the
said net income for the following reasons: spouses is deriving gross income, only such
The partners’ distributive share in the GPP is spouse shall be allowed the personal exemption.
treated as his gross income not his gross
sales/receipts and the 40% OSD allowed to
individuals is specifically mandated to be
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(b) Additional exemptions for taxpayer with (4) Not more than 21 years old, unmarried
dependents and not gainfully employed or
An individual, whether single or married, shall be (5) Regardless of age, is incapable of self-
allowed an additional exemption of P25,000 for support because of mental or physical
each qualified dependent child (QDC), provided defect. [Sec 35(B), NIRC]
that the total number of dependents for which
Note: Only children (not parents) may be
additional exemptions may be claimed shall not
considered “dependent” for purposes of
exceed 4 dependents (depends on the number of
additional exemptions.
qualified dependent children)
The definition of the term “dependent” under
Married Individuals: Additional exemptions for
Section 35(B) of the NIRC now includes a “Foster
QDC are claimed by only one spouse.
Child” or a child placed under planned temporary
Generally, the spouse who is the gross substitute parental care by a Foster Parent or a
compensation earner is the claimant of the Foster Family. [RMC No. 41-20i3, Jan. 23, 2013]
additional exemptions.
Where the husband and wife are both
Who may claim personal exemptions?
compensation income earners: the husband is
the proper claimant of the additional exemptions Citizens (whether resident or non-resident) and
EXCEPT if there is an express waiver by the resident aliens
husband in favor of his wife, as embodied in the
Non-resident aliens engaged in trade or business
application for registration (BIR Form No. 1902)
are entitled personal exemptions subject to
or in the Certificate of Update of Exemption and
reciprocity. (See below)
of Employer’s and Employee’s Information (BIR
Form No. 2305), whichever is applicable.
When the spouses have business and/or (c) Status-at-the-end-of-the-year rule
professional income only: either may claim the Change of Status [Sec 35(C), NIRC]
additional exemptions at the end of the year.
(a) If taxpayer marries during taxable year,
The employed spouse shall be automatically taxpayer may claim the corresponding
entitled to claim the additional exemptions for BPE in full for such year (i.e., no need to
children in the following instances: pro-rate the exemption).
(a) spouse is unemployed (b) If taxpayer should have additional
(b) spouse is a non-resident citizen deriving dependent(s) during taxable year,
income from foreign sources taxpayer may claim corresponding AE in
full for such year.
Legally separated spouses: Additional
exemptions can be claimed by the spouse with (c) If taxpayer dies during taxable year, his
custody of the child or children (but the total estate may claim BPE and AE as if he died
amount for the spouses shall not exceed the at the close of such year.
maximum of four). [Sec 35(B), NIRC] (d) If during the taxable year spouse dies; or
If the taxpayer should have additional any of the dependents dies or marries,
dependents during the taxable year, he may turns 21 years old or becomes gainfully
claim the corresponding additional exemption, employed, taxpayer may still claim same
as the case may be, in full for such year. exemptions as if the spouse or any of the
dependents died, or married, turned 21
Who is a dependent for purposes of additional
years old or became gainfully employed
exemptions?
at the close of such year.
(1) A taxpayer’s child, whether legitimate,
Note: When it comes to change of status, the
illegitimate or legally adopted child status beneficial to the taxpayer is used for
(2) Chiefly dependent for support upon on purposes of claiming deductions as long as the
the taxpayer taxpayer achieved such status at any time during
the taxable period.
(3) Living with the taxpayer
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(g) Non-deductible interest – should the taxpayer


elect to deduct interest payments against its
(d) Exemptions claimed by non-resident aliens
gross income, he cannot at the same time
Non-resident aliens engaged in trade or business capitalize such interest and claim depreciation on
are entitled personal exemptions subject to the undepreciated cost which includes the
reciprocity. interest. [PICOP v. Commissioner, G.R. No.
106949-50, Dec. 1, 1995]
It means that NRA-ETB shall be allowed a
(h) Non –deductible taxes
personal exemption only if the income tax law in
(i) Non-deductible losses
his country grants allowance for personal
(j) Losses on Wash Sales (except if by dealer in
exemptions to the citizens and residents of the
securities in ordinary course of exempt
Philippines as stipulated in the reciprocity tax
corporations) These are:
treaty with the Philippine Government.
(1) Proprietary Educational Institutions and
Limit of PE Allowed to NRAETB: An amount hospitals
equal to the exemptions allowed by the non- (2) Government owned and controlled
resident alien’s country to Filipino citizens not corporations
residing therein but deriving income therefrom, (3) Others
but not to exceed the amount fixed by NIRC.(In
other words, whichever is lower) Related Parties [Sec. 34(B)]
(1) Between members of a family (which shall
include only his brothers and sisters, spouse,
B.4.6. Items Not Deductible ancestors and lineal descendants)
(2) Between an individual and a corporation
General rule: In determining deductions, one of
the general rules is that deductions must be paid more than 50% in value of the outstanding
or incurred in connection with the taxpayer’s stock of which is owned, directly or indirectly,
trade, business or profession. Capital by or for such individual – except in the case
expenditures (e.g. acquisition cost of a building) of distributions in liquidation
(3) Between two corporations more than 50% in
are also not deductible, because these are not
expenses, but form part of assets. value of the outstanding stock of each of
which is owned, directly or indirectly by or for
Exceptions: In computing taxable net income, no the same individual
deduction shall be allowed with respect to: (4) Between the grantor and the fiduciary of a
(a) Personal, living or family expenses (note: they trust
(5) Between the fiduciary of a trust and the
are not deductible from compensation and
business/professional income fiduciary of another trust if the same person
(b) Any amount paid out for new buildings or for is a grantor with respect to each trust
permanent improvements (capital expenditures), (6) Between the fiduciary of a trust and a
or betterments made to increase the value of any beneficiary of such trust [Section 36(B), NIRC]
property or estate
(c) Any amount expended in restoring property Relevant points regarding related taxpayers
(major repairs) or in making good the exhaustion  Payment of interest is not deductible.
thereof for which an allowance [for depreciation  Bad debts are not deductible.
or depletion] is or has been made  Losses from sales or exchanges of property
(d) Premiums paid on any life insurance policy are not deductible.
covering the life of any officer, employee, or any
person financially interested in the trade or
business carried on by the taxpayer, individual or
corporate, when the taxpayer is directly or
indirectly a beneficiary under such policy
(e) Interest expense and bad debts between
related parties [Sec. 36(B), NIRC)]
(f) Losses from sales or exchanges of property
between related taxpayers.

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Summary Table for Taxation of Individuals (all individual taxpayers, including non-resident aliens)
Basic Personal Additional Personal
Classification Taxable Income Tax Rates
Exemption Exemption
Income from
sources within and
Resident Citizen Allowed Allowed 5%-32%
outside the
Philippines

Income from
Non-Resident Citizen sources within the Allowed Allowed 5%-32%
Philippines
Income from
Resident Alien sources within the Allowed Allowed 5%-32%
Philippines

Lower amount
between PE allowed
Non-resident Alien Income from to Filipinos in the
No specific
Engaged in Trade or sources within the foreign country 5%-32%
provision
Business Philippines where he resides v.
PE in the
Philippines

Non-resident Alien Not Income from


Engaged in Trade or sources within the Not allowed Not allowed 25%
Business Philippines

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C. INCOME TAX ON INDIVIDUALS consequence of their employment in


that country. Their salaries and wages
are paid by an employer abroad and is
C.1. INCOME TAX ON RESIDENT CITIZENS, not borne by an entity or person in the
NON-RESIDENT CITIZENS AND RESIDENT Philippines. They must be duly
ALIENS registered with the Philippine
Overseas Employment Administration
C.1.1. Coverage – Income From All Sources (POEA) with valid Overseas
Within and Without the Philippines; exception Employment Certificate (OEC).
(c) An OCW’s income arising out of his
overseas employment is exempt from
(i) Resident Citizens
income tax.
A Filipino resident citizen is taxable on income
from all sources (within and without the
Philippines) (iii) Resident Aliens
A resident alien is taxable only on income from
sources WITHIN the Philippines.
(ii) Non-resident Citizens
A resident alien is an individual whose
A non-resident citizen is taxable only on
residence is in the Philippines and who is not a
income derived from sources within the
Filipino citizen.
Philippines.
An alien actually present in the Philippine who
A non-resident citizen is a Filipino citizen who:
is not a mere transient or sojourner is a
(a) Establishes to the satisfaction of the resident of the Philippines for purposes of the
CIR the fact of his physical presence income tax. Whether he is a transient or not is
abroad with a definite intention to determined by his intentions with regard to
reside therein the length and nature of his stay. A mere
floating intention indefinite as to time, to
(b) Leaves the Philippines during the
return to another country is not sufficient to
taxable year to reside abroad (as
constitute him a transient. If he lives in the
immigrant or for employment on a
Philippines and has no definite intention to
permanent basis)
stay, he is a resident.
(c) Works and derives income from
One who comes to the Philippines for a
abroad and whose employment
definite purpose which, in its nature, may be
requires him to be present abroad
promptly accomplished is a transient. But if
most of the time during the taxable
his purpose is of such a nature that an
year
extended stay may be necessary for its
(d) Has been previously considered as a accomplishment, and to that end the alien
non-resident and arrives in the makes his home temporarily in the Philippines,
Philippines at any time during the he becomes a resident, though it may be his
taxable year to reside here intention at all times to return to his domicile
permanently (only with respect to his abroad when the purpose of which he came
income from sources abroad until the has been consummated or abandoned. [Sec. 5,
date of his arrival in the country) RR No. 2]
Other considerations:
(a) A Filipino citizen working and deriving C.1.2. Coverage – Taxation on Compensation
abroad as an Overseas Contract Income
Worker is taxable only on income from
Income arising from an ER-EE relationship. It
sources WITHIN the Philippines.
means all remuneration for services
(b) OCW refers to Filipino citizens in performed by an EE for his ER, including the
foreign countries, who are physically cash value of all remuneration paid in any
present in a foreign country as a medium other than cash. [Sec. 78(A)] It
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includes, but is not limited to salaries and (5) It should have been availed of for
wages, commissions, tips, allowances, the first time.
bonuses, Fringe Benefits of rank and file EEs
Separation pay – taxable if voluntarily availed
and other forms of compensation.
of. It shall not be taxable if involuntary i.e.
Death, sickness, disability, reorganization
/merger of company and company at the brink
i. Inclusions
of bankruptcy or for any cause beyond the
(a) Monetary compensation – If compensation control of the said official or employee
is paid in cash, the full amount received is the
measure of the income subject to tax.
(3) Bonuses, 13th month pay, and other
benefits not exempt
(1) Regular salary/wage
Tips and Gratuities – those paid directly to the
Salary – earnings received periodically for a employee (usually by a customer of the
regular work other than manual labor, such as employer) which are not accounted for by the
monthly salary of an employee employee to the employer. (taxable income
but not subject to withholding tax) [RR NO. 2-
Wages – all remuneration (other than fees
98, Sec. 2.78.1]
paid to a public official) for services performed
by an employee for his employer, including the Thirteenth month pay and other benefits - Not
cash value of all remuneration paid in any taxable if the total amount received is
medium other than cash. [Sec. 78A, NIRC] P82,000 or less. Any amount exceeding
P82,000 is taxable. [Sec. 32(7)(e), NIRC]
Overtime Pay – premium payment received for
(2) Separation pay/retirement benefit not
working beyond regular hours of work which is
otherwise exempt
included in the computation of gross salary of
Retirement pay – a lump sum payment employee. It constitutes compensation.
received by an employee who has served a
company for a considerable period of time and
has decided to withdraw from work into (4) Directors’ fees
privacy. [RR 6-82, Sec. 2b]
Fees – received by an employee for the
General rule: Retirement pay is taxable services rendered to the employer including a
director’s fee of the company, fees paid to the
Exceptions:
public officials such as clerks of court or
(a) SSS or GSIS retirement pays. sheriffs for services rendered in the
(b) Retirement pay (R.A. 7641) due to old performance of their official duty over and
age provided the following above their regular salaries.
requirements are met:
(1) The retirement program is (b) Nonmonetary compensation - If services
approved by the BIR are paid for in a medium other than money,
Commissioner; the fair market value of the thing taken in
(2) It must be a reasonable benefit payment is the measure of the income subject
plan. (fair and equitable) to tax.

(3) The retiree should have been


employed for 10 years in the said (1) Fringe benefit not subject to tax
company;
(See Chapter on Gross Income for the
(4) The retiree should have been 50 discussion of Taxable and Non-taxable fringe
years old or above at the time of benefits)
retirement; and
If the recipient of the fringe benefits is a rank
and file employee, and the said fringe benefit
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is not tax-exempt, then the value of such (a) Benefits received by government
fringe benefit shall be considered as part of employees under RA 6686
the compensation income of such employee
(b) Benefits received by employees
subject to tax payable by the employee.
pursuant to PD 851 (13th Month Pay
[Domondon]
Decree)
(c) Benefits received by employees not
ii. Exclusions covered by PD 851 as amended by
Memorandum Order No. 28; and,
(a) Fringe benefit subject to tax
(d) Other benefits such as productivity
(See Chapter on Gross Income for the
incentives and Christmas bonus
discussion of Taxable and Non-taxable fringe
benefits)
Where the recipient of the fringe benefit is not Iii. Deductions
a rank and file employee, and the said benefit
(a) Personal and additional exemptions (See
is not tax-exempt, then the same shall not be
the Chapter on Deductions for the full
included in the compensation income of such
discussion of Personal and additional
employee subject to tax. The fringe benefit
exemptions)
[tax] is instead levied upon the employer, who
is required to pay. [Domondon]
Basic Personal Exemptions
Convenience of the ER Rule According to RA 9504 (effective July 6, 2008)
basic personal exemption is Fifty thousand
If meals, living quarters, and other facilities
pesos (P50,000) for each individual taxpayer,
and privileges are furnished to an employee
regardless whether single, married or head of
for the convenience of the employer, and
the family.
incidental to the requirement of the
employee’s work or position, the value of that
privilege need not be included as
Additional Exemptions
compensation [Henderson v. Collector (1961)]
Depends on the number of qualified
dependent children
(b) De minimis benefits Amount allowed as a deduction  P25,000
Facilities or privileges of relatively small value per dependent child, but not to exceed four
furnished by an employer to his employees children [RA 9504]
and are as a means of promoting the health,
goodwill, contentment, or efficiency of his
employees. (b) Health and hospitalization insurance
These are exempt from fringe benefit tax and Premium Paid on Health or Hospitalization
compensation income tax. Insurance [Sec.34 (M)]
Amount of premium paid on health and/or
hospitalization by an individual taxpayer
(c) 13th month pay and other benefits and
(head of family or married), for himself and
payments specifically excluded from taxable
members of his family during the taxable year.
compensation income
Gross benefits received by employees of public
and private entities provided that the total Requisites for Deductibility
exclusion shall not exceed P82,000 (amounts (1) Insurance must have actually been
in excess are considered compensation taken
income)
(2) The amount of premium deductible
Benefits include: does not exceed P2,400 per family or
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P200 per month whichever is lower deposit substitutes, trust funds and
during the taxable year. similar arrangements - 20% final tax
(3) That said family has a gross income of (b) under the expanded foreign currency
not more than P250,000 for the deposit system (EFCDS) - 7.5% final
calendar year. tax for residents, exempt if non-
residents
(4) In case of married individual, only the
spouse claiming additional exemption
shall be entitled to this deduction.
Treatment of income from long-term deposits
Note: The spouse claiming the additional
On long-term deposit or investment
exemptions for qualified dependent children
certificates (LTDIC) in banks (e.g., savings,
shall be the same spouse to claim the
common or individual trust funds, deposit
deductions for premium payments.
substitutes, investment management
The following may avail of the deduction accounts and other investments, which have
maturity of 5 years or more) – exempt
(a) Individual taxpayers earning purely
compensation income during the year. Should LTDIC holder pre-terminate LTDIC
before the 5th year, a final tax shall be
(b) Individual taxpayer earning business
imposed on the entire income based on the
income or in practice of his profession.
remaining maturity:
4 years to less than 5 years 5%
C.1.3. Taxation of Business Income/Income
3 years to less than 4 years 12%
From Practice of Profession
less than 3 years 20%
All income obtained from doing business
and/or engaging in the practice of a
profession shall be included in the
(b) Royalties
computation of taxable income. (5-32% For
citizens, resident aliens & NRA Engaged in (See summary table)
trade or business; 25% in case of NRANETB)

(c) Dividends from domestic corporation


C.1.4. Taxation of Passive Income
(a) cash and/or property dividends
Passive Income Subject to Final Tax actually or constructively received by
an individual from
“Final tax” means tax withheld from source,
and the amount received by the income earner (b) a domestic corporation
is net of the tax already. The tax withheld by
(c) a joint stock company
the income payor is remitted by him to the BIR.
The income having been tax-paid already, it (d) insurance or mutual fund companies
need not be included in the income tax return (e) regional operating headquarters of
at the end of the year. These passive income multinational companies
items are as follows:
(f) share of an individual in the
(a) Interest income distributable net income after tax of a
(b) Royalties partnership (except a general
professional partnership) of which he
(c) Dividends from domestic corporations
is a partner
(d) Prizes and other winnings
(g) share of an individual member or co-
venturer in the net income after tax of
an association, a joint account, or a
(a) Interest income
joint venture or consortium taxable as
(a) on any currency bank deposit, yield or a corporation
any other monetary benefit from
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or local commercial banks, including branches


of foreign banks that may be authorized by the
RATE:
BSP to transact business with OBUs - tax rate
(a) 10%for residents (RC, RA) and non is 10% if payors are RESIDENTS, whether
resident citizens (NRC); individuals or corporations.
(b) 20% for NRAETB(non-resident aliens
engaged in trade or business) Gross income from all sources within the
Philippines derived by non-resident
A stock dividend representing the transfer of cinematographic film owners, lessors or
surplus to capital account shall not be subject distributors – tax rate is 25% if payee is: (a)
to tax. non-resident alien individual, or (b) non-
However, if a corporation cancels or redeems resident foreign corporation. The term
stock issued as a dividend at such time and in “cinematographic films” includes motion
such manner as to make the distribution and picture films, films, tapes, discs and other
cancellation or redemption, in whole or in part, such similar or related products.
essentially equivalent to the distribution of a
taxable dividend, the amount so distributed in Informer’s reward given to persons who
redemption or cancellation of the stock shall voluntarily provide definite and sworn
be considered as taxable income to the extent information that lead to or was instrumental
that it represents a distribution of earnings or in the discovery of fraud or violation of the
profits. [Sec. 73B, NIRC] provisions of the NIRC or special laws being
In other words, stock dividends are generally administered by the BIR and resulted in the
not subject to tax as long as there are no actual recovery or collection of revenues,
options in lieu of the shares of stock. surcharges and fees and/or the conviction of
the guilty party or parties, and/or the
imposition of any fine or penalty or the actual
On the other hand, a stock dividend collection of a compromise amount, in case of
constitutes income if it gives the shareholder amicable settlement, shall be subject to
an interest different from that which his income tax, collected as a final withholding
former stockholdings represented. tax, at the rate of 10%, pursuant to Sec. 282 of
the NIRC [RR 16-2010]

(d) Prizes and other winnings Passive income not subject to tax
Interest income from long-term deposit or
(a) Winnings, except Philippine Charity investment in the form of savings, common or
sweepstakes / lotto winnings – 20% individual trust funds, deposit substitutes,
(b) Prizes exceeding P10,000 – 20% investment management accounts and other
investments evidenced by certificates in such
Prize, differentiated from winnings form prescribed by the BSP shall be exempt
A prize is the result of an effort made (e.g., from tax
prize in a beauty contest), while winnings are
the result of a transaction where the outcome But should the holder of the certificate pre-
depends upon chance (e.g., betting). terminate the deposit or investment before
the 5th year, a final tax shall be imposed on
For interest from foreign currency loans the entire income and shall be deducted and
granted by FCDUs to residents other than withheld by the depository bank from the
Offshore Banking Units (OBUs) or other proceeds of the long-term deposit or
depository banks under the expanded system investment certificate based on the remaining
– tax rate is 10% if payors are RESIDENTS, maturity thereof:
whether individuals or corporations. Four (4) years to less than five (5) years - 5%;
For interest from foreign currency loans Three (3) years to less than four (4) years -
granted by OBUs to residents other than OBUs 12%; and
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Less than three (3) years - 20%.


What transactions covered
Any income of nonresidents, whether
individuals or corporations, from transactions Sales, exchanges, or other disposition of real
with depository banks under the expanded property (classified as capital assets),
system shall be exempt from income tax. including pacto de retro sales and other forms
of conditional sales of the following: citizens,
resident aliens, NRAETB, NRANETB,
C.1.5. Taxation of Captial Gains domestic corporations.
(1) Income from sale of shares of stock of a
philippine corporation Tax rate
General rule: 6% of —whichever is higher of:
(a) Shares traded and listed in the stock
exchange – exempt (a) Gross selling price, or
The transaction is exempt from income tax (b) Fair market value (determined in
regardless of the nature of business of the accordance with Sec. 6(E), NIRC).
seller or transferor. However, it is subject to
Exception:
the one-half of one percent (1/2 of 1%) stock
transaction tax imposed under Sec. 127(A) of In case of sales made to the government, any
the Tax Code based on the gross selling price of its political subdivisions or agencies, or to
or gross value in money of the shares of stock GOCCs, it can be taxed either:
sold or transferred.
Under Sec. 24(D)(1), NIRC – 6% CGT, or
Under Sec. 24(A), NIRC, at the option of the
(b) Shares not listed and traded in the stock
taxpayer.
exchange – subject to final tax
In case of the sale of or disposition of their
On sale, barter, exchange or other disposition
principal residence by natural persons
of shares of stockof a domestic corporation not
listed and traded through a local stock Requirements:
exchange, held as a capital asset: Sale or disposition by a natural person of his
principal residence,
On the net capital gain: The proceeds of which is fully utilized in
Not over P100,000 = Final Tax of 5% acquiring/constructing a new principal
residence,
On any amount in excess of P100,000 = plus
Final Tax of 10% on the excess Such acquisition/construction taking place
within 18 calendar months from the date of
sale or disposition,
Key Definitions
The taxpayer notifies the Commissioner within
Net capital gain: selling price less cost
30 days from the sale/disposition through a
Selling price: consideration on the sale OR fair prescribed return of his intention to avail of the
market value of the shares of stock at the time exemption,
of the sale, whichever is higher
The tax exemption can only be availed of once
Cost: original purchase price every 10 years.
Tax treatment: Exempt from capital gains tax
(CGT). If there is no full utilization of the
(2) Income from the sale of real property
proceeds of sale or disposition, the portion of
situated in the philippines
the gain presumed to have been realized from
the sale or disposition shall be subject to CGT.
What property covered
How taxable portion and tax determined:
Property located in the PH classified as capital
assets
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𝐻𝐼𝐺𝐻𝐸𝑅 𝑜𝑓 𝐺𝑟𝑜𝑠𝑠 𝑠𝑒𝑙𝑙𝑖𝑛𝑔 𝑝𝑟𝑖𝑐𝑒 At 30% corporate income tax, if the seller is a
𝐴𝑚𝑜𝑢𝑛𝑡 𝑢𝑛𝑢𝑡𝑖𝑙𝑖𝑧𝑒𝑑
[ 𝑜𝑟 ] 𝑥 [ 𝐺𝑟𝑜𝑠𝑠 𝑠𝑒𝑙𝑙𝑖𝑛𝑔 𝑝𝑟𝑖𝑐𝑒 ] corporation.
𝐹𝑀𝑉 @ 𝑠𝑎𝑙𝑒 Rule: Capital gain/loss is recognized in full.
Capital assets shall refer to all real properties
The historical cost or adjusted basis of the real held by a taxpayer, whether or not connected
property sold or disposed shall be carried over with his trade or business, and which are not
to the new principal residence built or included among the real properties
acquired. considered as ordinary assets under Section
Computation for the basis of new principal 39(A)(1) of the NIRC.
residence: Ordinary assets shall refer to all real
XXX properties specifically excluded from the
definition of capital assets under Section
Historical cost of old principal 39(A)(1) of the NIRC, namely:
residence
Stock in trade of a taxpayer or other real
Add: Additional cost to XXX property of a kind which would properly be
acquire new principal included in the inventory of the taxpayer if on
residence* hand at the close of the taxable year; or
Adjusted cost bases of the XXX Real property held by the taxpayer primarily
new principal residence for sale to customers in the ordinary course of
his trade or business; or
Real property used in trade or business (i.e.,
*Additional cost to acquire
buildings and/or improvements) of a
new principal residence:
character which is subject to the allowance for
Cost to acquire new principal XXX depreciation provided for under Sec. 34(F) of
residence the Code; or
Less: Gross selling price of old (XXX) Real property used in trade or business of the
principal residence taxpayer
Additional cost to acquire new XXX
principal residence
C.2. INCOME TAX ON NON-RESIDENT
ALIENS ENGAGED IN TRADE OR BUSINESS
A non-resident alien is an individual whose
residence and citizenship is not in the
(3) Income from the sale, exchange, or other Philippines.
disposition of other capital assets One who comes to the Philippines for a
definite purpose which, in its nature, may be
Other properties shall be subject to income tax promptly accomplished is a transient. But if
his purpose is of such a nature that an
(a) At the graduated income tax rates, if extended stay may be necessary for its
the seller is an individual; accomplishment, and to that end the alien
(b) Long-term capital gains: only 50% is makes his home temporarily in the Philippines,
recognized. he becomes a resident, though it may be his
(c) Short-term capital asset transactions: intention at all times to return to his domicile
100% subject to tax. [Sec. 39(B), abroad when the purpose of which he came
NIRC] has been consummated or abandoned. [Sec. 5,
RR No. 2]
Determination of whether short- or long-term: In general, a non-resident alien individual who
Short-term if held for 12 months or less; shall come to the Philippines and stay therein
otherwise, it is a long-term capital gain. for an aggregate period of more than 180 days
during any calendar year shall be deemed a
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non-resident alien doing business in the (2) Cinematographic films and similar works
Philippines. shall be subject to twenty-five percent (25%)
Intended stay in the Philippines: of the gross income 

(3) Interest income from long-term deposit or
a) Up to 180 days – Non-resident alien investment in the form of savings, common or
not engaged in trade or business individual trust funds, deposit substitutes,
b) More than 180 days but less than 1 investment management accounts and other
year – Non-resident alien engaged in investments evidenced by certificates in such
trade or business form prescribed by the Bangko Sentral ng
Pilipinas (BSP) shall be exempt from the tax 

c) 1 year or more – Resident alien But should the holder of the certificate pre-
terminate the deposit or investment before
General Rule: Subject to an income tax in the the fifth (5th) year, a final tax shall be imposed
same manner as an individual citizen and a on the entire income and shall be deducted
resident alien individual on taxable income and withheld by the depository bank from the
from all sources within the Philippines. proceeds of the long-term deposit or
investment certificate based on the remaining
Cash and/or property dividends maturity thereof:
The following shall be subject to an income (i) Four (4) years to less than five (5) years -
tax of twenty percent (20%) on the total 5%; 

amount thereof:
 (ii) Three (3) years to less than four (4) years -
(a) Cash and/or property dividends from: 12%; and 

(1) A domestic corporation; 
 (iii) Less than three (3) years - 20%. 

(2) A joint stock company; 

(3) An insurance or mutual fund Capital gains
company; 
 Capital gains realized from sale, barter or
(4) A regional operating headquarter of exchange of shares of stock in domestic

multinational company; 
 corporations not traded through the local
(5) The share of a nonresident alien stock exchange, and real properties shall be
subject to the similar tax prescribed on

individual in the distributable net income
citizens and resident aliens.
after tax of a partnership (except a general (a) Sale, barter or exchange of Shares of stock
professional partnership) of which he is a in domestic corporation not traded –
partner; (1) Net over P100,000 – 5% of net capital
(6) The share of a nonresident alien gains realized
individual in the net income after tax of an (2) On any amount in excess of P100,000 –
association, a joint account, or a joint 10% of net capital gains realized
venture taxable as a corporation of which (b) Sale, barter or exchange of real properties
he is a member or a co-venturer; – 6% of gross selling price or current FMV
(b) Interests 
 whichever is higher
(c) Royalties (in any form); and 

(d) Prizes (except prizes amounting to Ten

thousand pesos (P10,000) or less which shall C.3. INCOME TAX ON NON-RESIDENT
be subject to graduated tax) and other ALIENS NOT ENGAGED IN TRADE OR
winnings (except Philippine Charity BUSINESS
Sweepstakes and Lotto winnings) (1) Alien individuals employed by:
(a) Regional or Area Headquarters
Except: (RAHQ) and Regional Operating
(1) The following Royalties shall be subject to Headquarters (ROHQ) established in the
a final tax of ten percent (10%) on the total Philippines by multinational companies
amount thereof:

(a) On books as well as other literary Multinational company: a foreign firm or
works; and
(b) On musical compositions entity
 engaged in international trade
with affiliates or subsidiaries or branch
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offices in the Asia-Pacific Region and issuances and any issuance that may be issued
other foreign markets. from time to time, before payment of the
related income. The tax exemption certificate
(b) Offshore Banking Units established in or ruling must explicitly recognize the grant of
the Philippines tax exemption, as well as the corresponding
exemption from imposition of withholding tax.
(2) Alien individuals who are permanent Failure on the part of the taxpayer to present
residents of a foreign country but who are the said tax exemption certificate or ruling as
employed and assigned in the Philippines by a herein required shall subject him to the
foreign service contractor or by a foreign payment of appropriate withholding taxes due
service subcontractor engaged in petroleum on the transaction. [RMC No. 8-2014]
operations in the Philippines. 

C.4.1 Senior Citizens
Tax Rate and Base - 15% of gross income Who are covered: any resident citizen— (a) At
received as salaries, wages, annuities, least 60 years old,and
compensation, remuneration and other (b) Who are considered minimum wage
emoluments, such as honoraria and earners under RA 9504 (Sec. 4 (b) RA 7432, as
allowances. amended by RA 9994) and/or the aggregate
amount of gross income earned by the senior
The same tax treatment shall apply to citizen during the taxable year does not
Filipinos employed and occupying the same exceed the amount of his personal exemptions
positions as those of aliens employed by these (BPE and APE).
multinational companies, offshore banking
units and petroleum service contractors and C.4.2. Minimum Wage Earners
subcontractors.
Rule: they shall be exempt from payment of
Note that the coverage of the special income tax on their taxable income.

classification (and the corresponding tax rate) Limit: However, if he receives “other benefits”
is limited to income received as wages. Hence, in excess of the allowable statutory amount of
any income earned from all other sources P82,000, then he shall be taxable on the
within the Philippines by the alien employees exceeds benefits as well as his salaries, wages,
shall be subject to the pertinent income tax and allowances, just like an employee
(example: sale of real property in the receiving compensation income beyond the
Philippines is subject to 6% capital gain tax, statutory minimum wage.
imposed on the gross selling price or fair
market value of the property at the time of the Taxation of compensation income of a
sale, whichever is higher) minimum wage earner
(1) Statutory minimum wage – earner shall
C.4. INDIVIDUAL TAXPAYERS EXEMPT refer to rate fixed by the Regional Tripartite
FROM INCOME TAX Wage and Productivity Board, as defined by
the Bureau of Labor and Employment
Individual Taxpayers exempt from income tax Statistics (BLES) of the Department of Labor
are: and Employment. [Sec.22 GG, as amended by
(1) Senior Citizens 
 RA 9504]
(2) Minimum wage earners 
 (2) Minimum wage earner – shall refer to a
(3) Exemptions granted under international worker in the private sector paid the statutory

agreements 
 minimum wage, or to an employee in the
public sector with compensation income of
All individuals and entities claiming not more than the statutory minimum wage in
exemption from imposition of taxes on income the non-agricultural sector where he/she is
and, consequently, from withholding taxes are assigned. [Sec.22 HH, as amended by RA
required to provide a copy of a valid, current 9504]
and subsisting tax exemption certificate or
ruling, as per existing administrative
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The minimum wage shall be exempt from the


payment of income tax on their taxable
income: Provided, further, That the holiday
pay, overtime pay, night shift differential pay
and hazard pay received by such minimum
wage earners shall likewise be exempt from
income tax
(3) Income also subject to tax exemption:
holiday pay, overtime pay, night shift
differential, and hazard pay
Compensation income including overtime pay,
holiday pay and hazard pay, earned by
minimum wage earners who has no other
returnable income are NOT taxable and not
subject to withholding tax on wages [RA
9504]

C.4.3. Exemptions Granted Under


international Agreements
See RMC No, 31-2013, April 12, 2013 – taxation
of compensation income of Philippine
nationals and alien individuals employed by
foreign governments/embassies/diplomatic
missions and international organizations
situated in the Philippines.

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D. INCOME TAX ON CORPORATIONS domestic business, firm, entity or corporation


in the Philippines; and any other act or acts
D.1. INCOME TAX ON DOMESTIC that imply a continuity of commercial dealings
CORPORATIONS AND RESIDENT FOREIGN or arrangements and contemplate to that
CORPORATIONS extent the performance of acts or works, or the
exercise of some of the functions normally
Domestic Corporations incident to, and in progressive prosecution of
commercial gain or of the purpose and object
Taxes payable are: of the business organization: Provided,
(1) Regular Tax however, That the phrase "doing business"
(2) Minimum Corporate Income Tax shall not be deemed to include mere
investment as a shareholder by a foreign entity
Resident Foreign Corporations in domestic corporations duly registered to do
business, and/or the exercise of rights as such
General rule: A resident foreign corporation is investor; nor having a nominee director or
a corporation organized under the laws of a officer to represent its interests in such
foreign country, which is engaged in trade or corporation; nor appointing a representative
business in the Philippines. or distributor domiciled in the Philippines
(a) A Philippine branch of a foreign which transacts business in its own name and
corporation duly licensed by the SEC is for its own account; [Sec. 3 (d)]
considered a resident foreign corporation.
Thus, only the income of the Philippine branch With respect to their income from sources
from sources within the Philippines is subject within the Philippines
to Philippine income tax. 
 Resident foreign corporations are subject to
(b) Marubeni v. Commissioner: As general rule, any or some of the following:
the head office of a foreign corporation is the (1) Capital Gains Tax 

same juridical entity as its branch in the (2) Final Tax on Passive Income 

Philippines following the single entity (3) Normal Tax [OR] Minimum Corporate

concept. Thus, the income from sources 
Income Tax (MCIT) [OR] Gross Income Tax
within the Philippines of the foreign head 
(GIT) 

office shall thus be taxable to the Philippine (4) Branch Profit Remittance Tax 

branch.

But, when the head office of a foreign D.1.1. Regular Tax


corporation independently and directly Normal Corporate Income Tax Rate: 30% of
invested in a domestic corporation without the Taxable Income (effective January 1, 2009)
funds passing through its Philippine branch,
the taxpayer, with respect to the tax on dividend Gross Income xxx
income, would be the non-resident foreign Less: Allowable Deductions xxx
corporation itself and the dividend income Taxable Income xxx
shall be subject to the tax similarly imposed
on non- resident foreign corporations.
D.1.2. Minimum Corporate Income Tax (MCIT)
Definition of “doing business” under the
Applies to domestic corporations and RFCs
Foreign Investment Act of 1991


whenever such corporations have zero or
The phrase "doing business" shall include
negative taxable income or whenever the
soliciting orders, service contracts, opening
MCIT is greater than the normal income tax
offices, whether called "liaison" offices or
branches; appointing representatives or due from such corporations. 

distributors domiciled in the Philippines or
who in any calendar year stay in the country for Domestic Corporations
a period or periods totaling one hundred
eighty [180] days or more; participating in the (1) Imposed upon any domestic corporation
management, supervision or control of any beginning the fourth taxable year in which
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such corporation commenced its business Net Sales is gross sales less sales returns,
operations. For purposes of the MCIT, the discounts and allowances
taxable year in which business operations
commenced shall be the year when the Direct cost of services includes salaries of
corporation registers with the BIR (not in personnel rendering the services, expenses on
which the corporation started commercial the facilities directly utilized, cost of supplies,
operations). 
 and the like. “Direct costs and expenses” shall
(2) Tax rate: 2% of the Gross Income 
 only pertain to those costs exclusively and
directly incurred in relation to the revenue
Imposition of MCIT realized by the sellers of services. These refer
Gross Sales xxx to costs which are considered indispensable to
Less: Sales Returns xxx the earning of the revenue such that without
such costs, no revenue can be generated.
Sales Discounts xxx
Allowances xxx Pointers
Cost of Goods Sold xxx xxx MCIT is in the nature of a tax credit, not an
MCIT GI xxx allowable deduction. Its purpose is to prevent
corporations from escaping being taxed by
including frivolous expenses in their
Computation of gross income statement of income.
The term “Gross Income” shall be equivalent
to gross sales less sales returns, discounts and Is the Minimum Corporate Income Tax (MCIT)
allowances and cost of goods sold. “Cost of an addition to the regular or normal income
goods sold” shall include all business tax?
expenses directly incurred to produce the No, the MCIT is not an additional tax. The
merchandise to bring them to their present MCIT is compared with the regular income tax,
location and use. which is due from a corporation. If the regular
income is higher than the MCIT, then the
If apart from deriving income from core corporation does not pay the MCIT.
business activities there are other items of
gross income realized or earned by the Who are covered by MCIT?
taxpayer which are subject to the normal The MCIT covers domestic and resident
corporate income tax, they must be included foreign corporations which are subject to the
as part of gross income for computing MCIT. regular income tax. The term “regular income
[Sec. 27 (E), NIRC; RR 12-2007] tax” refers to the regular income tax rates
under the Tax Code. Thus, corporations which
This means that the term “gross income” will are subject to a special corporate tax system
also include all items of gross income do not fall within the coverage of the MCIT.
enumerated under Section 32(A) of the NIRC,
except: (a) income exempt from income tax, These special corporations are:
and (b) income subjected to FWT. (1) Corporations that are subject to ten
percent 
(10%) preferential tax rate:
Computation by type of business
(a) Merchandising/Manufacturing Concerns Proprietary educational institutions, nonprofit
hospitals, Offshore Banking Units (OBUs) on
Net Sales xxx their income from foreign currency
Less: Cost of Goods Sold xxx transactions which has been subjected to a
final income tax at 10% of such income, and
Gross Income xxx
depository banks under the expanded foreign
currency deposit system on their income from
(b) Service Concerns foreign currency transactions which has
subjected to final income tax at 10%; RFCs
Gross Receipts/Revenue xxx engaged in business as Regional Operating
Less: Direct Cost of Services xxx
Headquarters 

Gross Income xxx

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(2) Firms under special income tax regime payments under the normal income tax; and
such as those under the PEZA law [RA 7916], (c) MCIT paid in the previous taxable
the Bases Conversion Development Act [RA quarter(s).
7227] and forms enjoying Income Tax Holiday
(ITH) under EO No. 226; 
 Excess MCIT from the previous taxable year/s
(3) International carriers subject to tax at 2 shall not be allowed to be credited against the
½ % of their gross Philippine billings; 
 quarterly MCIT tax due.

Note: For domestic corporations whose Annual Income Tax Computation.


operations or activities are partly covered by The final comparison between the normal
the regular income tax and partly covered income tax payable and the MCIT shall be
under a special income tax system, the MCIT made at the end of the taxable year. The
shall apply on operations covered by the payable or excess payment in the Annual
regular corporate income tax system. Income Tax Return shall be computed taking
into consideration corporate income tax
MCIT gross income differentiated from the payment made at the time of filing of quarterly
normal tax gross income
 corporate income tax returns whether this be
MCIT or normal income tax.
The latter would include other incidental
income items, such as rent income, interest,
In the computation of annual income tax due,
gain on sale of assets, certain tax refunds, etc.
if the normal income tax due is higher than the
computed annual MCIT, the following shall be
What amount of income tax is paid by the
allowed to be credited against the annual
corporation to the BIR?

income tax: (a) quarterly MCIT payments, (b)
Whichever is higher between the normal tax quarterly normal income tax payments, (c)
and the minimum corporate income tax excess MCIT in the prior year/s (subject to the
prescriptive period allowed for its creditability),
Illustration: (d) CWTs in the current year, (d) excess CWTs
E Co., a domestic trading corporation, in its in the prior year.
fourth year of operations had a gross profit
from sales of P300,000 and net taxable If in the computation of annual income tax due,
income of P100,000. How much was the the computed annual MCIT due is higher than
income tax paid by the corporation for the the annual normal income tax due, the
year? following may be credited against the annual
income tax: (a) quarterly MCIT payments of
MCIT (P300,000 x 2%) P6,000 current taxable quarter, (b) quarterly normal
Normal Income Tax P30,000 income tax payments in current year, (c) CWTs
(P100,000 x 30%) in the current year, (d) excess CWTs in the prior
Income Tax to be paid for P30,000 year.
the year (whichever is
higher) Excess MCIT from the previous taxable year/s
shall not be allowed to be credited against the
Quarterly MCIT Computation annual MCIT due as the same can only be
The computation and the payment of MCIT applied against normal income tax.
shall likewise apply at the time of filing the
quarterly corporate income tax. In the Manner of Filing and Payment.
computation of the tax due for the taxable The MCIT shall be paid in the same manner
quarter, if the quarterly MCIT is higher than prescribed for the payment of the normal
the quarterly normal income tax, the tax due corporate income tax which is on a quarterly
to be paid for such taxable quarter at the time and on a yearly basis.
of filing the quarterly corporate income tax
return shall be the MCIT. Carry forward of excess minimum tax
Any excess of the minimum corporate income
Items allowed to be credited against quarterly tax over the normal income tax shall be carried
MCIT due: (a) CWT, (b) Quarterly income tax
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forward on an annual basis. The excess can be Arrow pointing
downward means that the
credited against the normal income tax in the normal tax is higher so that there can be an
nextthree (3) succeeding taxable years. [Sec. excess MCIT carry-forward against it.
27(E)(2)] In the year to which carried forward,
the normal tax should be higher than the MCIT. *Cannot carry forward an amount higher than
the NT, hence the excess of 60K from Year 4
Illustration: was reduced to 40K. The unused P20,000
A domestic corporation had the following data cannot be used in Year 8 because Year 8 was
on computations of the normal tax (NT) and beyond three years from Year 4.
the minimum corporate income tax (MCIT) for
five years. Relief from the MCIT under certain conditions
(Sec. 27 (E)(3), NIRC)
The Secretary of Finance,
Yr 4 Yr 5 Yr 6 Yr 7 Yr 8 upon the recommendation of the
MCIT 80K 50K 30K 40K 35K Commissioner, may suspend the imposition of
NT 20K 30K 40K 20K 70K the MCIT upon submission of proof by the
applicant- corporation that the corporation
The excess MCIT over NT carry-forward is sustained substantial losses on account of the
shown as follows: following
(LMB):
(1) Prolonged labor dispute (losses from a
strike staged by employees that lasts for more
than 6 months and caused the temporary
shutdown of operations), or
(2) Force majeure (acts of God and other
calamity; includes armed conflicts like war or
insurgency), or
(3) Legitimate business reverses (substantial
losses due to fire, robbery, theft or other
economic reasons).

Optional gross income tax (OGIT)


Section 27 (A) of the NIRC provides for an
optional gross income tax of 15% based on
gross income. The President, upon the
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recommendation of the Secretary of Finance, (6) Non- taxable joint ventures; and 

may, effective January 1, 2000, allow domestic (7) Enterprises that are registered:
corporations the option to be taxed at fifteen (a) with the Philippine Economic Zone
percent (15%) of gross income as defined Authority (PEZA) under R.A. 7916; 

therein, after the following conditions have (b) pursuant to the Bases Conversion and
been satisfied: Development Act of 1992 under R.A.
7227; and 

Tax effort ratio 20% of GNP
(c) under special economic zones
Ratio of income tax 40% declared by law which enjoy payment of
collection to total tax special tax rate on their registered
revenues operations or activities in lieu of other
VAT tax effort 4% of GNP
taxes, national or local. 

Ratio of Consolidated 0.90%
Public Sector Financial
Applicability of the MCIT where a corporation is
Position (CPSFP) to GNP
governed both under the regular tax system
Ratio of the corporation’s Does not and a special income tax system
Cost of Sales to Gross exceed 55%
For corporations whose operations or
Sales activities are partly covered by the regular
income tax and partly covered under special
income tax system, the MCIT shall apply on
Gross Sales xxx
operations by the regular income tax system.
Less: Sales Returns xxx
Sales Discounts xxx Resident Foreign Corporations
Allowances xxx
Cost of Goods Sold xxx xxx The discussion with respect to this topic
(income subject to normal tax, MCIT, or GIT)
GI xxx
under the subheading of domestic
corporations is equally applicable to resident
foreign corporations, both as to concepts and
The election of the gross income tax option by computations, except that RFCs are taxed
the corporation shall be irrevocable for three only on income from sources within the
(3) consecutive taxable years during which the Philippines.
corporation is qualified under the scheme. (a) Normal Corporate Income Tax Rate 30%

of net taxable income from sources within
For purposes of gross income tax, gross 
the Philippines [RA 9337] (b) Minimum
income should be the same as gross income
for purposes of MCIT in cases of trading, Corporate Income Tax 
(MCIT)  2% of MCIT
merchandising and manufacturing concern Gross Income from sources within the
business. However, for service enterprises, Philippines. The MCIT is imposed on RFCs
gross income means gross receipts less sales under the same conditions as domestic
returns, discounts, allowances and cost of corporations. [Sec. 28(A)(2), NIRC] 

services. (c) Gross Income Tax (GIT)  The President,
upon the recommendation of the Secretary of
Note: At present, the OGIT has not been Finance, may allow resident foreign
implemented in the Philippines. corporations the option to be taxed at fifteen
percent (15%) of gross income within the
Corporations exempt from the MCIT: Philippines, under the same conditions as
(1) Banks and other non-bank financial domestic corporations. [Sec. 28(A)(1), NIRC] 


intermediaries; 
 D.1.3. Branch Profit Remittance Tax
(2) Insurance companies; 
 Taxable transaction – any profit remitted by a
branch of a multinational corporation to its
(3) Publicly-held corporations; 

head office
(4) Taxable partnerships; 

(5) General professional partnerships; 

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Tax Rate and Base – 15% final tax based on the But by virtue of RA 9504, it now also applies
total profits applied or earmarked for to corporations, except non-resident foreign
remittance without any deduction for the tax corporation.
component. The 15% final tax should Moreover, the rate was increased from 10% to
excluding: (a) profits on activities which are 40%.
registered with the Philippine Economic Zone
Authority (PEZA) and (b) passive income gains D.1.5. Taxation of Passive Income
and profits received not directly connected
with the conduct of its trade or business in the Domestic Corporations
Philippines.
Passive Income Subject to Tax
Income not treated as branch profits unless (1) Interest from deposits and yield or any
effectively connected with the conduct of 
other monetary benefit from deposit
trade or business in the Philippines: substitutes and from trust funds and similar
(1) Interests, dividends, rents, royalties arrangements and royalties 


remuneration for technical services 
 (2) Capital gains from the sale of shares of
(2) salaries, wages premiums, annuities, stock not traded in the stock exchange

emoluments 
 (3) Income derived from depository bank
(3) other fixed or determinable annual, under the expanded foreign currency deposit

periodic or casual gains, profits, income system 


(4) capital gains received during each (4) Inter-corporate dividends 

taxable year from all sources within the (5) Capital gains realized from the sale,
Philippines 
 
exchange, or of lands and/or buildings 


Notes: Interest from deposits and yield or any other


(1) imposed whether the head office of the monetary benefit from deposit substitutes and
foreign corporation is located in a tax treaty from trust funds and similar arrangements and
country, in a tax haven or other non- treaty royalties
country. 
 On any currency bank deposit, yield or any
(2) imposed only on the profits remitted by a other monetary benefit from deposit
Philippine branch to the head office of a substitutes, trust funds and similar
foreign corporation. 
 arrangements - 20%

D.1.4. Allowable Deductions Capital gains from the sale of shares of stock
i. Itemized Deductions not traded in the stock exchange

(1) Bad debts 
 On sale, barter, exchange or other disposition
(2) Expenses 
 of shares of stockof a domestic corporation not
listed and traded through a local stock
(3) Losses 

exchange, held as a capital asset:
(4) Taxes 

(5) Depreciation 
 On the net capital gain:
(6) Interest 
 (1) First P100,000: Final Tax of 5%

(7) Depletion of oil and gas wells and mines 
 (2) On any amount in excess of P100,000: plus
(8) Charitable and other contributions 
 10% Final tax on the excess
(9) Research and development 

Income derived from depository bank under the
(10) Pension trusts 

expanded foreign currency deposit system
Under the expanded foreign currency deposit
ii. Optional Standard Deductions (OSD)
system (EFCDS) - 7.5%
Before RA 9504, effective July 6, 2009, OSD
only applied to individuals except non-
Inter-corporate dividends
resident aliens.
 Dividends received from another domestic
corporation - exempt

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Interest from deposits and yield or any other


Capital gains realized from the sale, exchange, monetary benefit from deposit substitutes,
or disposition of lands and/or buildings
 trust funds and similar arrangements and
On the sale, exchange or disposition of lands royalties
and/or buildings which are not actually used On any currency bank deposit, yield or any
in the business of a corporation and are other monetary benefit from deposit
treated as capital assets  On the gross substitutes, trust funds and similar
selling price, or the current fair market value arrangements – Final tax of 20%
at the time of the sale, whichever is higher, a
final tax of 6% Income derived from a depository bank under
the expanded foreign currency deposit system

Note: Tax treatment is the same as that of Under the expanded foreign currency deposit
individuals. system (EFCDS) – Final tax of 7.5%

The capital gains tax is applied on the gross Intercorporate dividends


selling price, or the current fair market value Dividends received from a
corporation liable
at the time of the sale, whichever is higher. to tax under the NIRC- exempt
Any gain or loss on the sale is immaterial
because there is a conclusive presumption by Exclude:
law that the sale resulted in a gain. (1) International carrier 

(2) Offshore banking units 

Passive Income Not Subject to Tax
(3) Branch profits remittances 

(1) Income derived by a depository bank under
the expanded foreign currency deposit system (4) Regional or area headquarters and
from foreign currency transactions with 
regional operating headquarters of
nonresidents, offshore banking units in the multination companies 

Philippines, local commercial banks,
including branches of foreign banks that may D.1.6. Taxation of Capital Gains
be authorized by the Bangko Sentral ng
Pilipinas (BSP) to transact business with Domestic Corporations
foreign currency depository system units and Income from sale of shares of stock

other depository banks under the expanded On sale, barter, exchange or other disposition
foreign currency deposit system shall be of shares of stockof a domestic corporation not
exempt from income exempt from income tax listed and traded through a local stock
exchange, held as a capital asset:
Except: Net income from transactions
specified by the Secretary of Finance upon On the net capital gain:

recommendation by the Monetary Board (1) First P100,000: Final Tax of 5%

(2) On any amount in excess of P100,000: plus
BUT: Interest income from foreign currency 10% Final tax on the excess
loans granted by such depository banks under
said expanded foreign currency deposit Income from the sale of real property situated
system to residents, other than offshore in the Philippines
banking units in the Philippines, shall be Income from the sale, exchange, or other
subject to a final tax at the rate of 10%.
disposition of other capital assets

On the sale, exchange or disposition of lands
(2) Any income of nonresidents, whether
and/or buildings which are not actually used
individuals or corporations, from transactions
in the business of a corporation and are
with depository banks under the expanded
treated as capital assets  On the gross
system shall be exempt from exempt from
selling price, or the current fair market value
income tax.
at the time of the sale, whichever is higher, a
final tax of 6%
Resident Foreign Corporations

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Note: Tax treatment is the same as that of (a) Intercorporate Dividend – 15%, as long as
individuals.
 the country in which the nonresident foreign
The capital gains tax is applied on the gross corporation is domiciled allows a tax credit for
selling price, or the current fair market value taxes “deemed paid” in the Philippines
at the time of the sale, whichever is higher. equivalent to at least 15%
Any gain or loss on the sale is immaterial (b) 15% represents the difference between the
because there is a conclusive presumption by regular income tax of 30% on corporations
law that the sale resulted in a gain. and the 15% tax on dividends (“tax sparing
credit”) 

Resident Foreign Corporations (c) If the country within which the NRFC is
domiciled does NOT allow a tax credit, a final
Capital gain from sale of shares of stock not withholding tax at the rate of30% is imposed
traded in the stock exchange
 on the dividends received from a domestic
On sale, barter, exchange or other disposition corporation. 

of shares of stock of a domestic corporation
not listed and traded through a local stock Capital gains from sale of shares of stock not
exchange, held as a capital asset: traded in the stock exchange

On sale, barter, exchange or other disposition
On the net capital gain:
 of real property or on shares of stock of a
(a) First P100,000: Final Tax of 5%
 domestic corporation not listed and traded
(b) On any amount in excess of P100,000: plus through a local stock exchange, held as a
10% Final tax on the excess capital asset:
On the net capital gain:
(a) First P100,000 Final Tax of 5%
D.2. INCOME TAX ON NON-RESIDENT (b) On any amount in excess of P100,000 plus
FOREIGN CORPORATIONS Final Tax of 10% on the excess

General rule Exclude:


Except as otherwise provided, the tax is 30% (1) Film rentals and other payments to non-
of the gross income (except certain passive resident cinematographic film owner, lessor or
income)received during each taxable year distributor
Final tax of 25% of gross income
from all sources within the Philippines, such from all sources within the Philippines 

as interests (except interests on foreign loans, (2) Rental, lease and charter fees payable to
dividends, rents, royalties, salaries, premiums non-resident owner or lessor of vessels
(except reinsurance premiums), annuities, chartered by Philippine nationals
Final tax of
emoluments or other fixed or determinable 4.5% of gross rentals, lease or charter fees
annual, periodic or casual gains, profits and from leases or charters to Filipino citizens or
income, and capital gains EXCEPT capital corporations, as approved by the Maritime
gains on the sale of shares of stock (not listed Authority 

and traded through a local stock exchange), of
(3) Rentals, charter and other fees payable to
a domestic corporation which are subject to
non-resident owner or lessor of aircraft
the tax rates prescribed for individuals and
machineries and other equipment
Final tax of
resident foreign corporations.
7.5% of gross rentals or fees 

Tax on certain income

Interest on foreign loans D.3. INCOME TAX ON SPECIAL


(1) on foreign loans contracted on or after CORPORATIONS
August 1, 1986 – 20%
(2) under the expanded foreign currency D.3.1. Domestic Corporations
deposit system (EFCDS) - exempt i. Proprietary Educational Institutions and
Hospitals
Intercorporate dividends

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Tax Rate and Base – 10% on net income functions may be subject to tax. Where it is
(except on income subject to capital gains tax done precisely to fulfill a constitutional
and passive income subject to final tax) within mandate and national policy, no one can
and without the Philippines doubt its wisdom. [Mactan Cebu Airport v
Marcos, 1996]
Caveat: If gross income from unrelated trade
or business or other activity exceeds 50% of If the taxing authority is the local gov’t unit
total gross income derived from all sources, RA 7160 expressly prohibits LGUs from levying
the tax rate of 30% shall be imposed on the tax on the Nat’l Gov’t, its agencies and
entire taxable income. instrumentalities and other LGUs.

Unrelated trade, business or other activity – iv. Depositary Banks (Foreign Currency Deposit
any trade, business or other activity, the Units)
conduct of which is not substantially related to Income derived from a depository bank under
the exercise or performance by such the expanded foreign currency deposit system

educational institution or hospital of its Under the expanded foreign currency deposit
primary purpose or function. system (EFCDS) – Final tax of 7.5%

Proprietary educational institution – any D.3.2. Resident Foreign Corporations


private school maintained and administered
by private individuals or groups with an issued i. International Carrier Doing Business in the
permit to operate from the DECS, CHED or Philippines
TESDA. [Sec. 27(B), NIRC] Tax Rate and Base – 2.5% on Gross Philippine
Billings (GPB)
ii. Non-profit Hospitals
(See Proprietary Educational Institutions and What is GPB
Hospitals, supra) In the case of International Air Carriers, GPB
refers to the amount of:
iii. Government-owned or Controlled (a) gross revenue derived from carriage of
Corporations, Agencies or Instrumentalities 
persons, excess baggage, cargo and mail
originating from the Philippines in a
For GOCCS continuous and uninterrupted flight,
General rule: GOCCs are taxable as any other irrespective of the place of sale or issue and
corporation engaged in similar business, the place of payment of the ticket or passage
industry or activity, except:
 document 

(1) Government Service Insurance System (b) gross revenue from tickets revalidated,
(GSIS)
 exchanged and/or indorsed to another
(2) Social Security System (SSS) international airline if the passenger boards a
(3) Philippine Health Insurance Corporation plane in a port or point in the Philippines 

(PHIC) 
 (c) for flights which originate from the
(4) Local water districts (LWDs) 
 Philippines, but transshipment of passenger
(5) Philippine Charity Sweepstakes Office takes place at any port outside the Philippines

(PCSO) 
 on another airline, the gross revenue
[Sec. 27(C), NIRC] consisting of only the aliquot portion of the
cost of the ticket corresponding to the leg
For instrumentalities and agencies of flown from the Philippines to the point of
government transhipment transshipment [RR 15-2002] 

General rule: The government is exempt from
tax. Air Canada vs. CIR (CTA Case No. 6572):
(a) A foreign airline company selling tickets in
Exception: When it chooses to tax itself. the Philippines through their local agents
Nothing can prevent Congress from decreeing shall be considered as resident foreign
that even instrumentalities or agencies of the
government performing governmental
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corporation engaged in trade or business 
in iv. Regional or Area Headquarters and
the country. 
 Regional Operating Headquarters of
(b) The absence of flight operations within the Multinational Companies

Philippine territory cannot alter the fact that Regional or area headquarters: not subject to
income tax
the income received was derived from
activities within the Philippines. 

Regional or area headquarters – a branch
(c) The test of taxability is the source, and the established in the Philippines by multinational
source is that activity which produced the companies and which headquarters do not
income. 
 earn or derive income from the Philippines and
which act as supervisory, communications and
In the case of International Shipping, GPB coordinating center for their affiliates,
means:
 subsidiaries, or branches in the Asia-Pacific
Gross revenue whether for passenger, cargo or Region and other foreign markets.
mail originating from the Philippines up to
final destination, regardless of the place of Regional operating headquarters
sale or payments of the passage or freight (a) 10% of their taxable income 

documents. (b) a branch established in the Philippines by

multinational companies which are engaged
ii. Off-shore Banking Units
in any of the following services: 

Coverage of the Rule
(1) general administration and planning
Only income derived by offshore banking units
(2) business planning and coordination
from foreign currency transactions with:
(3) sourcing and procurement of raw
(1) non-residents, 

materials and components
(2) other offshore banking units 
 (4) 
corporate finance advisory services
(3) local commercial banks including (5) marketing control and sales promotion
branches 
of foreign banks that may be (6) training and personnel management
authorized by the Bangko Sentral ng Pilipinas (7) logistic services
(BSP) to transact business with offshore
banking units. 
 (8) research and development services and
product development

Tax Rate (9)
 technical support and maintenance
Exempt from all taxes, except net income from (10) data processing and communications,
such transactions as may be specified by the
and

Secretary of Finance, upon recommendation
(11) business development.
by the Monetary Board to be subject to the
regular income tax payable by banks.

Exception: Interest income derived from


foreign currency loans granted to residents
other than offshore banking units or local
commercial banks, including local branches of
foreign banks that may be authorized by the
BSP to transact business with offshore
banking units, shall be subject only to a final
tax at the rate of 10%. [Sec. 28(A)(4), NIRC]

iii. Resident Depositary Banks (Foreign


Currency Deposit Units)
Income derived from a depository bank under
the expanded foreign currency deposit system

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

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D.4. IMPROPERLY ACCUMULATED paid-up capital of the corporation as of


EARNINGS TAX Balance Sheet date, 

[Sec. 29, NIRC, as implemented by RR 2-2001] (2) inclusive of accumulations taken from
other years; 

Rule: There is imposed for each taxable year, (3) Earnings reserved for definite corporate
in addition to other taxes, a tax equal to 10% Expansion projects or programs requiring
of the improperly accumulated taxable considerable capital expenditure as approved
income of domestic and closely-held by the Board of Directors or equivalent body; 

corporations formed or availed of for the
(4) Earnings reserved for Building, Plant or
purpose of avoiding the income tax with
Equipment Acquisition as approved by the
respect to its shareholders or the shareholders
Board of Directors or equivalent body; 

of any other corporation, by permitting the
earnings and profits of the corporation to (5) Earnings reserved for compliance with any
accumulate instead of dividing them among Loan Covenant or pre-existing obligation
or distributing them to the shareholders. established under a legitimate business
agreement; 

Rationale: It is a tax in the nature of a penalty (6) Earnings required by Law or applicable
to the corporation for the improper regulations to be retained by the corporation
accumulation of its earnings, and a deterrent or in respect of which there is legal prohibition
to the avoidance of tax upon shareholders who against its distribution; 

are supposed to pay dividends tax on the (7) In the case of subsidiaries of foreign
earnings distributed to them. The touchstone corporations in the Philippines, all
of the liability is the purpose behind the undistributed earnings intended or reserved
accumulation of the income and not the for Investments within the Philippines as can
consequences of the accumulation. be proven by corporate records and/or
relevant documentary evidence. 

Exception: The use of undistributed earnings
and profits for the reasonable needs of the Covered Corporations
business would not generally make the Only domestic corporations classified as
accumulated or undistributed earnings closely- held corporations are liable for IAET.
subject to the tax.
Closely-held corporations are those:
What is meant by “reasonable needs of the (1) at least 50% in value of the outstanding
business” is determined by the Immediacy Test capital stock; or 

Immediacy Test (2) at least 50% of the total combined voting
It states that the “reasonable needs of the power of all classes of stock entitled to vote 

business” are the
 (3) is owned directly or indirectly by or for not
(1) immediate needs of the business; and
 more than 20 individuals. Domestic
(2) reasonably anticipated needs. corporations not falling under the aforesaid
definition are, therefore, publicly- held
How to prove the “reasonable needs of the corporations. 

business”

The corporation should prove that there is To determine whether the corporation is
(1) an immediate need for the accumulation of closely held corporation, insofar as such

the earnings and profits; or 
 determination is based on stock ownership, the
(2) a direct correlation of anticipated needs to following rules shall be applied:

such accumulation of profits. 
 (1) Stock Not Owned by Individuals. - Stock
owned directly or indirectly by or for a
Composition corporation, partnership, estate or trust shall
The following constitute accumulation of be considered as being owned proportionately
earnings for the reasonable needs of the by its shareholders, partners or beneficiaries.
business: 

(1) Allowance for the increase in the (2) Family and Partnership Ownership. - An

accumulation of earnings up to 100% of the individual shall be considered as owning the
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stock owned, directly or indirectly, by or for his earnings, the Regulations adhere to the so-
family, or by or for his partner. 
 called “Immediacy Test” under American
jurisprudence as adopted in this jurisdiction.
For purposes of this paragraph, the ‘family of Accordingly, the term “reasonable needs of
an individual’ includes his brothers or sisters the business” means the immediate needs of
(whether by whole or half-blood), spouse, the business, including reasonably
ancestors and lineal descendants. 
 anticipated needs. In either case, the
corporation should be able to prove: (a) an
(3) Option to Acquire Stocks. - If any person immediate need for the accumulation of the
has an option to acquire stock, such stock earnings and profits, or (b) the direct
shall be considered as owned by such person. correlation of anticipated needs to such

 accumulation of profits. Otherwise, such
accumulation would be deemed to be not for
For purposes of this paragraph, an option to
the reasonable needs of the business, and the
acquire such an option and each one of a
penalty tax would apply.
series of option shall be considered as an
option to acquire such stock. 

D.5 EXEMPTION FROM TAX ON
(4) Constructive Ownership as Actual CORPORATIONS
Ownership. - Stock constructively owned by
reason of the application of (a) or (c) shall, for Tax exempt corporations
purposes of applying (1) or (2), be treated as (1) Nonprofit labor, agricultural or
actually owned by such person.

horticultural organizations
(2) Non-stock/ non-profit mutual savings
But stock constructively owned by the
bank or non-stock/ non-profit cooperative
individual by reason of the application of (b)
shall NOT be treated as owned by him for bank 

purposes of again applying such paragraph in (3) 
 Associations, orders, beneficiary
order to make another the constructive owner societies operating for the exclusive benefits
of such stock. of their members
(4) Cemetery company owned and operated
BIR Ruling 025-02 exclusively for the benefit of its members
The ownership of a domestic corporation for (5) Non-stock corporation or association
purposes of determining whether it is a closely 
organized and operated exclusively for
held corporation or a publicly held corporation religious, charitable, scientific, athletic, or
is ultimately traced to the individual cultural purposes or for the rehabilitation of
shareholders of the parent company. veterans, provided that no individual person
Where at least 50% of the outstanding capital owns its assets or no individual person
stock or at least 50% of the total combined receives benefit on its earnings 

voting power of all classes of stock entitled to (6) Non-profit business league, chamber of
vote in a corporation is owned directly or commerce, or board of trade
indirectly by at least 21 or more individuals, the (7) Non-profit civic league or organization
corporation is considered as a publicly-held operating exclusively for the promotion of
corporation, thus, exempt from IAET. social welfare 

(8) Non-stock and non-profit educational
Determination of reasonable needs of the 
institutions
business

(9) 
 Government educational institutions
An accumulation of earnings or profits
(10) Organizations with a purely local
(including undistributed earnings or profits of
operation whose income is derived only from
prior years) is unreasonable if it is not
assessment, duties and fees collected from
necessary for the purpose of the business,
their members to meet operational expenses
considering all the circumstances of the case.
such as fire insurance company, farmers’ or
other mutual typhoon associations, mutual
To determine the “reasonable needs” of the
business in order to justify an accumulation of
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ditch or irrigation company and mutual or considered as a corporation and is thus


cooperative 
telephone company 
 subject to corporate tax of 30%.
(11) Associations of farmers, fruit growers, and

the like whose primary function is to 
market Rules
the product of their members 
[Sec. 30, NIRC] (1) The partnership is subject to the same rules

on corporations (capital gains tax, final tax
NPC in general is subject to income tax; on passive income, normal tax, minimum
PAGCOR is not subject to income tax [RA corporate income tax [MCIT] and gross income
9337] tax [GIT]), but is not subject to the improperly
accumulated earnings tax [IAET]. The
Qualification for tax exemption under Sec. 30 partnership must file quarterly and year-end
of the 1997 NIRC: income tax returns. 

(1) It must be a non-stock corporation or (2) The taxable income of the partnership,

association organized and operated less the normal corporate income tax (30%)
exclusively for religious, charitable, scientific, thereon, is the distributable net income of the
athletic or cultural purposes, or for the partnership. 

rehabilitation of veterans. 

(2) It should meet the following tests: The share of a partner in the partnership’s
(a) Organizational Test–requires that he distributable net income of a year shall be
corporation or association’s constitutive deemed to have been actually or
documents exclusively limit its purposes constructively received by the partners in the
to one or more of those described in same taxable year and shall be taxed to them
paragraph (E) of 
Section 30 of the 1997 in their individual capacity, whether actually
distributed or not. [Sec. 73(D), NIRC] Such
NIRC. 

share will be subjected to a final tax of 10% to
(b) Operational Test – mandates that the be withheld by the partnership. [Sec. 24(B)(2),
regular activities of the corporation or NIRC]
association be exclusively devoted to the
accomplishment of the purposes
specified in paragraph (E) of Section 30 of General Professional Partnerships
the 1997 NIRC, as amended. A Partnerships formed by persons for the sole
corporation or association fails to meet purpose of exercising their common
this test if a substantial part of its profession, no part of the income of which is
operations may be considered 
“activities derived from engaging in any trade or
conducted for profit”. 
 business. A GPP is exempt from income tax. It
(3) All the net income or assets of the is, however, required to file a tax return for its
corporation or association must be devoted to income for the purpose of furnishing
its purpose/s and no part of its net income or information as to the share in the gains or
asset accrues to or benefits any 
member or profits that each partner shall include in his
specified person. (4) It must not be a branch individual tax return.
of a foreign non- 
stock, non-profit
corporation. 
 Rules
[RMO No. 20-2013] (1) A GPP is a partnership formed by persons
for the purpose of exercising their common
profession, no part of the income of which is
D.6. TAX ON GENERAL PARTNERSHIPS, derived from engaging in trade or business. A
GENERAL PROFESSIONAL PARTNERSHIPS, GPP as such shall not be subject to the income
CO-OWNERSHIPS, JOINT VENTURES AND tax. It is not a taxable entity for income tax
CONSORTIUMS purposes. 

(2) The partners shall only be liable for
General Partnerships income tax only in their separate and
Partnerships wherein all or part of their individual capacities. 

income is derived from the conduct of trade or (3) For purposes of computing the distributive
business. An ordinary business partnership is share of the partners, the net income of the
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GPP shall be computed in the same manner as


a corporation. When Co-ownership is not subject to tax
(4) Each partner shall report as gross income When the co-ownership’s activities are limited
his distributive share, actually or merely to the preservation of the co-owned
constructively received, in the net income of property and to the collection of the income
the partnership. from the property. The income derived by a co-
(5) The distributive share of a partner (actual owner from the property shall be reported in
or constructive) shall be subject to a creditable his individual tax return regardless of whether
withholding income tax of 10% if the amount such income is actually or constructively
share is not more than P720,000 and 15% if received.
the amount of the share is more than
P720,000. [RR 2- 1998] When Co-ownership is subject to tax
(6) If the partnership sustains a net operating The following circumstances would render a
loss, the partners shall be entitled to deduct co-ownership subject to a corporate income
their respective shares in the net operating tax: (a) When a co-ownership is formed or
loss from their individual gross income. established voluntarily, or upon agreement of
the parties; (b) When the individual co-owner
GPP is not a taxable entity reinvested his share, and (c) When the
The GPP is deemed to be no more than a mere inherited property remained undivided for
mechanism or a flow-through entity in the more than ten years, and no attempt was ever
generation of income by, and the ultimate made to divide to same among the co-heirs,
mechanism distribution of such income to the nor was the property under administration
individual partners. [Tan v. Commissioner (Oct. proceedings nor held in trust, the property
3, 1994)] should be considered as owned by an
unregistered partnership.
But the partnership itself is required to file
income tax returns for the purpose of Automatically converted into an unregistered
furnishing information as to the share in the partnership the moment the said common
gains or profits which each partner shall properties and/or the incomes derived from
include in his individual return. [RR 2- 1998] them are used as a common fund with intent
to produce profits for the heirs in proportion to
The share of an individual partner in the net their respective shares in the inheritance as
profit of a general professional partnership is determined in a project partition either duly
deemed to have been actually or executed in an extrajudicial settlement or
constructively received by the partner in the approved by the court in the corresponding
same taxable year in which such partnership testate or intestate proceeding. [Ona v. CIR,
net income was earned, and shall be taxed to May, 25 1972]
them in their individual capacities, whether
actually distributed or not, at the graduated Joint Ventures and Consortiums
income tax ranging from 5% to 32%. To constitute a” joint venture,” certain factors
are essential. Each party to the venture must
Thus, the principle of constructive receipt of make a contribution, not necessarily of capital,
income or profit is being applied to but by way of services, skill, knowledge,
undistributed profits of GPPs. The payment [to material or money,; profits must be shared
the partners] of such tax-paid profits in among the parties; there must be a joint
another year should no longer be liable to proprietary interest and right of mutual
income tax. [Mamalateo] control over the subject matter of the
enterprise; and usually, there is single
Co-ownerships business transaction.
There is co-ownership

(1) When two or more heirs inherit and An unincorporated joint venture is taxed likes
undivided property from a decedent. a corporation. The share of the joint venture
(2) When a donor makes a gift of an undivided partners will no longer be taxable to them
property in favor of two or more donees. because they partake of dividends if paid to a

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domestic or resident corporation. However, an submit to the Commissioner an annual


unincorporated joint venture formed for the information return containing the list of
purpose of undertaking a construction project payees and income payments, amount of
or engaging in petroleum operations pursuant taxes withheld from each payee and such
to the consortium agreement with the other pertinent information as may be
Philippine Government is not subject to the required by the Commissioner. [Sec. 58(C),
corporate income tax. Only the joint venture NIRC]
partners will be taxed on their respective
shares in the income of the joint ventures. Every employer required to deduct and
withhold the taxes in respect of the wages of
Two elements necessary to exempt a joint his employees shall, on or before January
venture or consortium from tax thirty-first (31st) of the succeeding year,
(1) The joint venture must be an submit to the Commissioner an annual

unincorporated entity formed by two or information return containing a list of

more persons 
 employees, the total amount of compensation
(2) The joint venture was formed for the income of each employee, the total amount of

purpose of undertaking a construction taxes withheld therefrom during the year,
accompanied by copies of the statement
project, or engaging in the petroleum and
referred to in the preceding paragraph, and
other energy operations with operating
such other information as may be deemed
contract with the government. 

necessary. [Sec. 83(B), NIRC]

E.2. PERIOD TO FILE INCOME TAX RETURN


E. FILING OF RETURNS AND PAYMENT OF INDIVIDUALS AND CORPORATIONS
OF INCOME TAX
(1) Individuals
E.1. DEFINITION OF A TAX RETURN AND Individuals deriving mixed income, or purely
INFORMATION RETURN business/professional income, or other
income must file quarterly income tax returns
Tax Return (BIR Form 1700 Q), and an annual income tax
Tax return refers to a formal report prepared return (BIR Form 1700) as follows: (Sec. 74,
by the taxpayer or his agent in a prescribed NIRC)
form showing an enumeration of taxable
amounts and description of taxable Period Due Date for Filing Return
transactions, allowable deductions, amount Q1 Return April 15 of the same year
of tax and tax payable to the government. Q2 Return August 15 of the same
year
Examples of tax returns are: Q3 Return November 15 of the same
(a) BIR Form Nos. 1700 and 1701 – Annual year
Income Tax Returns for Individual Annual Return April 15 of the following
(b) BIR Form No. 1702 – Annual Income Tax year
Return for Corporations and Partnerships
(c) BIR Form No. 1800 – Donor’s Tax Return (2) Corporations
(d) BIR Form No. 1801 – Estate Tax Return Domestic corporations and resident foreign
corporations shall file quarterly corporate
Information Return
income tax returns (BIR Form 1702 Q) within
Any individual not required to file an income
60 days after the end of the calendar or fiscal
tax return may nevertheless be required to file quarter used, and annual corporate income
an information return pursuant to rules and tax return (BIR Form 1702) on or before the 15th
regulations prescribed by the Secretary of day of the fourth month following the close of
Finance, upon recommendation of the the calendar year or fiscal year, as the case
Commissioner. [Sec. 51(A)(3), NIRC]
may be (Sec. 74, NIRC). The deadlines for the
filing of the tax returns by a corporation using
Every withholding agent required to deduct
the calendar year are as follows:
and withhold taxes under Section 57 shall
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Period Due Date for Filing Return Individuals whose sole income has been
Q1 Return May 31 of the same year subjected to final withholding tax pursuant to
Q2 Return August 31 of the same Sec. 57(A) of the Tax Code.
year
Q3 Return November 30 of the same Individuals who are exempt from income tax
year pursuant to the provisions of the Tax Code and
Annual Return April 15 of the following other laws, general or special (Sec. 51, NIRC).
year
Special Provisions
Income of non-resident aliens not engaged in
E.3. PERSONS LIABLE TO FILE INCOME TAX trade or business in the Philippines is subject to
RETURNS withholding income tax to be withheld by the
payor thereof.
E.3.1. Individual Taxpayers
i. General Rule and Exceptions (Sec. 51(A), In the case of married persons, whether
NIRC) citizens or aliens, residents or not, who do not
General Rule: The following are required to file derive income purely from compensation, only
income tax returns: one consolidated return to cover the income of
(a) Every Filipino citizen residing in the both spouses for the taxable year shall be filed
Philippines by either spouse; where it is impracticable for
(b) Every Filipino citizen residing outside the the spouses to file one consolidated return,
Philippines on his income from sources each may file a separate return but the returns
within the Philippines so filed shall be consolidated for the purpose
(c) Every alien residing in the Philippines, on of verification. The husband shall be deemed
income derived from sources within the the head of family entitled to claim the
Philippines additional exemption in respect of dependent
(d) Every non-resident alien engaged in children, unless he explicitly waives his right in
trade or business or in the exercise of favor of the wife in the withholding exemption
profession in the Philippines. certificate (Sec. 79 (F)(1), NIRC).

Note: A grant of tax exemption is not The income of unmarried minors is a tax
necessariliy an excuse from the requirement to liability of the minor but where such income is
file a tax return [Garrison v. CA, 187 SCRA 525]. derived from property received from a living
parent, the income shall be included in the
Exceptions: return of the parent except (a) when the
Individuals whose gross income (not donor’s tax has been paid on such property, or
necessarily from compensation income) does (b) when the transfer of such property is
not exceed his total personal and additional exempt form the donor’s tax.
exemptions for dependents, except citizens
and alien individuals engaged in business or If the taxpayer is unable to make his return,
practice of profession within the Philippines such as when he suffers from disability, the
who shall file income tax returns regardless of return may be made by his duly authorized
the amount of gross income. agent or representative or by the guardian or
other person charged with the care of the
Individuals with respect to pure compensation taxpayer or his property, the principal and his
income derived from sources within the representative or guardian incurring the
Philippines, the income tax on which has been penalties for erroneous, false or fraudulent
withheld except when such compensation has returns.
been derived from more than one employer.
ii. Substituted Filing
A minimum wage earner as defined in Sec. Substituted filing of tax returns is required
22(HH) of the NIRC, as amended by R.A. No. where (i) an employee receives purely
9504. compensation income from a single or one

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employer who deducted and remitted to the residence or place of business in the
BIR the (ii) correct amount of withholding tax Philippines, with the Office of the
form the employee’s compensation income Commissioner (Sec. 51(B), NIRC)
during the year, and said employee has (iii) no
taxable other income subject to income tax (2) Corporations
under the global tax system. In lieu of the The return shall be filed at the place where the
regular tax returns to be filed by the corporation’s principal office is located and
employees, the employer shall file BIR Form where its books of accounts and other date are
2316 (Certificate of Income Tax Withheld on kept; otherwise, the returns shall be filed and
Compensation) with the BIR on or before the tax paid thereon with the Office of the
January 31 of the following year. BIR Form Commissioner of Internal Revenue.
2316 shall contain a certification to the effect
that the employer’s filing of BIR Form 1604-CF E.5. PENALTIES FOR NON-FILING OF
shall be considered as a substituted filing of RETURNS
the employee’s income tax return to the extent
that the amount of compensation and tax (a) For failure to file any return and pay the tax
withheld in BIR Form 1604-CF as filed with due: a penalty equivalent to 25% of the
BIR is consistent with the corresponding amount due (Sec. 248(A)(1), NIRC).
amounts indicated in BIR Form 2316. However, (b) In case of willful neglect to file the return:
non-resident citizens who receive purely a penalty equivalent to 50% of the tax or of the
income from foreign sources are no longer deficiency tax, in case, any payment has been
required to file their Philippine income tax made on the basis of such return before the
return, although they must still file an income discovery of the falsity or fraud (Sec. 248(B),
tax return covering income from sources NIRC).
within the Philippines.

E.3.2. Corporate Taxpayers F. WITHHOLDING OF TAXES


All corporations subject to income tax, except
foreign corporations not engaged in trade or F.1. CONCEPT OF WITHHOLDING TAXES
business in the Philippines, shall render
quarterly income tax returns on a cumulative Withholding tax is a method of collecting
basis for the preceding quarter or quarters income tax in advance from the taxable
upon which their income tax is paid and a final income of the recipient of income. It is a
or adjustment return on or before the 15th day systematic way of collecting taxes at source,
of April or fourth month following the close of an indispensable method of collecting taxes to
the fiscal year covering the entire taxable ensure adequate revenue for the government.
income of the preceding calendar or fiscal year,
signed and sworn to by the President, Vice- The withholding of income tax on
President or principal officer and by the compensation income, on certain income
treasurer or assistant treasurer (Sec. 52(A), payments made to resident taxpayers, and on
NIRC). income payments made to non-resident
taxpayers is very important for all taxpayers,
E.4. WHERE TO FILE INCOME TAX because the obligation to withhold and remit
RETURNS the tax is mandatory and prescribed by law.

(1) Individuals In the operation of the withholding tax system,


Except in cases where the Commissioner the payee is the taxpayer, the person on whom
otherwise permits, the return shall be filed the tax is imposed, while the payor, a separate
with an authorized agent bank, Revenue entity, acts no more than an agent of the
District Officer, Collection Agent or duly government for the collection of the tax in
authorized Treasurer of the city or order to ensure its payment. The amount
municipality in which such person has his thereby used to settle the tax liability is
legal residence or principal place of business deemed sourced from the proceeds
in the Philippines, or if there be no legal constitutive of the tax base. In an ad valorem
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tax, the tax paid or withheld is not deducted (b) The income recipient is still required to file
from the tax base, except when the law clearly an income tax return, to report the income
spells out in defining the tax base. and/or pay the difference between the tax
withheld and the tax due on the income. 

The duty to withhold is different from the duty (c) Taxes withheld on income payments
to pay income tax. The revenue officers covered by the expanded withholding tax and
generally disallow the expenses claimed as compensation income are creditable in nature.
deduction from gross income, if no 

withholding of tax as required by law or the
regulations was withheld and remitted to the Withholding of VAT
BIR within the prescribed dates. (1) On gross payments for the purchase of
goods 

In addition, the withholding tax that should
(2) On gross payments for the purchase of
have been withheld and remitted to the BIR as
services 

well as the penalties for non-, late or
erroneous payment of the withholding tax (3) Payments made to government public
such as surcharges and deficiency interest are works contractors 

assessed by the BIR. [Mamalateo] (4) Payments for lease or use of property or
property rights to non-resident owners 

F.2. KINDS OF WITHHOLDING TAXES

Withholding of final tax of certain income



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

Withholding of creditable tax at source



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

Withholding of creditable tax (RR 2-98)


(a) Under the creditable withholding tax
system, taxes withheld on certain income
payments are intended to equal or at least
approximate the tax due of the payee on said
income. 

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TAXATION LAW
TAXATION 2

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I. Estate Tax (1) Right/privilege of the deceased person to


transmit his/her estate to his/her lawful heirs
and beneficiaries at the time of death;
A. BASIC PRINCIPLES (2) Certain transfers, during his lifetime, which
are made by law as equivalent to
Death is the source of the taxing power. It is the testamentary disposition.
power to transmit or the transmission from the
dead to the living on which the tax is based. The 4 Justification Theories for the Imposition of
tax accrues as of the death of the decedent by Estate Tax
operation of law. [Lorenzo v. Posadas, (1937)] (1) Benefits-received theory– The State collects
the tax because of the services it renders in
(1) Estate tax accrues at the time of the the distribution of the estate of the decedent,
decedent’s death, but the obligation to pay either by law or in accordance with his will.
the same is different and is fixed by law. The (2) Privilege theory or state partnership theory –
tax is measured by the value of the property Succession to the property of a deceased
AT THE TIME OF DEATH. person is not a right but a privilege granted
(2) Estate tax is measured (i.e., tax base) by the by the State and consequently, the
value at that time of such property as passes legislature can constitutionally burden such
to him (i.e., death). Subsequent appreciation succession with a tax. The State collects the
or depreciation is immaterial; tax because of the protection it provides in
(3) Estate taxation is governed by the statute in the acquisition of large estates. Hence, the
force at the time of the death of the decedent. State is a “silent or passive partner” in the
Tax laws cannot be given retroactive effect accumulation of said large property.
unless they explicitly provide for it. (3) Ability-to-pay theory – Receipt of inheritance,
which is in the nature of unearned wealth or
Inheritance taxes, which were imposed on the windfall, places assets into the hands of the
right of the heirs to receive property upon the heirs and beneficiaries. This creates an ability
death of the decedent, were abolished. They are to pay the tax and thus contributes to
no longer imposed under the current NIRC. government income.
(4) Redistribution of wealth theory – The
B. DEFINITION imposition of estate tax reduces the property
received by the successor, which helps
Estate tax is an excise tax on the right of promote a more equitable distribution of
transmitting property at the time of death and on wealth in society. The taxes paid by the rich
the privilege that a person is given in controlling are programmed for disbursement by
to a certain extent the disposition of his property Congress for the benefit of the poor in terms
to take effect upon death. [VITUG and ACOSTA at on social services, education, health, etc.
211]

C. NATURE E. TIME AND TRANSFER OF PROPERTIES

It is a transfer tax, i.e., an excise tax on the right Art. 777, Civil Code. The rights to the
of transmitting property, not a property tax. succession are transmitted from the moment
Compared to old inheritance, this was a tax on of the death of the decedent.
the right to transfer and not the right to inherit
property. The decedent’s estate includes property to the
extent of the interest therein of the decedent at
D. PURPOSE OR OBJECT the time of his death. (Sec. 85(A)) N.B. – It is the
interest of the decedent on the property, not the
Purpose: To tax the shifting of economic benefits actual property itself. In some cases, however,
and enjoyment of property from the dead to the they may be the same.
living.
Estate taxation is governed by the statute in force
Taxable objects/subjects: at the time of death of the decedent. Estate tax
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accrues as of the death of the decedent and the (ii) That before his death, the transfer should be
accrual of the tax is distinct from the obligation to revocable by the transferor at will, ad
pay the same. Upon the death of the decedent, nutum; but revocability may be provided for
succession takes place and the right of the State indirectly by means of a reserved power in
to tax the privilege to transmit the estate vests the donor to dispose of the properties
instantly upon death. (Sec. 3, RR 2-2003) conveyed;
N.B. – Note that in transfers for insufficient (iii) That the transfer should be void if the
consideration, the value to be included in the transferor should survive the transferee.
estate is the excess of the FMV at time of death
over the value of the consideration received at the (2) Transfers Inter Vivos. Gratuitous transfers
time of transfer. that take effect during the lifetime of the
donor. (See Donor’s Tax for requisites)
Despite the transfer of properties and rights at
the time of death, the executor or administrator General Rule: Donation Inter Vivos are subject to
shall not deliver a distributive share to any party Donor’s Tax.
interested in the estate, unless there is a
certification from CIR that estate tax has been Exceptions: Donation Inter Vivos are subject to
paid. (Sec.94) Estate Tax when it is treated by law as substitutes
for testamentary dispositions (i.e., transfers
Time of death governs: which are inter vivos in form but mortis causa in
(1) The determination of the extent of the substance)
decedent’s interest for computing his gross (a) Transfers in Contemplation of Death [Sec.
estate. 85(B), NIRC]
(2) The statute that governs estate taxation. (b) Revocable transfers [Sec. 85(C), NIRC]
(3) The accrual of the estate tax. (c) Transfers of property arising under general
power of appointment [Sec. 85(D), NIRC]
Taxable Transfers (d) Transfers for insufficient consideration [Sec.
85(G), NIRC]
Taxable transfers are complete when the
transferor divests himself of all economic Note: These transfers would be included in the
beneficial interest in himself or his estate. computation of the gross value of estate. See
further discussion in the valuation of Gross Estate.
(1) Transfers Mortis Causa – These are gratuitous
transfers that take effect after death, either F. CLASSIFICATION OF DECEDENT
testate or intestate. These transfers are
subject to estate tax. Estate Tax applies only to individuals. The
decedent may be classified into:
A donation which purports to be one inter (1) Citizen (RC/NRC)
vivos but withholds from the donee the right to (2) Resident alien (RA); or
dispose of the donated property during the (3) Non-resident alien (NRA).
donor's lifetime is in truth one mortis causa. In a
donation mortis causa, the right of disposition is F.1. CONCEPT OF RESIDENCE
not transferred to the donee while the donor is For purposes of estate taxation, “residence”
still alive. The requisites of a testamentary refers to domicile, the permanent home or the
disposition should be fulfilled. place to which whenever absent, one intends to
return (animus revertendi), and depends on facts
Characteristics: (Maglasang v Heirs of and circumstances, in the sense that they
Cabatingan, 2002) disclose intent. It is therefore, not necessarily the
(i) It conveys no title or ownership to the actual place of residence. (Corre v Tan Corre,
transferee before the death of the transferor; 1956)
or what amounts to the same thing, that the
transferor should retain the ownership (full Situs of Intangible Personal Properties
or naked) and control of the property while General Rule: Mobilia Sequuntur Personam
alive; Principle: Taxation of intangible personal
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properties (such as credits, bills, bank deposits


promissory notes, and corporate stocks) follows
the residence/domicile of owner thereof. Situs is
the domicile or residence of the owner. (Collector
v Fisher)

Exceptions:
(1) Rule of Reciprocity
(2) When it is inconsistent with express
provisions of law
(3) When justice does not demand that it should
be, as where the property in fact has a situs
elsewhere

Intangible Properties which are considered


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

F.2. RULE OF RECIPROCITY


There is reciprocity if the foreign country of which
the decedent was a citizen and resident at the
time of his death:
(a) Did not impose a transfer tax of any character,
in respect of intangible personal property of
citizens of the Philippines not residing in that
foreign country; OR
(b) Allowed a similar exemption from transfer
tax in respect of intangible personal property
owned by citizens of the Philippines not
residing in that country
If there is reciprocity, the intangible personal
property of an NRA shall not be included in his
gross estate. If there is no reciprocity, such
intangible personal property will be included.
[Sec. 104]

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G. GROSS ESTATE VIS-À-VIS NET ESTATE

Gross Estate Net Estate


Value at the time of death of all the decedent’s Value of the estate after all deductions have been
property wherever situated made against the gross estate; subject to the
HOWEVER, in the case of a NRA at the time of his graduated tax rates. [Sec. 6, RR 2-2003]
death, only that part of the entire gross estate which
is situated in the Philippines shall be included in his This is the TAX BASE.
taxable estate. [Sec 85, NIRC]

Formula for Estate Tax (see Annex A for expanded formulae)


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

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

Summary of the Composition of the Gross Estate and Exclusions, Deductions therefrom
RC/NRC/RA NRA
Composition and Determination of GROSS Estate
The value at the time of his death of all the The value at the time of his death of all the
deceased’s: deceased’s:
a. Real property wherever situated a. Real property located in the Phil.
b. Tangible personal property wherever situated b. Tangible personal property located in the Phil.
c. Intangible personal property wherever c. Intangible personal property with a situs in the
situated Phil. (subject to the rule of reciprocity)
Note: If there is reciprocity, intangible assets
are excluded from gross estate
Exclusions from Gross Estate(Sec 85(H) and Sec 87)
a. Separate property of the surviving spouse (Sec. 85 (H))
b. GSIS proceeds/ benefits
c. Accruals from SSS
d. Proceeds of life insurance where the beneficiary is irrevocably appointed
e. Proceeds of life insurance under a group insurance taken by employer
f. War damage payments and Benefits received from US Veterans Administration
g. Transfer by way of bona fide sales
h. Transfer of property to the National Government or to any of its political subdivisions
i. Merger of usufruct in the owner of the naked title (Sec. 87 (A))
j. Properties held in trust by the decedent. Transmission of inheritance or legacy by fiduciary heir or
legatee to the fideicommissay (Sec. 87 (B))
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RC/NRC/RA NRA
k. Transmission from the first heir, legatee, or done in favour of another beneficiary, in accordance
with the desire of their predecessor (Sec. 87 (C))
l. Acquisition and/or transfer expressly declared as not taxable
m. Bequests, devises, legacies or transfers to social welfare, cultural and charitable institutions,
provided that not more than 30% of said transfer shall be used for administration purposes (Sec.
87 (D))
Deductions from GROSS estate to arrive at the NET estate
Ordinary deductions Ordinary deductions1
(1) Expenses, losses, indebtedness, taxes. (ELIT) (1) Proportionate deductions for (ELIT)2
(a) Funeral expenses (a) Funeral expenses
(b) Judicial expenses (b) Judicial expenses
(c) Claims against the estate (c) Claims against the estate
(d) Claims against insolvent persons (d) Claims against insolvent persons
(e) Unpaid mortgage and debt (e) Unpaid mortgage and debt
(f) Taxes (f) Taxes
(g) Losses (g) Losses

(2) Vanishing deductions (2) Vanishing deductions


(3) Transfers for public use (3) Transfers for public use
(4) Amounts received under R.A. 4917

Special deductions No Amounts received under R.A. 4917


(a) Family home No special deductions
(b) Standard deduction
(c) Medical expenses

Share in conjugal property Share in conjugal property

1 No deduction shall be allowed for NRA, if the executor, administrator, or anyone of the heirs, DID NOT include in the
return required to be filed under Section 90 of the Code the value at the time of the decedent’s death of that part of his
gross estate NOT situated in the Philippines. [Sec. 86 (D), NIRC; Sec 7, RR 2-2003]
Gross Estate Phil
2 Formula for Proportionate Deductions of NRA: Allowable Deduction =
Gross Estate World
x ELIT

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VALUATION OF GROSS ESTATE (SEC [Sec. 85, NIRC]


88) (1) Property owned by the decedent actually
General Rule: Gross Estate = FMV at the time and physically present in his estate at the
of the decedent’s death time of his death;
(2) Decedent’s interest;
Real Property (3) Properties not physically in the estate,
(1) Appraised value, whichever is higher such as:
between: (a) Transfers in contemplation of death
(a) FMV, as determined by the [Sec. 85(B), NIRC];
Commissioner of Internal Revenue (b) Transfers with retention or reservation
(CIR) (zonal value) or of certain rights [Sec. 85(B), NIRC];
(b) FMV, as shown in the schedule of (c) Revocable transfers [Sec. 85(C),
values fixed by the Provincial or City NIRC];
Assessor. (d) Property passing under general power
If there is no zonal value, the taxable of appointment [Sec. 85(D), NIRC];
base is the FMV that appears in the (e) Transfers for insufficient
latest tax declaration. consideration [Sec. 85(G), NIRC];
(2) If there is an improvement, the value of (f) Proceeds of life insurance [Sec. 85(E),
improvement is the construction cost per NIRC];
building permit or the fair market value (g) Claims against insolvent persons [Sec.
per latest tax declaration. 86(A)(d)]; and
(h) Capital of the surviving spouse [Sec.
Personal Property 85(H), NIRC].
(1) FMV at the time of death.
(2) If none, acquisition cost for recently DECEDENT’S INTEREST (Sec. 85(A))
acquired properties or the current market This includes any interest having value or
price for the previously acquired capable of being valued which is owned by the
properties. (Sec 40(B) decedent existing at the time of death, such as
(3) Stocks, bonds, and other securities. dividend declared on or before death, but is
(a) If listed and traded stocks = value is received by the estate after death, partnership
the mean between the highest and profits which have accrued before his death,
lowest quoted selling prices at the but received after death. This also includes
date of death; if none, nearest the date those transferred by the decedent at the time
of death (Sec 5, RR 02-2003) of his death.
(b) If unlisted stocks = book value at time Note: When decedent had relinquished his
of death (ordinary common shares) or interest BEFORE his death, he could not be
par value (preferred shares) deemed to have transmitted interest in such
N.B: Bonds, mortgages, and Certificates of property at his death.
Stocks are taxable at the place where they
are physically located. TRANSFERS IN CONTEMPLATION OF DEATH
(4) Proceeds of Life Insurance with Revocable (Sec. 85(B))
Beneficiary: face value of policy (not cash The term “in contemplation of death”, as used
surrender value) in estate taxation, does not refer to the
general expectation of death. The words mean
Right to Usufruct use or habitation, and that it is the thought of death, as a controlling
annuity motive, which induces the disposition of the
(1) Probable life of the beneficiary in property for the purpose of avoiding the tax.
accordance with the latest basic standard The decedent’s motive is a question of fact.
mortality table shall be taken into account. Thus, the imminence of death may afford
convincing evidence of the impelling cause of
J. ITEMS TO BE INCLUDED IN GROSS transfer. However, it is a contemplation of
ESTATE death and not necessarily contemplation of
imminent death to which the statute refers.
Items to be included in the Gross Estate
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These transfers should be without or with


insufficient considerations. If notice has not been given or the power has
not been exercised before the date of his death,
The law does not specify the number of years such notice shall be considered to have been
prior to a decedent’s death within which a given, or the power exercised, on the date of
transfer can be considered in contemplation of his death.
death. (De leon)
TRANSFER OF PROPERTY UNDER GENERAL
TRANSFERS WITH RETENTION OR POWER OF APPOINTMENT (Sec. 85(D))
RESERVATION OF CERTAIN RIGHTS Power of Appointment – the right to designate
These are transfers with retention or the person or property who shall enjoy and
reservation of certain rights that result to the possess certain property from the estate of a
incapacity of transferee to freely enjoy and prior decedent. (Domondon)
dispose of the property until the transferor’s (i) General Power of Appointment: when it
death, and the transfer may be regarded as gives to the decedent the power to appoint
having been intended to take effect in any person he pleases including himself.
possession or enjoyment at the transferor’s He had a power exercisable in favor of
death. These do not include bona fide sale for himself, his creditors or creditors of his
an adequate and full consideration. estate (AmJur)
(ii) Special Power of Appointment: when the
REVOCABLE TRANSFERS (Sec. 85(C)) decedent
General Rule: A transfer is a revocable transfer a. can appoint only among a
where: designated class of persons other
(1) There is a transfer by trust or otherwise, than himself, his estate, the
(2) The enjoyment thereof was subject at the creditors of his estate, or
date of his death to any change through b. if the power of appointment is
the exercise of a power (in whatever expressly not exercisable in favor
capacity exercisable) by: of the decedent, his estate, his
(a) The decedent alone; creditors, or creditors of his estate.
(b) The decedent in conjunction with any
other person without regard to when General Rule: Property over which the
or from what source the decedent decedent held a power of appointment is
acquired such power, to alter, amend, excluded in his gross estate
revoke, or terminate; or
(c) Where any such power is relinquished Exception: Included in the gross estate if the
in contemplation of the decedent property arises under a general power of
death. appointment exercised by the decedent:
(1) By will; or
Exception: Bona fide sale for an adequate (2) By deed executed in contemplation of or
and full consideration in money or intended to take effect in possession or
money’s worth enjoyment at or after his death; or
(3) By deed under which he has retained for
Note: The power to alter, amend or revoke his life or any period not ascertainable
shall be considered to exist on the date of the without reference to his death or for any
decedent’s death even though: period which does not in fact end before
(a) The exercise of the power is subject to a his death –
precedent giving of notice, or (a) The possession or enjoyment of, or the
(b) The alteration, amendment or revocation right to the income from the property;
takes effect only on the expiration of a or
stated period after the exercise of the (b) The right either alone or in conjunction
power, whether or not on or before the with any person, to designate the
date of the decedent’s death notice has persons who shall enjoy or possess the
been given or the power has been property or the income therefrom.
exercised.

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TRANSFERS FOR INSUFFICIENT Proceeds of life insurance taken out by the


CONSIDERATION (Sec. 85(G)) decedent on his own life shall be included in
Transfers, trusts, interests, rights, or powers the gross estate in the following cases:
(denominated as transfer in contemplation of (1) Beneficiary is the estate of the deceased,
death, revocable transfer and property his executor or administrator, irrespective
passing under general power of appointment) of whether or not the insured retained the
made, created, exercised or relinquished for a power of revocation; or
consideration in money or money’s worth, but (2) Beneficiary is other than the decedent’s
is NOT a bona fide sale for an adequate and estate, executor or administrator, when
full consideration in money or money’s worth. designation of beneficiary is not expressly
made irrevocable.
The value to be included in the gross estate is
the excess of the fair market value of the When not taxable
property at the time of the decedent’s death (1) Irrevocably designated; how done –
over the consideration received. (i) By expressly stating it in the policy (the
designation of a beneficiary is
Example: PRESUMED to be revocable);
Case A: If bona fide sale – no value shall be (ii) By not changing the beneficiary during
included in the gross estate the lifetime of the insured. This was
Case B: If not a bona fide sale - the excess of added in Sec. 11, RA 10607 (2013)
the fair market value at the time of death over which provides that, “The insured
the value of the consideration received by the shall have the right to change the
decedent shall form part of his gross estate. beneficiary he designated in the policy
Case C: If inter vivos transfer is proven (i.e., it’s revocable), unless he has
fictitious/simulated – total value of the expressly waived this right in said
property at the time of death included in the policy. Notwithstanding the foregoing,
gross estate. in the event the insured does not
change the beneficiary during his
lifetime, the designation shall be
Case Case Case deemed irrevocable.”
Over (2) Accident insurance proceeds as the Tax
A B C
Code specifically mentions only life
FMV, transfer 2,000 1,500 2,500
insurance policies
FMV, death 2,500 2,000 2,000 (3) Proceeds of a group insurance policy
Consideration 2,000 800 0 taken out by a company for its employees.
received (4) Amount receivable by any beneficiary
irrevocably designated in the policy of
Value included in the 0 1,200 2,000 insurance by the insured. The transfer is
Gross Estate absolute and the insured did not retain
any legal interest in the insurance
The transfer for insufficient consideration (5) Amount receivable by any beneficiary
must fall under any of the following: irrevocably designated in the policy of
(1) Transfer in contemplation of death; insurance by the insured. The transfer is
(2) Revocable transfer, or absolute and the insured did not retain
(3) Property passing under a GPA. any legal interest in the insurance
(6) Proceeds of insurance policies issued by
Otherwise, the tax imposed is donor’s tax. the GSIS to government officials and
employees, which are exempt from all
PROCEEDS OF LIFE INSURANCE (Sec. 85(E)) taxes; (PD 1146)
Inclusion of proceeds of life insurance to the (i) Benefits accruing under the SSS law
gross estate depends on i) designated (RA 1161)
beneficiary; ii) revocability of the insurance; iii) (7) Proceeds of life insurance payable to heirs
period and source of funds used in premiums. of deceased members of military
personnel (RA 360)
When included in the gross estate
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i. FUNERAL EXPENSES (Sec. 86 (A)(1)(a))


Actual funeral expenses shall mean (i) those
CAPITAL OF THE SURVIVING SPOUSE which are actually incurred (ii) in connection
[Sec.85(H), NIRC] with, and before the interment or burial of the
It is NOT part of the gross estate of the deceased and (iii) must be paid out of the
deceased spouse. (See Exclusions) estate and not by another person or out of
contributions from friends and relatives. These
To determine the conjugal or separate must be (iv) duly supported by receipts or
character of proceeds, the following factors invoices or other evidence to show that they
are considered: were actually incurred. They include:
(1) Policy was taken before marriage – Source (a) The mourning apparel of the surviving
of funds determines ownership of the spouse and unmarried minor children of
proceeds of life insurance the deceased bought and used on the
(2) Policy was taken during marriage occasion of the burial;
(a) Beneficiary is estate of the insured – (b) Expenses for the deceased’s wake,
Proceeds are presumed conjugal; including food and drinks;
hence, one-half share of the surviving (c) Publication charges for death notices;
spouse is not taxable (d) Telecommunication expenses incurred in
(b) Beneficiary is third person – Proceeds informing relatives of the deceased;
are payable to beneficiary even in (e) Cost of burial plot, tombstones,
premiums were paid out of the monument or mausoleum but not their
conjugal upkeep. In case the deceased owns a
family estate or several burial lots, only
CLAIMS AGAINST INSOLVENT PERSONS the value corresponding to the plot where
For estate tax purposes, an insolvent is a he is buried is deductible;
person whose properties are not sufficient to (f) Interment and/or cremation fees and
satisfy, whether fully or partially, his debts. A charges; and
judicial declaration of insolvency is not (g) All other expenses incurred for the
required but the incapacity of the debtor performance of the rites and ceremonies
should be proven. As a rule, regardless of the incident to interment.
amount the debtor is unable to pay, the full
amount of the claim against the insolvent Limitation: Allowable deduction is not to
person should be included in the gross estate exceed P200,000 and whichever is lower of:
of the decedent. The portion of the claim (a) Actual funeral expenses (whether paid
which is not collectible should be allowed as a or not) up to the time of interment, or
deduction from the gross estate. (b) An amount equal to 5% of the gross
estate.
The unpaid portion of the funeral expenses
K. DEDUCTIONS FROM ESTATE incurred which is in excess of the P200,000
threshold is NOT allowed to be claimed as a
Deductions and/or losses already deducted deduction under “claims against the estate”.
from gross income can no longer be deducted (Sec. 6(A)(1), RR 02-200)
from gross estate. Further, deductions should N.B. – Compare (1) ACTUAL, (2) 5% GROSS, or
not be compensated for by any insurance or (3) 200K and pick whichever is lower.
extrajudicial settlement. Otherwise, they are
not valid deductions. Not included are: (i) Expenses incurred after
the interment, such as for prayers, masses,
entertainment, or the like are not deductible.
(ii) Any portion of the funeral and burial
K.1. ORDINARY DEDUCTIONS expenses borne or defrayed by relatives and
friends of the deceased are not deductible. (iii)
1.A. Expenses, Losses, Indebtedness and Taxes, Medical expenses as of the last illness will not
Etc. (ELIT) form part of funeral expenses but should be

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claimed as medical expenses. (Sec. 6, RR 2- (6) Clerk hire


2003) (7) Costs of preserving and distributing the
estate
Illustrations (8) Costs of storing or maintaining property of
(a) If five percent (5%) of the gross estate is the estate
P220,000 and the amount actually (9) Brokerage fees for selling property of the
incurred is P215,000, the maximum estate
amount that may be deducted is only Not deductible
P200,000; (a) Compensation paid to a trustee of the
(b) If five percent (5%) of the gross estate is P decedent’s estate for his services rendered
100,000 and the total amount incurred is for the purpose of managing the
P150,000 where P20,000 thereof is still decedent’s real estate for the benefit of
unpaid, the only amount that can be the testamentary heirs (Lorenzo v.
claimed as deduction for funeral expenses Posadas)
is P100,000. The entire P50,000 excess (b) Expenses incurred by the presumptive heir
amount consisting of P30,000 paid and that of her witnesses for appearance
amount and P20,000 unpaid amount can at the trial to oppose the probate of a will.
no longer be claimed as FUNERAL (c) Attorney’s fees incident to litigation
EXPENSES. Neither can the P20,000 incurred by the heirs in asserting their
unpaid portion be deducted from the respective rights, or claims as to who are
gross estate as CLAIMS AGAINST THE entitled to the estate left by the deceased.
ESTATE. (d) Premiums paid by the administrator on his
bond, being exclusively used for his
ii. JUDICIAL EXPENSES OF TESTAMENTARY account, since the giving of the bond is in
AND INTESTATE PROCEEDINGS (Sec. 86 the nature of a qualification for the office
(A)(1)(b)) and not necessary in the settlement of his
Expenses allowed as deduction under this estate.
category are (i) those incurred in the inventory-
taking of assets comprising the gross estate, iii. CLAIMS AGAINST THE ESTATE (Sec. 86
their administration, the payment of debts of (A)(1)(c))
the estate, as well as the distribution of the The word “claims” is generally construed to
estate among the heirs. They are (ii) incurred mean (i) debts or demands of a pecuniary
during the settlement of the estate but not nature (ii) which could have been enforced
beyond the last day prescribed by law, or the against the deceased in his lifetime and could
extension thereof, for the filing of the estate have been reduced to simple money
tax return. (Sec. 86 (A)(2), RR 2-2003). judgements. These are liabilities of the estate
or indebtedness of such (iii) arising out of:
These expenses must be (iii) for the benefit of contract, tort, or operation of law. (Dizon v
the estate, and (iv) substantiated by recipts CTA, 2008)
OR if unpaid, should be supported by a sworn
statement of account issued and signed by the Requisites for Deductibility of Claims Against
creditor. the Estate:
(a) The liability represents a personal
Judicial expenses may include: obligation of the deceased existing at the
(1) Fees of executor or administrator time of his death except unpaid
(2) Attorney’s fees – These refer to the obligations incurred incident to his death
notarial fee paid for the extrajudicial such as unpaid funeral expenses (i.e.,
settlement is deductible since such expenses incurred up to the time of
settlement effected a distribution of the internment) and unpaid medical expenses
decedent’s estate to his lawful heirs. [CIR which are classified under a different
v. CA (2000)] category of deductions.
(3) Court fees (b) The liability was contracted in good faith
(4) Accountant’s fees and for adequate and full consideration in
(5) Appraiser’s fees money or money’s worth
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(c) The claim must be a debt or claim which is its receivable showing the unpaid balance
valid in law and enforceable in court; of the decedent-debtor
(d) The indebtedness must not have been
condoned by the creditor or the action to In case the creditor is an individual who is
collect from the decedent must not have no longer required to file ITRs with the
prescribed. Bureau, a duly notarized declaration by
(e) They must be reasonably certain in the creditor of his capacity to lend at the
amount, and substantiated. time when the loan was granted without
prejudice to verification that may be made
Substantiation Requirements by the BIR to substantiate such
declaration of the creditor.
In case of simple loan (including advances):
(1) The debt instrument must be duly If the creditor is a non-resident, the
notarized at the time the indebtedness executor/ administrator or any of the legal
was incurred, such as promissory note or heirs must submit a duly notarized
contract of loan, except for loans granted declaration by the creditor of his capacity
by financial institutions where to lend at the time when the loan was
notarization is not part of the business granted, authenticated or certified to as
practice/policy of the financial institution- such by the tax authority of the country
lender. where the non-resident creditor is a
resident
(2) Duly notarized Certification from the
creditor as to the unpaid balance of the (4) A statement under oath executed by the
debt, including interest as of the time of administrator or executor of the estate
death. If the creditor is: reflecting the disposition of the proceeds
- CORPORATION: sworn certification of the loan if it was contracted within 3
should be signed by the President, or Vice- years prior to the death of the decedent.
President, or other principal officer of the
corporation. If the unpaid obligation arose from purchase
- PARTNERSHIP: sworn certification of goods or services:
should be signed by any of the general (1) Pertinent documents evidencing the
partners. purchase of goods or service, such as sales
- BANK/FINANCIAL INSTITUTIONS: invoice/delivery receipt (for sale of goods),
Certification shall be executed by the or contract for the services agreed to be
branch manager of the bank/financial rendered (for sale of services), as duly
institution which monitors and manages acknowledged, executed and signed by
the loan of the decedent-debtor. decedent-debtor and creditor, and
- INDIVIDUAL: sworn certification should statement of account given by the creditor
be signed by him. as duly received by the decedent-debtor

In any of these cases, the one who should (2) Duly notarized certification from the
certify must not be a relative of the creditor as to the unpaid balance of the
borrower within the 4th civil degree, either debt, including interest as of the time of
by consanguinity or affinity, except when a death.
copy of the promissory note or other
evidence of the indebtedness must is filed (3) Certified true copy of the latest audited
with the RDO having jurisdiction over the balance sheet of the creditor with a
borrower within 15 days from the detailed schedule of its receivable
execution thereof. showing the unpaid balance of the
decedent-debtor. Moreover, a certified
(3) Proof of financial capacity of the creditor to true copy of the updated latest subsidiary
lend the amount at the time the loan was ledger/records of the debtor-decedent,
granted, as well as its latest audited should likewise be submitted.
balance sheet with a detailed schedule of
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Where the settlement is made through the mortgaged property, to the extent of the
Court in a testate or intestate proceeding, decedent’s interest therein, should always
pertinent documents filed with the Court form part of the taxable gross estate. (RR 2-
evidencing the claims against the estate, 2003)
and the Court Order approving the said
claims, if already issued, in addition to the Unpaid Taxes
documents mentioned in the preceding Requisites for Deductibility
paragraphs. (a) Taxes which have accrued as of or before
the death of the decedent (if it was
iv. CLAIMS AGAINST INSOLVENT PERSONS incurred after, it is chargeable to the
(Sec. 86 (A)(1)(d)) income of the estate), and
These are claims of the estate (i) against (b) Unpaid as of the time of his death,
insolvent persons (ii) which are not collectible. regardless of whether or not it was
To be deductible from the gross estate: incurred in connection with trade or
business
Additional Requirements:
(a) The incapacity of the debtor to pay his Not included:
obligation should be proven, although a (a) Income tax upon income received after
judicial declaration of insolvency is not death, or
required; (b) Property taxes not accrued before his
(b) The full amount owed by the insolvent death, or
must first be included in the decedent’s (c) The estate tax due from the transmission
gross estate; and of his estate
(c) If the insolvent could only pay a partial
amount, the full amount owed shall be Casualty Losses
included in the gross estate, and the Requisites for Deductibility
amount uncollectible shall be allowed as (a) Incurred during the settlement of the
a deduction. estate
N.B. – Unpaid claims on funeral expenses in (b) Arising from fires, storms, shipwreck, or
excess of 200K cannot be designated as other casualties from robbery, theft, or
claims against the estate. embezzlement
(c) Not compensated by insurance or
v. UNPAID MORTGAGES, LOSSES AND TAXES otherwise
(Sec. 86(A)(1)(e)) (d) At the filing of the estate tax return, such
losses have not been claimed as a
Unpaid Mortgages deduction for income tax purposes in an
Requisites for Deductibility [Sec. 6-A5(a), RR income tax return
2-2003] (e) Incurred not later than the last day for the
(a) The value of the decedent’s interest payment of the estate tax as prescribed by
therein, undiminished by such mortgage law.  6 MONTHS (or +30 days if an
or indebtedness, is included in the value of extension is granted) after death.
the gross estates. Therefore, all casualty losses AFTER 6
(b) The mortgages were contracted bona fide months (or +30 days) are not deductible.
and for an adequate and full consideration
in money or money’s worth. Casualty loss can be allowed as deduction in
one instance only, either for income tax
In case the loan of the decedent is only an purposes or estate tax purposes. (Sec. 6(A)(5)),
accommodation loan where the loan proceeds Rev. Reg 2-2003)
went to another person, the value of the
unpaid loan must be included as a receivable NOTE: See Formula for computing Ordinary
of the estate. If there is a legal impediment to Deductions of NRA above.
recognize the same as a receivable of the
estate, the said unpaid obligation shall not be 1.B. Property Previously Taxed [Sec. 86(A)(2)]
allowed as a deduction. In all instances, the a.k.a. VANISHING DEDUCTIONS

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taxed or the aggregate value of such


This is an amount allowed to reduce the property if more than one item, as finally
taxable estate of a decedent where property: determined for the purpose of the prior
(1) Received by him from a prior decedent by estate tax (or gift tax) or the value of such
gift, bequest, device, or inheritance property in present decedent’s gross
(2) Transferred to him by gift, has been the estate, whichever is lower.
object of previous transfer transaction, (2) Deduction for mortgage or lien – The initial
subject to transfer tax, either donor’s tax value (in number 1 above) shall be reduced
or estate tax. by the total amount paid, if any, by the
present decedent on any mortgage or
Conditions other lien on the property where a
(1) There must be 2 deceased persons and the deduction was allowed, by reason of the
first one is the donor payment, of such mortgage or other lien
(2) The second decedent dies within 5 years from the gross estate of the prior decedent,
after the death of a prior decedent, or in or gift or donor, in determining the estate
case of gift, the decedent-donee dies tax of the prior decedent or the donor’s tax.
within the same period after the date of (3) Deductions for expenses, etc. – The value
the gift. as reduced in #2 shall be further reduced
by an amount which bears the same ratio
Requisites to the amounts allowed as deductions for:
(1) Death – The present decedent died within (a) Expenses, losses, indebtedness, and
5 years from the date of the prior decedent taxes (ordinary deductions), and
OR date of gift. (b) Transfers for public use as the amount
(2) Identity of the property– The property with otherwise deductible for property
respect to which deduction is sought can previously taxed bears to the value of
be identified as the one who received from the decedent’s gross estate; and
prior decedent, or from the donor, or as (4) Percentage of deductions – The vanishing
the property acquired in exchange for the deduction shall be the value (final basis) in
original property so received. #3 multiplied by the ff. percentages:
(3) Inclusion of the property – The property
must have formed part of the gross estate VD
If received by inheritance or gift
situated in the Philippines of the prior Rate
decedent, or have been included in the 100% Within 1 year prior to the death of
total amount of the gifts of the donor the present decedent
made within 5 years prior to the present 80% More than 1 year but not more than
decedent’s death. 2 years prior to the death of the
(4) Previous taxation of property – The estate decedent
tax on the prior succession, or the donor’s 60% More than 2 years but not more
tax on the gift must have been finally than 3 years
determined and paid by the prior decedent 40% More than 3 years but not more
or by the donor, as the case may be. than 4 years prior to the death of
(5) No previous vanishing deduction on the the decedent
property – No such deduction on the 20% More than 4 years but not more
property, or the property given in than 5 years prior to the death of
exchange therefor, was allowed in the decedent
determining the value of the net estate of
the prior decedent. This is intended to
preclude the application of the vanishing
deduction on the same property more
than once.

Limitations
(1) Value of property – The deduction is
limited by the value of property previously

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FORMULA FOR VANISHING DEDUCTIONS: (2) Benefits granted in case of separation


(please take note of the limitations above) beyond the control of the employee.

Value Taken of Property SPECIAL DEDUCTIONS


Less: Mortgage debt paid, if any
(A) Family Home (Sec. 86(A)(4))
= Initial Basis It is the dwelling house, including the land on
Less: Proportionate Deduction** which it is situated, where the husband and
wife, or a head of the family, and members of
= Final Basis their family reside, as certified to by the
Multiplied by Deduction Rate Barangay Captain of the locality. It is deemed
constituted on the house and lot from the time
VANISHING DEDUCTION it is actually occupied as the family residence
and considered as such for as long as any of its
**Proportionate Deduction beneficiaries actually resides therein. (Arts.
152 and 153, Family Code)
Initial Basis
Value of GE of present decedent
x (ELIT+TPU)
Temporary absence from the constituted
family home due to travel or studies or work
Note: Amount of Vanishing Deductions is NOT abroad, etc. does not interrupt actual
subtracted from the value of the CPG to occupancy. The family home is generally
determine the share of surviving spouse. It is characterized by permanency, that is, the
deducted from the exclusive property of the place to which, whenever absent for business
decedent. or pleasure, one still intends to return. (Sec.
6(D), RR 2-2003)
1.C. Transfers for Public Purpose (Sec. 86(A)(3))
These are (i) dispositions in a last will and It must be part of the ACP or CPG, or the
testament or transfers to take effect after exclusive properties of either spouse. It may
death (ii) in favor of the Government of the also be constituted by an unmarried head of a
Republic of the Philippines, or any political family on his or her own property. (Sec. 6(D),
subdivision thereof, for exclusively public RR 2-2003 citing Art. 156, FC).
purposes. The whole amount of all the
bequests, legacies, devises, or transfers to or For purposes of availing this deduction, a
for the use of shall be deductible from gross person may constitute only one family home.
estate, (iii) provided such amount or value had Sec. 6(D), RR 2-2003 citing Art. 161, FC.
been included in the computation of the gross
estate. Thus, there is no limitation for the Requisites for Deductibility (Sec. 6(D)(b), RR 2-
amount to be deducted. 2003)
(1) The family home must be the actual
1.D. Amounts Received by Heirs Under RA 4917 residential home of the decedent and his
(An Act Providing that Retirement Benefits of family at the time of his death, as certified
Employees of Private Firms shall not be subject by the barangay captain of the locality.
to attachment, levy, execution or any tax (2) The total value of the family home must be
whatsoever) [Sec. 86(A)(7)] included as part of the gross estate of the
decedent
Any amount received by the heirs from the (3) Allowable deduction must be in an
decedent’s employer as a consequence of the amount equivalent to the current FMV of
death of the decedent-employee in the family home as declared or included in
accordance with RA 4917, provided that such the gross estate, or the extent of the
amount is included in the gross estate of the decedent’s interest (whether
decedent. These include: conjugal/community or exclusive
(1) Retirement benefits from private firms property), whichever is lower, but in no
with private benefit plan, if the retiring case shall the deduction exceed
employee is 50 years old or older. This can P1,000,000.
only be availed once.
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(4) The decedent was married or if single, was nor (iii) any unpaid amount for medical
a head of the family. expenses incurred prior to the one-year period
(5) Along with the decedent, any of the from date of death be allowed to be deducted
beneficiaries must be dwelling in the from the gross estate under “Claims against
family home. the estate”. (RR 2-2003, Sec. 6-F)
(6) The family home as well as the land on
which it stands must be owned by the (D) Net Share of Surviving Spouse in CPG/ACP
decedent. Therefore, the FMV of the family (Sec. 86(C),; Sec. 6(H), RR 2-2003)
home should have been included in the
computation of the decedent’s gross (Compare with Capital of Suriving Spouse
estate. which is excluded from the gross estate).

Beneficiaries of a Family Home The amount deductible is the net share of the
(1) The husband and wife, or an unmarried surviving spouse in the CPG. The net share is
person who is the head of a family; and equivalent to ½ of 50% of the conjugal
(2) Their parents, ascendants, descendants, property after deducting the obligations
brothers and sisters, whether the chargeable to such property. Net share of the
relationship be legitimate or illegitimate, surviving spouse is neither an ordinary nor a
who are living in the family home and who special deduction.
depend upon the head of the family for
legal support. N.B. – There are three deductions with ceilings:
(1) Funeral expenses at P200,000; (2) Medical
Limitation: P1,000,000 expenses at P500,000, and (3) Family home at
1M.
(B) Standard Deduction (Sec. 86(A)(5), Sec.
6(E), RR 2-2003) L. EXCLUSIONS FROM ESTATE
An amount equivalent to one million pesos
(P1,000,000) shall be deducted from the Capital of the Surviving Spouse (Sec. 85(H))
gross estate without need of substantiation. Capital: property of the spouses brought into
marriage. Strictly speaking, capital under the
Civil Law refers to the property brought by the
(C) Medical Expenses (Sec. 86(A)(6); Sec. 6(F), husband to the marriage while that brought
RR 2-2003) into the marriage by the wife known is as
All medical expenses (cost of medicine, paraphernal property. (Domondon)
hospital bills, doctors’ fees, etc.) incurred
(whether paid or unpaid). Exclusive Property of Each Spouse
If ACP governs If CPG governs
Requisites for Deductibility property relations property relations
1. The expenses were incurred by the decedent
within 1 year prior to his death The community of The husband and wife
2. The expenses are duly substantiated with property shall consist place in a common
receipts and other documents in support of all the property fund the proceeds,
thereof owned by the spouses products, fruits, and
at the time of the income from their
Limitation Provided, that in no case shall the celebration of the separate properties
deductible medical expenses exceed Five marriage or acquired and those acquired by
Hundred Thousand Pesos (P500,000). thereafter. (Art. 91 either or both
Family Code) spouses through their
Not allowed as deduction: (i) Any amount of efforts or by chance,
medical expenses incurred within one year (1) The following are and, upon dissolution
from death in excess of P500,000 shall no excluded from of the marriage or of
longer be allowed as a deduction under this the community the partnership, the
subsection. Neither can (ii) any unpaid amount property: net gains or benefits
thereof in excess of the P500,000 threshold (a) Property obtained by either or
acquired by both spouses shall be
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gratuitous title divided equally partnership or by


by either between them, unless either or both
spouse, and the otherwise agreed in spouses. (Art. 118,
fruits as well as marriage Family Code)
the income settlements. (Art. (3) Whenever an
thereof, if any, 106, Family Code) amount or credit
unless it is payable within a
expressly (1) The following are period of time
provided by the exclusive property belongs to one of
donor, testator, of each spouse: the spouses, the
or grantor that (a) That which is sums collated
they shall form brought to the during the
part of the marriage as his marriage in
community or her own partial payments
property. (b) That which or by instalments
(b) Property for each acquires on the principal
personal and DURING the are considered
exclusive use of marriage by the exclusive
either spouse; gratuitous title property of the
however, (c) That which is spouse. However,
jewelry shall acquired by interest falling
form part of the right of due during the
community redemption, by marriage on the
property. barter or by principal belong
(c) Property exchange with to the conjugal
acquired before property partnership.
the marriage by belonging to (4) All property
either spouse only one of the acquired during
who has spouses the marriage
legitimate (d) That which is whether the
descendants purchased with acquisition
from a former exclusive appears to have
marriage, and money of the been made,
the fruits as wife or the contracted or
well as the husband (Art. registered in the
income, if any, 109, Family name of one or
of such Code) both spouses,, is
property. (Art. (2) Property bought presumed to
92 Family on instalments belong to the
Code) paid partly from conjugal
(2) Property acquired exclusive funds of partnership,
during the either or both unless it is proved
marriage is spouses and that it pertains
presumed to partly from exclusively to the
belong to the conjugal funds husband or to the
community, belong to the wife.
unless it is proved buyer or buyers if If separation of property governs property
that it is one of full ownership relations
those excluded was vested
therefrom. BEFORE the Separation of property may refer to present
marriage subject or future property or both. It may be total or
to reimbursement partial. In the latter case, the property not
advanced by the agreed upon as separate shall pertain to the
conjugal absolute community. (Art. 144, Family Code)

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M. TAX CREDIT FOR ESTATE TAXES


To each spouse shall belong all earnings PAID IN A FOREIGN COUNTRY
from his or her profession, business or It is a remedy against international double
industry, and all fruits, natural, industrial, or taxation. To minimize the onerous effect of
civil, due or received during the marriage taxing the same property twice, tax credit
from his or her separate property. (Art. 145, against Philippine estate tax is allowed for
Family Code) estate taxes paid to foreign countries.

Exemptions: Who may claim: RC/NRC/RA. Only the estate


(1) Where net estate does not exceed of a decedent who was a citizen or a resident
P200,000. (Sec. 84) of the Philippines at the time of his death can
(2) The following transmissions shall not be claim tax credit for any estate tax paid to a
taxed: foreign country.
(a) Merger of the usufruct in the owner
of the naked title General Rule
(b) Transmission or delivery of the The estate tax imposed by the NIRC shall be
inheritance or legacy by the fiduciary credited with the amounts of any estate tax
heir or legatee to the fideicomissary imposed by the authority of a foreign country.
(c) The transmission from the first heir,
legatee, or done in favor of another
beneficiary in accordance with the
desire of the predecessor
(d) All bequests, devises, legacies, or
transfers to social welfare, cultural
and charitable institutions, no part of
the net income of which inures to the
benefit of any individual, and
provided that not more than 30% of
the said bequests, etc shall be used
by such institution for administration
purposes.

Note: Effectivity of Family Code (Aug 3, 1988)


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

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Limitations on Credit
A. For Estate Taxes paid to one foreign country (Specific Country Limitation)
The amount of the credit in respect to the tax paid to any country shall not exceed the same proportion of
the tax against which such credit is taken, which the decedent's net estate situated within such country
taxable under the tax code bears to his entire net estate.

DECEDENT ' S NET ESTATE (FOREIGN COUNTRY)


𝑇AX CREDIT LIMIT = ENTIRE NET ESTATE
X PHILIPPINE ESTATE TAX

B. For estate taxes paid to 2 or more foreign countries (Global Limitation)


The total amount of the credit shall not exceed the same proportion of the tax against which such credit is
taken, which the decedent's net estate situated outside the Philippines taxable under the tax code bears to
his entire net estate.

DECEDENT ' S NET ESTATE (FOREIGN COUNTRY)


TAX CREDIT LIMIT = ENTIRE NET ESTATE
X PHILIPPINE ESTATE TAX

Compare the tax credit allowed under Limitation A and Limitation B. The lower of the two amounts is the
final allowable tax credit. In this case, the amount computed under Limitation A (4,400) is lower, thus it
becomes the final allowable tax credit.

If there is only one foreign country involved, both limitations will yield the same answer.

The resulting amount will be compared to the actual tax paid to the foreign country. The lower amount will
be the final allowable tax credit.

Illustration:

Net Estate – Philippines (reduced by all allowable P1,050,000


deductions, except standard deduction)
Country G Net Estate 300,000
Country H Net Estate 150,000
Tax paid/incurred:
Philippines 15,000
Country G 5,000
Country H 1,400
Net Estate – Philippines (reduced by all allowable P1,050,000
deductions, except standard deduction)

Net taxable estate is P500,000 (1,050,000 + 300,000 + 150,000 – 1,000,000 standard deduction). The
Philippine estate tax on P500,000 is P15,000

Solution – Limitation A
(1) Apply Formula A. The result after applying the formula above is compared to the tax actually paid for
each foreign country.
(2) The lower of the two amounts for each foreign country will be added to get the total tax credit allowed
under Limitation A.

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Amount Allowed (whichever is lower)


Country G
3,000
(300/1500 x 15,000) 3,000
Actually paid to Country G 5,000
Country H
1,500
(150/1500 x 15,000) 1,400
Actually paid to Country H 1,400
Tax credit allowed under Limitation A P 4,400

Solution – Limitation B:
(1) Apply Formula B. The result after applying the formula above is compared to the tax actually paid in
total to foreign countries.
(2) The lower of the two amounts will be added to get the total tax credit allowed under Limitation B.

Amount Allowed (Lower)

450/1500 x 15,000 4,500

Total foreign income taxes


6,400
paid
Tax credit allowed under Limitation A P 4,400

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(4) For estate tax returns showing a gross


N. FILING OF NOTICE OF DEATH value exceeding P2,000,000 - there must
(Section 89) be a statement duly certified to by a
Certified Public Accountant containing
Notice of Death the following:
When needed: (a) Itemized assets of the decedent with
(i) in all cases of transfers subject to tax; or their corresponding gross value at the
(ii) where, though exempt from tax, the value time of his death, or in the case of a
of the gross estate exceeds P20,000. non-resident, not a citizen of the
Philippines, of that part of his gross
Period of sending notice: A written Notice of estate situated in the Philippines;
Death must be given to the BIR. (b) Itemized deductions from gross estate
(a) Within 2 months after the death of the allowed in Section 86; and
decedent or (c) The amount of tax due whether paid or
(b) Within 2 months after the executor or still due and outstanding.
administrator or executor qualifies as such.
Remember:
Who will file: executor, administrator, or any of P20,000 – File Notice of Death
the legal heirs, as the case may be. P200,000 – File Estate Tax Return
P2,000,000 – Statement duly certified by
O. ESTATE TAX RETURN CPA
(Section 90 – 91)
Period for Filing
When Required (Copies in duplicate) General Rule: Filed within 6 months from the
(1) When the estate is subject to estate tax, decedent's death.
OR
(2) When, though exempt from tax, the gross Exception: The CIR shall have authority to
value of the estate exceeds Two hundred grant, in meritorious cases, a reasonable
thousand pesos (P200,000), OR extension not exceeding 30 days for filing the
(3) Regardless of the gross value of the estate, return.
when the said estate consists of registered
or registrable property such as real Who will file: executor, administrator, or any of
property, motor vehicle, shares of stock or the legal heirs, as the case may be, under oath.
other similar property for which a If there is no executor or administrator
clearance from the Bureau of Internal appointed, qualified, and acting within the
Revenue is required as a condition Philippines, any person in actual or
precedent for the transfer of ownership constructive possession of any property of the
thereof in the name of the transferee. decedent may file this return.

Contents Where to file the estate tax return and pay the
The executor, or the administrator, or any of tax due (Sec. 9, RR 2-2003)
the legal heirs, as the case may be, shall file a Resident Citizen (RC and RA)
return under oath in duplicate, setting forth: The executor or administrator shall register
(1) The value of the gross estate of the the estate of the decedent and secure a new
decedent at the time of his death, or in TIN from the RDO where the decedent was
case of a nonresident, not a citizen of the domiciled at the time of his death and shall file
Philippines, of that part of his gross estate the estate tax return and pay the
situated in the Philippines; corresponding estate tax with:
(2) The deductions allowed from gross estate (1) An authorized agent bank (AAB), or
in determining the net taxable estate; and (2) Revenue District Officer (RDO), or
(3) Such part of such information as may at (3) Collection Officer,
the time be ascertainable and such (4) Duly authorized Treasurer of the city or
supplemental data as may be necessary to municipality in which the decedent was
establish the correct taxes. domiciled at the time of his death, or

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Where the taxes are assessed by reason of


Non-resident decedent (NRA/NRC) with negligence, intentional disregard of rules and
executor or administrator in the Philippines regulations, or fraud on the part of the
The estate tax return shall be filed with and taxpayer, no extension will be granted by the
the TIN for the estate shall be secured from CIR.
the RDO where such executor or administrator
is registered. If extension granted, the CIR may require the
executor, or administrator, or beneficiary, as
If the executor or administrator is not the case may be, to furnish a bond in such
registered, the estate tax return shall be filed amount, not exceeding double the amount of
with and the TIN for the estate shall be the tax and with such sureties as the CIR
secured from the RDO having jurisdiction over deems necessary, conditioned upon the
the executor or administrator’s legal residence. payment of the said tax in accordance with the
terms of the extension.
Non-resident decedent does not have an
executor or administrator in the Philippines Effects of granting an extension
The estate tax return shall be filed with and (1) Payment of the amount in respect of which
the TIN for the estate shall be secured from the extension is granted on or before the
the Office of the Commissioner through RDO date of the expiration of the period of the
39 QC. extension
(2) Suspension of the running of statute of
The foregoing provisions notwithstanding, the limitations for deficiency assessment for
CIR may continue to exercise his power to the period of any extension
allow a different venue/place in the filing of (3) Any amount paid after the statutory due
tax returns. date of the tax, but within the extension
period, shall be subject to interest but not
Payment: Pay as you file to surcharge.
At the time the return is filed by the executor,
administrator or the heirs. Can estate tax be paid in installments? Yes!
The executor or administrator, or if there is In case the available cash of the estate is not
none appointed, qualified, and acting within sufficient to pay its total estate tax liability, the
the Philippines, then any person in actual or estate may be allowed to pay the tax by
constructive possession of any property of the installment and a clearance shall be released
decedent. The estate tax shall be paid by the only with respect to the property the
executor or administrator before the delivery corresponding/computed tax on which has
of the distributive share in the inheritance to been paid. (Sec. 9(F), RR 2-2003)
any heir or beneficiary.
Who are liable for the payment of estate taxes
Exception: In meritorious cases, the CIR may Primarily, the estate, through the executor or
grant a reasonable extension not exceeding administrator.
30 days from filing. (1) Payment shall be made before the delivery
of the distributive share in the inheritance
Extension of Payment (Sec. 9(E), RR 2-2003) to any heir or beneficiary.
The CIR may allow an extension of payment, if (2) If there are two or more executors or
he finds that the payment on the due date of administrators, all of them are severally
the estate tax or of any part thereof would liable for the payment of the tax.
impose undue hardship upon the estate or any (3) The estate tax clearance issued by the CIR
of the heirs: or the RDO having jurisdiction over the
(1) Extension not to exceed 5 years, in case estate, will serve as the authority to
the estate is settled judicially, or distribute the remaining properties/share
(2) 2 years in case the estate is settled in the inheritance to the heir or beneficiary.
extrajudicially.
Subsidiarily, heirs or beneficiaries, for the
payment of that portion of the estate which his
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distributive share bears to the value of the


total net estate.
The extent of his liability, however, shall in no
case exceed the value of his share in the
inheritance.

Claims for taxes, whether assessed before or


after the death of the deceased, can be
collected from the heirs even after the
distribution of the properties of the decedent,
xxx. The heirs shall be liable therefor, in
proportion to their share in the inheritance.
Marcos v. CA (1997)

Tax deficiency after distribution of properties


(1) Sue all the heirs and collect from each of
them the amount of tax proportionate to
the inheritance received
(2) By virtue of a lien created under Sec 219,
sue only one heir and subject the property
he received from the estate to the
payment of estate tax. Such heir may go
against the other heirs.

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Tax Rates:
If the Net Estate is
Over But not Over The Tax Shall be Plus Of the Excess Over
P 200,000.00 Exempt
P 200,000.00 500,000.00 0 5% P 200,000.00
500,000.00 2,000,000.00 P 15,000.00 8% 500,000.00
2,000,000.00 5,000,000.00 135,000.00 11 % 2,000,000.00
5,000,000.00 10,000,000.00 465,000.00 15 % 5,000,000.00
10,000,000.00 1,215,000.00 20 % 10,000,000.00

Exempt: If net taxable estate ≤ 200,000

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II. Donor’s Tax (1)


(2)
To supplement estate tax;
To prevent avoidance of income tax through
the device of splitting income among
A. BASIC PRINCIPLES numerous donees, who are usually members
of a family or into many trusts, with the donor
The donor’s tax is imposed on donations inter thereby escaping the effect of the progressive
vivos or those made between living persons to rates of income tax.
take effect during the lifetime of the donor. It
supplements the estate tax by preventing the If donor is:
avoidance of the latter through the device of RC/NRC/RA = liable for donor’s tax
donating the property during the lifetime of the REGARDLESS of where the gift was made or
deceased. where property is located

It shall not apply unless and until there is a NRA = liable for donor’s tax only if the property
completed gift. The transfer of property by gift is donated is within the Philippines.
perfected from the moment the donor knows of
the acceptance by the donee; it is completed by E. REQUISITES OF VALID DONATION
delivery, either actually or constructively, of the (Art 725, NCC)
donated property, to the donee. Thus, the law in
force at the time of the perfection/completion of Requisites of a VALID and COMPLETE donation
the donation shall govern the imposition of the (1) Donative intent of the donor3
donor’s tax. (Sec. 11, RR 2-2003) (2) Capacity of the donor
(3) Delivery of the donated property
B. DEFINITION (4) Acceptance of the donee
(5) Donation must be in the proper form
A donor’s tax is levied, assessed, collected and (a) Movable: orally or in writing if value is
paid upon the transfer by any person, resident or equal to or less than P5,000. Otherwise,
nonresident, of the property by gift. (Sec. 98(A), it shall be in writing.
NIRC). It shall apply whether the transfer is in (b) Immovable: must be made in a public
trust or otherwise, whether the gift is direct or document.
indirect, and whether the property is real or Re: acceptance (Sec. 11, RR 2-2003)
personal, tangible or intangible. [Sec. 98(B), (1) For movables exceeding 5K – Acceptance
NIRC] shall be in writing (Art. 748, Civil Code)
(2) For immovable (Art. 749, Civil Code) –
It is the tax on donations. Thus, it is a tax on (i) an (a) Must be in the same deed of donation; or
act of the donor disposing gratuitously of a (b) In a separate public document – the
thing/right in favour of a done located within the donor shall be notified thereof in an
Philippines, and on (ii) sales/exchanges of authentic form, and this step shall be
properties, other than real property (defined in noted in both instruments
Sec 24D) classified as capital asset within the (c) But it shall not take effect unless it is
Philippines, for less than adequate and full done during the lifetime of the donor.
consideration in money or money’s worth.
A gift that is incomplete because of reserved
C. NATURE powers becomes complete when either:
(a) the donor renounces the power OR
Donor’s tax is not a property tax but a tax (b) his right to exercise the reserved power
imposed on the transfer of property by way of gift ceases because of the happening of some
inter vivos. [Sec 11, RR 2-2003 citing Lladoc v. CIR event or contingency or the fulfillment of
(1965)] some condition, other than because of
the donor’s death. [Sec. 11, RR 2-2003]
D. PURPOSE OR OBJECT

3 Note: The transfers which may be constituted as


donation is exempt from the donative intent requirement.
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F. TRANSFERS WHICH MAY BE and the fair market value of the property, if any,
CONSTITUTED AS DONATION received as consideration shall be deemed a gift
subject to the donor’s tax under Sec. 100 of the
(1) Sale, exchange or transfer of property for Tax Code, as amended.”
insufficient consideration
(2) Condonation or remission of debt where the G. TRANSFER FOR LESS THAN ADEQUATE
debtor did not render service in favor of the AND FULL CONSIDERATION
creditor
In order for the rule to apply, there must be 1) a
Condonation or remission of debt is defined transfer of property, other than real property
as an act of liberality, by virtue of which, classified as a capital asset and subject to capital
without receiving any equivalent, the creditor gains tax under Sec. 24 (D) and 2) the transfer
renounces the enforcement of the obligation, was for less than an adequate and full
which is extinguished in its entirety or in that consideration in money or money’s worth.
part or aspect of the same to which the
remission refers. It is an essential In this case, the amount by which the fair market
characteristic of remission that it be value of the property exceed the value of the
gratuitous, that there is no equivalent consideration shall be considered a gift.
received for the benefit given; once such
equivalent exists, the nature of the act H. CLASSIFICATION OF DONOR
changes. It may become dation in payment
when the creditor receives a thing different Donor’s Tax applies to individuals and
from that stipulated; or novation, when the corporations (in their secondary purpose). They
object or principal conditions of the may be classified into:
obligation should be changed; or (a) Residents (RC/RA/DC/RFC)
compromise, when the matter renounced is (b) Non-Residents (NRC/NRA/NRFC)
in litigation or dispute and in exchange of Such classification is important in determining
some concession which the creditor receives. the deductions from the gross gift of the donor,
(Dizon v CTA, 2008) and in filing the return.

(3) Renunciation in favor of other heirs (Sec 11, Situs of Intangible Personal Properties
RR 2-2003) General Rule: Mobilia Sequuntur Personam
(a) Renunciation by the surviving spouse of Principle: Taxation of intangible personal
their share in the ACP/CPG after the properties (such as credits, bills, bank deposits
dissolution of the marriage in favor of promissory notes, and corporate stocks) follows
heirs of the deceased spouse or any other the residence/domicile of owner thereof. Situs is
person/s the domicile or residence of the owner. (Collector
(b) Renunciation by an heir, specifically and v Fisher)
categorically in favor of identified heir/s Exceptions:
to the exclusion or disadvantage of the (1) When it is inconsistent with express
other co-heirs in the hereditary estate provisions of law
However, general renunciation by an heir, (2) When justice does not demand that it should
including the surviving spouse, of their be, as where the property in fact has a situs
share in the hereditary estate left by the elsewhere
decedent is NOT subject to DT
Rule of Reciprocity
(4) Sale of shares not listed and traded in a local Same as in Estate Tax. See discussion above.
stock exchange below FMV. Sec. 7.c.1.4, RR 6-
2008 provides: “In case the fair market value of
the shares of stock sold, bartered, or exchanged
is greater than the amount of money and/or fair
market value of the property received, the excess
of the fair market value of the shares of stock sold,
bartered or exchanged over the amount of money
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I. DETERMINATION OF GROSS GIFT (INCLUDING COMPOSITION OF GROSS GIFT)

RC/NRC/RA NRA
Composition and Determination of Gross Gift
(a) Real property wherever situated (a) Real property located in the Phil.
(b) Tangible personal property wherever situated (b) Tangible personal property located in the Phil.,
(c) Intangible personal property wherever situated (c) Intangible personal property with a situs in the
Phil. (subject to the rule of reciprocity)

Note: If there is reciprocity, intangible assets are


excluded from gross gifts

Deductions and Exemptions from GROSS gift to arrive at NET Gifts


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

(1) Dowries or donations made: (1) NONE


(a) On account of marriage
(b) Before its celebration or within one year
thereafter
(c) By parents to each of their legitimate,
recognized natural, or adopted children
(d) To the extent of the first P10,000

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

(3) Gifts in favor of an educational and/or charitable, religious, cultural or social welfare corporation,
institution, accredited nongovernment organization, trust or philanthropic organization or research
institution or organization, Provided not more than 30% of said gifts will be used by such donee for
administration purposes.

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

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NOT SUBJECT TO DONOR’S TAX liability value is the indicated value of the
(1) Contributions to candidate or political party equity.
for campaign purposes duly reported to
COMELEC Note:
(2) Gift to Parish Priest or Church (applies only to Where property is transferred for less than an
real property tax) adequate and full consideration in money or
(3) Onerous Donations or Donations in exchange money’s worth, then the amount by which the
for goods/services (since they are subject to FMV of the property at the time of the execution
income tax) of the Contract to Sell or execution of the Deed of
Sale which is not preceded by a Contract to Sell
SUBJECT TO DONOR’S TAX exceeded the value of the agreed or actual
Gratuitous Donations to Homeowners’ consideration or selling price shall be deemed a
Association gift, and shall be included in computing the
amount of gifts made during the calendar year.
J. VALUATION OF GIFTS MADE IN [Sec. 11, RR 2-2003]
PROPERTY N.B. – Applies also to sale, barter, or exchange of
shares of stock not listed and traded in a local
Taxable Base: stock exchange at prices below the FMV. (Sec. 7,
Net gifts i.e., net economic benefit from the RR 6-2008)
transfer that accrues to the donee AT THE TIME
OF DONATION However, where the consideration is fictitious, the
(1) If gift is personal property = FMV at the time entire value of the property shall be subject to
of donation donor’s tax.
(2) If gift is real property = whichever is HIGHER
(a) FMV as determined by the CIR (Zonal Donation to a Political Candidate
Value) or Prior to RA 7166, a donation for a political
(b) FMV in the latest schedule of values fixed candidate was subject to donor’s tax. (ACCRA v
by the provincial and city assessor (MV CIR)
per Tax Declaration)
Under RA 7166, contributions duly reported to the
NOTE: Real property considered as capital assets BIR are not subject to donor’s tax, as long as it is
under the Tax Code are exempted from this rule utilized in his campaign.
because the taxable value taken into account in
the computation of tax is the higher of either the Unutilized/excess campaign funds, that is,
zonal value or the assessor’s value; not the campaign contributions net of the candidate’s
consideration. Therefore, the insufficiency and campaign exepnditures, shall be considered as
inadequacy of the consideration paid would not subject to income tax and as such, must be
affect the computation of the tax due and included in the candidate’s taxable income as
payable [Sec. 100 in relation to Sec. 24(d), NIRC] stated in his/her ITR filed for the subject taxable
year (Sec. 2, RR 7-2011)
Under Section 24(d), the fair market value itself,
if higher than the gross selling price, is the basis
for computing the capital gains tax imposed
upon the sale of such capital assets.

(3) If there is an improvement = construction cost


(based on the building permit and/or
occupancy permit) + 10% per year after the
year of construction; or the FMV based on the
latest tax declaration.
(4) If unlisted stocks = Adjusted Net Asset
Method shall be used whereby all assets and
liabilities are adjusted to fair market values.
The net of adjusted asset minus the adjusted
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K. TAX CREDIT FOR DONOR’S TAXES PAID IN A FOREIGN COUNTRY

Who may claim the tax credit


(1) Resident citizen
(2) Non-resident citizen
(3) Resident alien

1. Per Country Limit

Net Gift (Foreign Country)


x Philippine Donor's Tax
Entire Net Gift

2. Worldwide Limit

Net Gift (All Countries)


x Philippine Donor's Tax
Entire Net Gift

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L. EXEMPTIONS OF GIFTS FROM DONOR’S (5) Relationship of the donor to the donee;
TAX (6) Such further information as the CIR may
(See table above) require.

(1) Encumbrances on the property donated if Period for Filing


assumed by the donee in the deed of General Rule: The return must be filed within 30
donation. days after the date when the gift was made or
(2) Donations made to entities exempted under completed. The tax due thereon shall be paid at
special laws. the same time that the return is filed.
(a) Aquaculture Department of the
Southeast Asian Fisheries Development Who will file: Any person who made a gift, such
Center of the Philippines must be filed under oath.
(b) Development Academy of the Philippines
(c) Integrated Bar of the Philippines Where to file the donor’s tax return and pay the tax
(d) International Rice Research Institute due (Sec. 9, RR 2-2003)
(e) National Museum
(f) National Library Resident
(g) National Social Action Council Unless the CIR permits otherwise, the return shall
(h) Ramon Magsaysay Foundation be filed and tax paid to:
(i) Philippine Inventor’s Commission (1) To Authorized Agent Bank (AAB) or the
(j) Philippine American Cultural Foundation Revenue District Officer having jurisdiction
(k) Task Force on Human Settlement on the over the place of the domicile of the donor at
donation of equipment, materials and the time of the transfer.
services (2) If no AAB = to the Revenue Collection Officer
or duly Authorized City or Municipal
Treasurer where the donor was domiciled at
M. PERSON LIABLE the time of the transfer,
(see Classification of Donor) (3) if no legal residence in Phil or NRA = with
Revenue District No. 39 - South Quezon City
Every person, whether natural or juridical, or with the Philippine Embassy or Consulate
resident or non-resident, who transfers or causes in the country where donor is domiciled at the
to transfer property by gift, whether in trust or time of the transfer.
otherwise, whether the gift is direct or indirect
and whether the property is real or personal, Non-residents
tangible or intangible. (Sec. 98, NIRC) (1) The Philippine Embassy or Consulate in the
country where he is domiciled at the time of
DONOR’S TAX RETURN the transfer, or
Separate return is filed for each gift made on (2) Directly with the Office of the Commissioner.
different dates during the year reflecting therein
any previous net gifts made in the same calendar Payment: Pay as you file.
year. In case of donation to relatives, only one
return shall be filed for several gifts by the donor N. TAX BASIS
to the different donees on the same date. If the
gift involves CPG, each spouse shall file separate The tax for each calendar year shall be computed
return with respect to his/her respective share in on the basis of the total net gifts made during the
the CPG. calendar. (Sec. 99, NIRC)

Contents “Net Gifts”


(1) Each gift made during the calendar year (a) The net economic benefit from the transfer
which is to be included in computing net gifts; that accrues to the donee.
(2) The deductions claimed and allowable; (b) Accordingly, if a mortgaged property is
(3) Any previous net gifts made during the same transferred as a gift, but imposing upon the
calendar year; donee the obligation to pay the mortgage
(4) The name of the donee; liability, then the net gift is measured by
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deducting from the fair market value of the


property the amount of the mortgage
assumed. (Sec. 11, RR 2-2003)

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

If there are several gifts during the year


Gross Gifts made on a certain date
Less: Deductions from gross gifts
-----------------------------------------------------
Net gifts made on a certain date
Add: Prior Net gifts during the year
-----------------------------------------------------
=Aggregate Net Gifts
Multiply by: Tax rate
-----------------------------------------------------
= Donor’s Tax on Aggregate Net Gifts
Less: Donor’s Tax Paid on Prior Net Gifts
-----------------------------------------------------
Donor’s Tax Due on the Net Gifts to Date
Less: Tax Credit, if any
-----------------------------------------------------
= Donor’s Tax Due, if any

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Tax Rate
(1) IF NOT A STRANGER

Net Gift Over But not Over The Tax Shall be Plus Of the Excess Over
100,000.00 Exempt
100,000.00 200,000.00 0 2% 100,000.00
200,000.00 500,000.00 P 2,000.00 4% 200,000.00
500,000.00 1,000,000.00 14,000.00 6% 500,000.00
1,000,000.00 3,000,000.00 44,000.00 8% 1,000,000.00
3,000,000.00 5,000,000.00 204,000.00 10% 3,000,000.00
5,000,000.00 10,000,000.00 404,000.00 12% 5,000,000.00
10,000,000.00 and over 1,004,000.00 15% 10,000,000.00

(2) IF A STRANGER: 30%

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

Donation made to a stranger is subject to 30% of the net gift. A stranger is a person who is not a:
 Brother, sister (whether by whole or half blood), spouse, ancestor and lineal descendants; or
 Relative by consanguinity in the collateral line within the fourth degree of relationship.

SUMMARY OF TRANSFER TAXES

TRANSFER TAXES
Estate Tax Donor’s Tax
Time for filing a return and payment of tax
FILED: within six (6) months from the decedent's NOTE: separate return is filed for each gift made on
death. different dates during the year reflecting therein
E: not exceeding 30 days (in meritorious cases) any previous net gifts made in the same calendar
year.
NB: Written notice of death to CIR w/in 2 mos.
After death FILED: within thirty (30) days after the gift
(donation) is made
PAID: before the delivery of the distributive share
in the inheritance to any heir or beneficiary; upon In case of donation to relatives, only one return shall
filing of return. be filed for several gifts by the donor to the different
E: extension (when payment on the due date donees on the same date.
would impose undue hardship) not to exceed
1. 5 years, in case the estate is settled through the If the gift involves CPG, each spouse shall file
courts; or separate return wrt his/her respective share in the
2. 2 years in case the estate is settled extra- CPG.
judicially.

NB: when extension is granted, a bond may be


required by CIR ≤ 2x amount of tax
Where to file and to whom paid
General Rule: to the Authorized Agent Bank Resident
(AAB), Revenue Collection Officer (RCO) or duly GR: to AAB of the RDO having jurisdiction over the
authorized Treasurer of the city or municipality in place of the domicile of the donor at the time of the
the Revenue District Office having jurisdiction over transfer.
the place of domicile of the decedent at the time
of his death
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Exception:
Exception: If NRA/NRC, (1) If no AAB = to the RCO or duly Authorized City
If w/ Aor, Eor in Phil = to the AAB of the RDO or Municipal Treasurer where the donor was
where such Aor,Eor is registered/domiciled, if not domiciled at the time of the transfer,
yet registered with the BIR.
If w/o Aor,Eor in Phil = to AAB under the (2) If no legal residence in Phil or NRA = with
jurisdiction of RDO No. 39 Revenue District No. 39 - South Quezon City or
with the Philippine Embassy or Consulate in the
country where donor is domiciled at the time of
the transfer.

Non-resident
(1) The Philippine Embassy or Consulate in the
country where he is domiciled at the time of the
transfer, or
(2) Directly with the Office of the Commissioner.
Who should file
(1) The Eor/Aor or any of the legal heirs of the Any person, natural or juridical, resident or non-
decedent, whether resident or non-resident of resident, who transfers or causes to transfer
the Philippines, under any of the following property by gift, whether in trust or otherwise,
situations: whether the gift is direct or indirect and whether the
(a) In all cases of transfers subject to estate property is real or personal, tangible or intangible.
tax;
(b) Where though exempt from estate tax, the
gross value of the estate exceeds two
hundred thousand (P200,000) pesos; or
(c) Regardless of the gross value of the
estate, where the said estate consists of
registered or registrable property such as
real property, motor vehicle, shares of
stock or other similar property for which a
clearance from the BIR is required as a
condition precedent for the transfer of
ownership therof in the name of the
transferee; or
(2) If there is no executor or administrator
appointed, qualified, and acting within the
Philippines, then any person in actual or
constructive possession of any property of the
decedent.
NB: Eor/Aor has the primary obligation to pay the
estate tax but the heir or beneficiary has subsidiary
liability for the payment of that portion of the
estate which his distributive share bears to the
value of the total net estate. The extent of his
liability, however, shall in no case exceed the value
of his share in the inheritance.

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ESTATE TAX

EXCLUSIVE COMMUNITY TOTAL


Gross Estate4
Add:
Taxable Transfers & Others
Revocable Transfers/Donation Mortis Causa
Transfers in contemplation of death
Property passing under GPoA Value Taken of Property
Transfers for insufficient consideration5 Less: Mortgage debt paid, if any
Decedent’s Interest Accrued6
Proceeds of Life Insurance w/ Initial Basis
revocable beneficiary7 Less: Proportionate Deduction
Family Home Final Basis
Claims against an Insolvent Person8 Multiplied by Deduction Rate
Amount received by heirs
VANISHING DEDUCTION

**Proportionate Deduction
Initial Basis
=
Value of GE of present decedent
x (ELIT+TPU)

Less: (Ordinary Deductions)


7 ELIT9
Vanishing Deductions
Transfers for Public Use
Retirement Benefits received by heirs

4 DO NOT INCLUDE: Exemptions


5 Amount included in the GE = FMV at the time of death – consideration amount
6 Accrued before his death but only received after his death, e.g., dividends declared on/before, and received after death;

partnership’s profit earned on/before and received after, accrued interest and rents on/before and collected after death
7
Beneficiary must be the estate of the decedent, E/Aor or a third person. If premiums are paid using conjugal funds, part
of conjugal funds.
8 Full amount of the receivable. However, the uncollectible amount may be deducted from GE under ELIT.
Philippine Gross Estate
9 If NRA, Allowable Deduction wrt ELIT =
World Gross Estate
x ELIT
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Net Estate
Less: (Special Deductions10)
Standard Deduction
Family Home
Medical Expenses
Amounts received by heirs If only 1 country is involved: (whichever is lower)

Net EState in the Foreign Country


Net Taxable Estate (before share of surviving Estate Tax Credit = x Philippine Estate Tax
World Net Estate
spouse)
Less: Share of Surviving Spouse OR actual estate tax paid to foreign country
Net Taxable Estate
If two or more countries are involved: (whichever is lower)
Multiply by Tax Rate
Net Estate per Foreign Country
Estate Tax Credit = x Philippine Estate Tax
Estate Tax Due Entire Net Estate
Less: Tax Credit11, if any Net Estate of ALL Foreign Country
ESTATE TAX DUE OR
Entire Net Estate
x Philippine Estate Tax

OR actual estate tax paid to foreign country

10 These are not allowable deductions when TP is NRA.


11 Applies only to RC/NRC/RA
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DONOR’S TAX

ON FIRST DONATION

Gross Gift xxx


Less: Deductions (those not beneficial
to the done e.g., mortgage) xxx

Net Gift xxx


Less: Exemptions, if applicable xxx

Net Taxable Gift xxx


Multiply by Tax Rate xx%

Donor’s Tax Due xxx


Less: Tax Credit12, if any xxx
DONOR’S TAX DUE xxx

ON SUBSEQUENT DONATIONS w/in the same calendar year

Gross Gift xxx


Less: Deductions (those not beneficial
to the done e.g., mortgage) xxx

Net Gift xxx


Less: Exemptions, if applicable xxx

Net Taxable Gift xxx


Add: All previous net gifts during the year xxx
Aggregate Net Gifts xxx
Multiply by Tax Rate xx%
If only 1 country is involved: (whichever is lower)
Donor’s Tax on Aggregate Net Gifts xxx
Less: Donor’s tax on previous net gifts during the year xxx Net Donations outside Phil
Tax Credit =
Net Dontations w/in and w/o
x Philippine Donor ' s Tax
Donor’s Tax Due xxx
If two or more countries are involved: (whichever is lower)
Less: Tax Credit13, if any xxx
DONOR’S TAX DUE xxx Tax Credit =
Net Donation per Foreign Country
Net Dontations w/in and w/o
x Philippine Donor's Tax

OR
Net Donation w/o
Net Dontations w/in and w/o
x Philippine Donor ' s Tax

OR actual donor’s tax paid to foreign country

12 Applies only to RC/NRC/RA


13 Applies only to RC/NRC/RA
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ESTATE TAX

DEATH GR: w/in 6m after death


E: extension of 30d ESTATE TAX
RETURN + CANCEL TIN
PAYMENT
(NB: Date of
payment may be Transfer
Prepare the LIST of assets extended, 5yrs properties to
NOTICE OF DEATH to RDO and liabilities and their or 2yrs), if estate
Get TIN for ESTATE the heirs
by Eor/Aor supporting documents exceeds
200,000php

DONOR’S TAX

Full Exemption NO TAX RETURN


NECESSARY
COMPLETION/ Exempt
PERFECTION OF
DONATION Partial Exemption
w/in 30d after
gift was made DONOR’S TAX No Notice of
RETURN + PAYMENT Donation
(NB: Date of payment Necessary
may be extended ≤ 6
months)
Liable

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III. Value-Added Tax measures to cushion the impact of the


imposition of the tax on those previously
(VAT) exempt. Excise taxes on petroleum
products and natural gas were reduced.
Percentage tax on domestic carriers was
A. CONCEPT removed. Power producers are now
exempt from paying franchise tax.
VAT is a consumption tax imposed at every (e) VAT, by its very nature, is regressive. BUT
stage of distribution process on (i) the sale, the Constitution does not really prohibit
barter, exchange, or lease of goods or the imposition of indirect taxes (which is
properties and (ii) rendition of services in the essentially regressive).
course of trade or business, or the (iii) (f) What it simply provides is that Congress
importation of goods, whether such imported shall “evolve a progressive system of
goods are for use in business or non-business taxation”.
purposes. (Sec. 4.105-2, RR 16-2005)
Tolentino v. Secretary of Finance (1995):
The taxpayer (seller) determines his tax (a) Regressivity is not a negative standard for
liability by computing the tax on the gross courts to enforce. What Congress is
selling price or gross receipt (output tax), and required by the Constitution to do is to
subtracting or crediting the earlier VAT on the “evolve a progressive system of taxation.”
purchase or importation of goods or on the This provision is placed in the
purchase of service (input tax) against the tax Constitution as moral incentives to
due on his own sale legislation, not as judicially enforceable
rights.
B. CONSTITUTIONALITY OF VAT (b) Direct taxes are to be preferred, and as
much as possible, indirect taxes should
ABAKADA Guro Party List, et. al. v. Ermita be minimized but not avoided entirely
(2005): because it is difficult, if not impossible, to
(a) The validity of raising the VAT rate from avoid them.
10% to 12% by the President was upheld (c) The regressive effects are corrected by
by SC. the zero rating of certain transactions and
(b) With respect to Sec. 8, amending Sec. 110 through the exemptions.
(A), which provides for 60-month
amortization of the input tax on capital C. CHARACTERISTICS/ELEMENTS OF A
goods purchased: It is not oppressive, VAT-TAXABLE TRANSACTION
arbitrary, and confiscatory. The taxpayer is
not permanently deprived of his privilege General Characteristics/Nature:
to credit the input tax. For whatever is the (1) Privilege/Percentage Tax – imposed by
purpose, it involves executive economic law directly not on the thing or service but
policy and legislative wisdom in which the on the ACT (sale, barter, exchange, lease,
Court cannot intervene. importation, or performance of service)
(c) The tax law is uniform: it provides a (2) Ad Valorem Tax – the amount is based on
standard rate of 0% or 10% (or 12% now) the gross selling price or gross value in
on all goods or services. The law does not money of the goods or service, including
make any distinction as to the type of the use or lease or properties.
industry or trade that will bear the 70% (3) Indirect Tax – The seller is the one
limitation on the creditable input tax, 5- statutorily liable for the payment of the tax
year amortization of input tax on purchase but the amount of the tax may be shifted
of capital goods, or the 5% final or passed on to the buyer, transferee or
withholding tax by the government. lessee of the goods, properties or services.
(d) It is equitable: The law is equipped with a (4) Excise Tax - a tax on the privilege of
threshold margin (P1.5M). Also, basic engaging in the business of selling goods
marine and agricultural products in their or services, or in the importation of goods
original state are still not subject to tax.
Congress also provided for mitigating
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Nature – VAT is a tax on consumption levied not it sells exclusively to members or their
on the sale, barter, exchange or lease of goods guests), or government entity.
or properties and services in the Philippines
and on importation of goods into the N.B. – Services rendered by non-resident
Philippines. foreign persons shall be considered as being
rendered in the course of trade or business,
This rule shall likewise apply to existing even if the performance of services is not
contracts of sale or lease of goods, properties regular (Section 4.105-3, RR No. 16-2005)
or services at the time of the effectivity of RA
No. 9337. However, in the case of importation, D. IMPACT OF TAX V. INCIDENT OF TAX
the importer is the one liable for the VAT. (Sec.
4.105.2, RR 16-2005) Impact Incidence
The statutory One who bears the
General Features: taxpayer, the one burden of taxation
(1) VAT uses the Tax Credit Method from whom the
(2) All goods, properties and services (except government
exempt transactions) including goods collects.
subject to excise taxes, and use or lease of Seller/Importer – Buyer/Final
properties, whether real or 158ersonal, are Seller/Importer is Consumer – the
subject to tax at all levels of distribution. the one who collects buyer is the one who
(3) Although tax is levied at all stages, the the tax and pays to bears the burden of
cumulative effect is that the final value of the government the taxation.
the goods sold to the ultimate consumers
is taxed only once. E. TAX CREDIT METHOD
(4) VAT, as a general rule, follow the
destination principle (goods and services A taxpayer’s tax payable is the excess of
are taxed only in the country where they output tax over input tax:
are consumed). Therefore, no VAT shall be
imposed to form part of the cost of goods OUTPUT VAT – INPUT VAT = VAT PAYABLE
destined for consumption outside the
territorial border of the taxing authority. Under the VAT method of taxation, which is
invoice-based, an entity can subtract from the
Elements of a VAT-taxable transaction in VAT charged on its sales or outputs the VAT it
general paid on its purchases, inputs and imports. [CIR
1. There must be a sale, barter, exchange, or v. Seagate (2005)].
lease in the Philippines
2. The subject matter must be taxable Input tax – the VAT due on or paid by a VAT-
goods or properties or services registered person on importation of goods or
GR: The sale must be made by a taxable local purchases of goods, properties, or
person in the course of trade or business services, including lease or use of properties,
or in the furtherance of their profession. in the course of his trade or business.
Exception: In the case of importation of (1) It includes the transitional input tax and
goods, the transaction is taxable whether the presumptive input tax as determined
or not done in the course of business. in accordance with Section 111 of the Code.
(2) It includes input taxes which can be
Meaning of “in the course of trade or business” directly attributed to transactions subject
Means the regular conduct of pursuit of a to the VAT plus a ratable portion of any
commercial or an economic activity, including input tax which cannot be directly
transactions incidental thereto, by any person attributed to either the taxable or exempt
regardless of whether or not the person activity.
engaged therein is a nonstock, nonprofit (3) Input tax must be evidenced by a VAT
private organization (irrespective of the invoice or official receipt issued by a VAT-
disposition of its net income and whether or registered person in accordance with Secs.
113 and 237 of the Code. [RR 16-2005]
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2. the service falls under any of the


Output tax – the VAT due on the sale or lease categories provided in Section 102(b)
of taxable goods or properties or services by of the Tax Code; and
any person registered or required to register 3. it is paid for in acceptable foreign
under Section 236 of the Code. currency that is accounted for in
accordance with the regulations of the
If at the end of any taxable month or quarter: BSP.
(a) The output tax exceeds the input tax, the
excess shall be paid by the VAT-registered In that case, the Court held that a ruling
person providing that the service must be “destined
(b) The input tax exceeds the output tax, the for consumption outside of the Philippines” in
excess shall be carried over to the order to qualify for zero rating contravenes
succeeding quarter or quarters [Sec. both the law and the regulations issued
110(B), NIRC] pursuant to it. The Court held that such ruling
was ultra vires and therefore void.
F. DESTINATION PRINCIPLE
The law neither makes a qualification nor adds
As a general rule, the VAT system uses the a condition in determining the tax situs of a
destination principle as a basis for the zero-rated service. Under this criterion, the
jurisdictional reach of the tax. Goods and place where the service is rendered determines
services are taxed only in the country where the jurisdiction to impose the VAT. Performed
they are consumed. Thus, exports are zero- in the Philippines, such service is necessarily
rated, while imports are taxed. [CIR v. subject to its jurisdiction, for the State
American Express International (2005)] necessarily has to have “a substantial
connection” to it, in order to enforce a zero
N.B. – Cross Border Doctrine mandates that no rate. The place of payment is immaterial; much
VAT shall be imposed to form part of the cost less is the place where the output of the service
of the goods destined for consumption outside will be further or ultimately used. [CIR v.
the territorial border of the taxing authority. American Express International (2005)]

Atlas Consolidated Mining & Dev. Corp. v. CIR G. PERSONS LIABLE


(2007): Actual export of goods and services Transactions subject to VAT:
from the Philippines to a foreign country must 1. Sale, Barter or Exchange of Goods or
be free of VAT, while those destined for use or Properties
consumption within the Philippines shall be 2. Sale of Services, including Lease or use of
imposed with 12% VAT. [Deoferio Jr. and Properties
Mamalateo, p. 422] 3. Importation of Goods.

Exception to destination principle – Sec. Persons Liable:


108(b)(2)14 1. Any person who sells, barters, exchanges,
or leases goods or properties, or who
Sec. 108(b)(2), which subjects certain services renders services, in the course of trade or
rendered in the Philippines to a zero-rated business
VAT, is an exception under the destination a. Exception – A non-VAT-
principle. The Court in CIR v. AMEX (2005) registered person whose annual
enumerated the requisites to fall under that gross sales or receipts does not
provision. exceed P1,919,500.
1. The service is performed in the 2. Any person who imports goods, whether
Philippines; or not in the course of business

14 Services other than those mentioned in the outside the Philippines when the services were
preceding paragraph rendered to a person engaged performed, the consideration for which is paid for in
in business conducted outside the Philippines or a acceptable foreign currency and accounted for in
nonresident person not engaged in business who is accordance with the rules and regulations of the BSP.
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The term “person” refers to any individual, (i) Actual/deemed sale for a valuable
trust, estate, partnership, corporation, joint consideration
venture, cooperative or association (Sec. (ii) For use or consumption in the Phil
4.105-1, RR 16-2005). (regardless of the payment arrangements)
(iii) Not exempt from VAT (NIRC, special law,
General Rule: VAT and Percentage Tax cannot special agreement)
be charged together. It’s either the transaction
is under VAT or Other Percentage Tax. Special rules
Sale of Real Properties (RP)
Exception: When one erroneously declares Casual Sale Subject to CGT (6%)
himself to VAT registered. (Capital
Assets)
H. VAT ON SALE OF GOODS OR Regular Sales
PROPERTIES (Ordinary
Assets)
Sale of goods or properties in general Commercial Subject to 12% VAT
Rate: 12% VAT beginning 1 February 2006 Property
[RMC No. 7-06] (Sale/Lease)
Transactions: Residential If monthly rental ≤ 12,800
1. Every sale, barter or exchange (actual Units = VAT and OPT-exempt
sale) (Lease) If monthly rental > 12,800
2. Transactions “deemed sale” of taxable but aggregate annual
goods or properties (RR 16-2005) (See rentals ≤1,919,500 =
also Sec. J, infra) subject to OPT
Basis: Gross selling price or gross value in If monthly rental > 12,800
money of the goods or properties sold, and aggregate annual
bartered or exchanged. rentals > 1,919,500 =
Who Pays: Paid by SELLER/TRANSFEROR. subject to VAT
(Sec. 106, NIRC); N.B. – the end-user is the one Residential If SP > 1,919,500.00 =
who is actually burdened with the tax since the Lot subject to VAT
tax is passed on to him. IF SP ≤ 1,919,500.00 =
VAT-exempt
Residential If SP > 3,199,200.00 =
Meaning of goods or properties House and subject to VAT
Goods or properties – all tangible and Lot IF SP ≤ 3,199,200.00 =
intangible objects which are capable of VAT-exempt
pecuniary estimation, including:
(1) Real properties held primarily for sale to Sales of real properties subject to VAT – Sale of
customers or held for lease in the ordinary real properties held primarily for sale to
course of trade or business; customers or held for lease in the ordinary
(2) The right or the privilege to use patent, course of trade or business of the seller shall
copyright, design, or model, plan, secret be subject to VAT. (Sec. 4.106-3, RR 16-2005)
formula or process, goodwill, trademark,
trade brand or other like property or right;
(3) The right or the privilege to use in the Types of sales of real estate; Effects
Philippines of any industrial, commercial 1. Cash sale – entire selling price taxable in
or scientific equipment; the month of the sale.
(4) The right or the privilege to use motion 2. Installment sales
picture films, films tapes and discs; a. Meaning of installment sale –
(5) Radio, television, satellite transmission initial payments of which in the
and cable television time. year of sale ≤ 25% GSP
b. Effect – the real estate dealer
Goods/Personal Properties shall be subject to VAT on the
installment payments, including
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interest and penalties, actually price, charges for packing, delivery and
and/or constructively received by insurance
the seller.
3. Deferred sales If goods/personal properties,
a. Meaning – initial payments GSP = amount paid in consideration
exceed 25% of the GSP IF DEEMED SALE: FMV at the time of the
b. Effect – Treated as a cash sale transaction
which makes the entire selling NB: in retirement/cessation, inventory (raw
price taxable in month of sale materials, finished goods, machinery,
4. Tax free exchanges under Sec. 40[C][2] equipment, furniture, fixture), tax base =
are not subject to VAT. whichever is lower,
i. acquisition cost
Reference: Sec. 4.106-3, RR 16-2005 ii. current market price of goods

Meaning of GSP – total amount of money or its N.B.: CIR has the power to determine the
equivalent which the purchaser pays or is appropriate tax base in 1) SBE in deemed sales
obligated to pay to the seller in consideration and 2) when GSP is unreasonably lower than
of the sale, barter or exchange of the goods or AMV16
properties, excluding VAT. The excise tax, if
any, on such goods or properties shall form Not taxable: [Sec. 109 (P)(Q)]
part of the gross selling price. (1) Not primarily held for sale or lease in the
course of trade or business
In the case of sale, barter or exchange of real (2) Low cost or socialized housing
property subject to VAT, GSP shall mean: (3) Residential lot when value does not
1. The consideration stated in the sales exceed P1,919,500
document or (4) House and lot/other residential dwelling <
2. The fair market value (FMV) whichever is P3,199,200
higher. (5) Lease (rental per unit < 12,800/month
and total rental from all units <
Meaning of FMV – Whichever is higher of the P1,919,500/ year)
following: (6) Transmission to a trustee (Except:
1. The fair market value as determined by the transmission is deemed sale transaction)
CIR (zonal value) or General Rule: Transmission of property
2. The fair market value as shown in to a trustee shall NOT be subject to VAT if
schedule of values of the Provincial and the property is to be merely held in trust
City Assessors (real property tax for the trustor and/or beneficiary.
declaration). Exception: However, if the property
transferred is originally intended for sale,
General Rule: GSP is the total amount of lease or use in the ordinary course of trade
money paid in consideration of sale, barter, or business AND the transfer constitutes a
exchange, or lease. completed gift, the transfer is subject to
VAT as a deemed sale transaction. The
Excludes: VAT, sales discounts and, transfer is a completed gift if the
allowances and returns (See Section on transferor divests himself absolutely of
Allowable Discounts) control over the property, i.e., irrevocable
transfer of corpus and/or irrevocable
Includes: Excise tax paid, initial payments 15 , designation of beneficiary.
interests and penalties (if instalment),
commission income (if exported), purchase

15 16
Initial payments does not include the amount of GSP is unreasonably lower than the actual market
mortgage on RP sold (except excess when mortgage value if it is lower than 30% of AMV of the same
exceeds the cost of the property), notes and other goods of the same quantity or quality sold in the
evidence on=f indebtedness issued by the purchaser immediate locality or the nearest date of sale.
at the time of the sale
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(7) Transfer to corporation in exchange of RATED SALES OF GOODS OR


shares of stocks (see Sec. 40, NIRC for PROPERTIES
Tax-free exchange)
(8) Advance payment by the lessee Rate: 0% Output VAT; 12% Input VAT
(9) Security deposits for lease agreements.17 Transactions: Every sale, barter or exchange,
or transactions “deemed sale” of taxable
Allowable Deductions from GSP goods or properties (RR 16-2005)
The following are deductible from the gross Concept – A zero-rated sale of goods or
selling price: properties by a VAT-registered person is a
taxable transaction for VAT purposes, but
(1) Sales returns and allowances – the selling shall not result in any output tax. However, the
price of the goods or properties returned input tax on purchases of goods, properties or
and not sold necessarily reduces the gross services, related to such zero-rated sale, shall
sales on which the rate is applied. be available as tax credit or refund.
(a) Sales returns and allowances for
which a proper credit/refund was Transaction is subject to VAT but at 0%
made during the month or quarter to instead of 12%.
the buyer for sales previously recorded (1) Export Sales
as table sales are allowed as a (2) Foreign Currency Denominated Sales
deduction in the period when they are (3) Sales of Goods or Property to persons or
made. Excess may be carried over to entities who are tax-exempt/Effectively
the succeeding period. Zero-Rated Sales
(b) The value of goods or properties sold
and subsequently returned or for Export Sales [Sec. 106(A)(2)(a), NIRC]
which allowances were granted by a
VAT-registered person may be (1) The (i) sale and actual shipment of goods
deducted from the gross sales or from the Philippines to a foreign country
receipts for the quarter in which a AND (ii) paid for in acceptable foreign
refund is made or a credit currency or its equivalent in goods or
memorandum is issued. services, AND (iii) accounted for in
accordance with the rules and regulations
(2) Sales Discounts – bona fide or regular of the BSP
discounts given to purchasers, which are (2) (i) Sale of raw materials or packaging
ascertainable and definitely agreed upon materials to a nonresident buyer (ii) for
between the vendor and the vendee at the delivery to a resident local export-oriented
time of sale are deductible from the GSP. enterprise (iii) to be used in manufacturing,
(a) If given after the sale or are in the processing, packing or repacking in the
nature of a rebate or partial remission Philippines of the said buyer's goods AND
of indebtedness, they will not be (iv) paid for in acceptable foreign currency
allowed as a deduction from the GSP. AND (v) accounted for in accordance with
(b) Furthermore the discount must be the rules and regulations of the BSP.
expressly indicated in the sales invoice (3) (i) Sale of raw materials or packaging
and the amount forming part of the materials (ii) to export-oriented enterprise
gross sales duly recorded in the books (iii) whose export sales exceed seventy
of accounts. percent (70%) of total annual production.
(c) Credits for allowances to cover roll (a) Any enterprise whose export sales
back in prices and other adjustments exceed 70% of the total annual
are not deductible. production of the preceding taxable
year shall be considered an export-
I. ZERO-RATED SALES OF GOODS OR oriented enterprise upon
PROPERTIES, AND EFFECTIVELY ZERO-

17 Please take note of the difference between


security deposits and those applied to rent.
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accreditation under the rules & products, whether paid for in foreign
regulations of Export Development currency or not.
Act, RA 7844 (RR 7-95) (5) Sales by a VAT-registered supplier to a
(4) Sale of gold to the Bangko Sentral ng manufacturer/producer whose products
Pilipinas (BSP) are 100% exported are considered export
(5) The sale of goods, supplies, equipment sales. A certification to this effect must be
and fuel to persons engaged in issued by the Board of Investment which
international shipping or international air shall be good for 1 year unless
transport operations (RA 9337) subsequently re-issued. (RR 16-2005)
(a) Limited to goods, supplies, equipment
and fuel pertaining to or attributable Export sales of registered export traders
to the transport of goods and shall include commission income, and
passengers from a port in the Phil. that exportation of goods on
directly to a foreign port without consignment shall not be deemed export
docking or stopping at any other port sales until the export products consigned
in the Phil. are in fact sold by the consignee.
(b) If any portion of such fuel, goods, or
supplies is used for purposes other Foreign Currency Denominated Sale (FCDS)
than that mentioned, such portion of (1) (i) Sale to a nonresident of goods (except
fuel, goods, and supplies shall be those mentioned in Sections 149 and 150
subject to 12% VAT. (RR 16-2005) i.e., automobiles and non-essential goods
(6) Those considered export sales under the like jewelry, perfume, and yachts), (ii)
Omnibus Investment Code of 1987, and assembled or manufactured in the
other special laws (ex. Bases Conversion & Philippines (iii) for delivery to a resident in
Development Act of 1992) the Philippines (iv) paid for in acceptable
foreign currency AND (v) accounted for in
Under Omnibus Investment Code (EO 226): accordance with the rules and regulations
Considered Export Sales of the BSP.
(1) Phil. port FOB value of export products (2) (i) Sales of locally manufactured or
exported directly by a registered export assembled goods (ii) for household and
producer; OR personal use (iii) to Filipinos abroad and
(2) Net selling price of export products sold other non-residents of the Philippines as
by a registered export producer to well as returning Overseas Filipinos under
another export producer, or to an export the Internal Export Program of the
trader that subsequently exports the government (iv) paid for in convertible
same (only when actually exported by the foreign currency AND (v) accounted for in
latter) evidenced by landing certificates. accordance with the rules and regulations
of the BSP shall also be considered export
Constructive Exports (without actual sales. (RR 16-2005)
exportation):
(1) Sales to bonded manufacturing Effectively Zero-Rated Sales
warehouses of export-oriented (1) Sales to persons or entities whose
manufacturers; exemption under special laws or
(2) Sales to export processing zones (RA international agreements to which the
7916); Philippines is a signatory effectively
(3) Sales to registered export traders subjects such sales to zero rate.
operating bonded trading warehouses
(2) (i) The local sale of goods and properties
supplying raw materials in the
(ii) by a VAT-registered person (iii) to a
manufacture of export products (RA
person or entity who was granted indirect
7227)
tax exemption under special laws or
(4) Sales to diplomatic missions and other
international agreement. (RR 16-2005)
agencies and/or instrumentalities
granted tax immunities, of locally
manufactured, assembled or repacked ECOZONES

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The ECOZONES shall be managed and (b) Sale of Services by a PEZA registered
operated by the PEZA as separate customs enterprise to a buyer from the
territory. (Sec. 8, RA 7916 “Special Economic Customs Territory – this is NOT
Zone Act of 1995”). Consequently, sales made embraced by the 5% special tax
by a person in the customs territory to a PEZA- regime, hence, such seller shall be
registered entity are considered exports to a SUBJECT TO 12% VAT.
foreign country and thus, zero-rated.
(c) Sale of Goods by a PEZA registered
Conversely, sales by a PEZA-registered entity
enterprise to Another PEZA registered
to a person in the customs territory are
enterprise (ie Intra-ECOZONE Sales of
deemed imports from a foreign country.
Goods) – this shall be EXEMPT from
VAT.
Tax treatment of sales to & by PEZA-
registered enterprise within & without the
ecozone [RMC 74-99]: (4) Sale of Services by ECOZONE enterprise,
(1) Any sale of goods, property or services to Another ECOZONE enterprise (Intra-
made by a VAT registered supplier from ECOZONE enterprise Sale of Service)
the Customs Territory** to any registered (a) if PEZA registered seller is subject to
enterprise operating in the ecozone, 5% special tax regime - EXEMPT from
REGARDLESS of the class or type of the VAT
latter’s PEZA registration, is actually (b) if PEZA registered seller is subject to
qualified and thus LEGALLY ENTITLED TO taxes under NIRC (ie not subject to 5%
THE 0% VAT. special tax regime) – subject to 0%
VAT pursuant to “cross border
“Customs Territory” shall mean the national doctrine”
territory of the Philippines outside of the
proclaimed boundaries of the ECOZONES Difference between Zero-rated and VAT-
except those areas specifically declared by exempt
other laws and/or presidential proclamations Zero-rated VAT-exempt
to have the status of special economic zones It is a taxable Not subject to output
and/or free ports. [Sec. 2(g), Rule 1, Part I, RA transaction but does tax
7916-IRR] not result in an output
tax
(2) By a VAT-Exempt Supplier from the The input VAT on the The seller in an
Customs Territory to a PEZA registered purchases of a VAT- exempt transaction is
enterprise registered person with not entitled to any
zero-rated sales may input tax on his
Sale of goods, property and services by VAT- be allowed as tax purchases despite the
Exempt supplier from the Customs Territory to credits or refunded issuance of a VAT
a PEZA registered enterprise shall be treated invoice or receipt;
EXEMPT FROM VAT, regardless of whether or
Persons engaged in Registration is
not the PEZA registered buyer is subject to
transactions which are optional for VAT-
taxes under the NIRC or enjoying the 5%
zero-rated, being exempt persons.
special tax regime.
subject to VAT, are
required to register
(3) By a PEZA Registered Enterprise
(a) Sale of Goods by a PEZA registered
enterprise to a buyer from the J. TRANSACTIONS DEEMED SALE (SEC.
Customs Territory (i.e., domestic 106 (B)
sales) -- this case shall be treated as a
technical IMPORTATION made by the Rate: 12% VAT
buyer. Such buyer shall be treated as Basis: Market value of the goods deemed sold
an IMPORTER thereof and shall be as of the time of the occurrence of the
imposed with the corresponding VAT. transactions or as the CIR shall prescribe. In
the case of retirement/cessation of business,
the tax base shall be the acquisition cost or the
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current market price of the goods or With respect to ALL goods on hand, whether
properties, whichever is lower. In the case of a capital goods, stock-in-trade, supplies or
sale where the gross selling price is materials, as of the date of such retirement or
unreasonably lower than the fair market cessation, whether or not the business is
value, the actual market value shall be the tax continued by the new owner or successor ARE
base. The gross selling price is unreasonably CONSIDERED DEEMED SALES
lower than the actual market value if it is lower
by more than 30% of the actual market value Examples: change of ownership of the
of the same goods of the same quantity and business (e.g., when a sole proprietorship
quality sold in the immediate locality on or incorporates, or the proprietor sells his entire
nearest the date of sale. (RR 16-2005) business) and dissolution of a partnership and
creation of a new partnership which takes over
Transactions Deemed Sale the business. (RR 16-2005)
(1) Transfer, use or consumption not in the
course of business of goods or properties K. CHANGE OR CESSATION OF STATUS
originally intended for sale or for use in the AS VAT-REGISTERED PERSON (SEC
course of business. 106[C])
Example: when a VAT-registered person
withdraws goods from his business for his Rate: 12% VAT
personal use. (RR 16-2005) Basis: the acquisition cost or the current
(2) Distribution or transfer to shareholders, market price of the goods or properties,
investors or creditors whichever is LOWER.
(a) Shareholders or investors as share in
the profits of the VAT-registered VAT shall apply to goods disposed of or
persons; existing as of a certain date if under the
(b) Creditors in payment of debt; circumstances to be prescribed in rules and
(3) Consignment of goods if actual sale is not regulations to be promulgated by the
made within 60 days following the date Secretary of Finance, upon recommendation
such goods were consigned of the CIR, the status of a person as a VAT-
(4) Retirement from or cessation of business, registered person changes or is terminated.
with respect to inventories of taxable
goods existing as of such retirement or Subject to output VAT (RR 16-2005, Sec. 4.106
cessation (b))
12% VAT is applicable to goods/properties
Distribution or transfer to shareholders, originally intended for sale or use in business
investors or creditors and capital goods which are existing as of the
As regards distribution to shareholders or occurrence of the following:
investors as share in the profits of the VAT- (1) Change of business activity from VAT
registered persons, property dividends which taxable status to VAT-exempt status
constitute stocks in trade or properties Example: A VAT-registered person
primarily held for sale or lease declared out of engaged in a taxable activity like
retained earnings on or after Jan. 1, 1996 and wholesaler or retailer who decides to
distributed by the company to its shareholders discontinue such activity and engages
shall be subject to VAT based on the zonal instead in life insurance business or in any
value or FMV at the time of the distribution, other business not subject to VAT.
whichever is applicable. (RR 16-2005) (2) Approval of request for cancellation of a
registration due to reversion to exempt
Consignment of goods status
Consigned goods returned by the consignee (3) Approval of request for cancellation of
within the 60-day period are not deemed sold. registration due to desire to revert to
(RR 16-2005) exempt status after lapse of 3 consecutive
years from the time of registration by a
Retirement from or cessation of business person who voluntarily registered despite
being exempt under Sec. 109 (2)
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(4) Approval of request for cancellation of non-exempt persons or entities who acquire
registration of one who commenced tax-free imported goods from exempt
business with the expectation of gross persons, entities or agencies (RR 16-2005)
sales/receipts exceeding P1,919,500 (per
RR 16-2011) but who failed to exceed this Importation of Goods
amount during the first 12 months of Importation of goods BEGINS when the
operation carrying vessel/aircraft enters the Philippine
jurisdiction with an intention to unload its
Not Subject to Output Vat – goods or cargoes. It ENDS when there is already
properties existing as of the occurrence of the payment of duties/taxes/other charges and
following: issuance of permit to withdraw.
(1) Change of control of a corporation by the Note: Importation of goods to bonded
acquisition of the controlling interest of warehouse for processing is not importation.
such corporation by another stockholder Importation connotes permanency and gain.
(individual or corporate) or group of Thus, if goods are only for exhibit, such goods
stockholders. are VAT-exempt.
Note: Exchange of goods or properties
including the real estate properties used Customs duty – amount of customs duty
in business or held for sale or for lease by legally due and paid by the importer.
the transferor, for shares of stocks, Therefore, if importer is entitled to 90%
whether resulting in corporate control or customs duty exemption, the 10% duty paid
not, is SUBJECT TO VAT (RR 10-11) should be the base in computation of the VAT.
(2) Change in the trade or corporate name of
the business Other similar chargers – specific charges
(3) Merger or consolidation of corporations. which an importer has to pay.
The unused input tax of the dissolved (a) Other taxes (special import tax)
corporation, as of the date of merger or (b) Bank charges
consolidation, shall be absorbed the (c) Arrastre charges
surviving or new corporation. (d) Wharfage dues
Note: The INPUT VAT of the dissolved (e) Brokerage fees
corporation will be absorbed by the (f) All other charges or expenses
surviving corporation
(4) Inventory used for promotions and Office Landed Cost - invoice amount including costs
Supplies of loading, shipping and unloading, customs
duties, freight, insurance, other charges,
L. VAT ON IMPORTATION OF GOODS excise tax (if any)

Rate: 12% VAT Expenses incurred after the release of the


Basis: total value used by the Bureau of goods such as those incurred in delivering
Customs in determining tariff and customs goods do not form part of the landed cost.
duties, plus customs duties, excise taxes, if
any, and other charges (such as postage, Transfer of goods by tax exempt persons:
commission). (1) If importer is tax-exempt, the subsequent
Where the customs duties are determined on purchasers, transferees or recipients of
the basis of the quantity or volume of the such imported goods shall be considered
goods, VAT shall be based on the landed cost as importers who shall be liable for the tax
plus excise taxes, if any. on importation.
(2) The tax due on such importation shall
Who Pays: IMPORTER prior to the release of constitute a lien on the goods superior to
such goods from customs custody (Sec. 107 all charges or liens on the goods,
(A), NIRC) irrespective of the possessor thereof. (As
Importer: any person who brings goods into amended by RA 9337)
the Philippines, whether or not made in the
course of his trade or business, including
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M. VAT ON SALE OF SERVICE AND USE “Sale/Exchange of Services”: means the


OR LEASE OF PROPERTIES performance of all kinds of services in the
[Sec 108] Philippines for others for a fee, remuneration
or consideration.” (Sec 108, Diaz v Secretary of
Rate: 12% Finance, 2011). It includes:
Basis: Gross receipts derived from the sale or (1) Construction and service contractors
exchange of services, including the use or (2) Stock, real estate, commercial, customs
lease of properties. and immigration brokers
(3) Lessors of property, whether personal or
Gross Receipts - the total amount of money or real18
its equivalent representing the contract price, (4) Persons engaged in warehousing service.
compensation, service fee, rental or royalty, (5) Lessors or distributors of cinematographic
including the amount charged for materials films
supplied with the services and deposits and (6) Persons engaged in milling, processing,
advanced payments actually or constructively manufacturing or repacking goods for
received during the taxable quarter for the others are subject to VAT,
services performed or to be performed for EXCEPT palay into rice, corn into corn
another person, excluding VAT. (Sec. 108 (A), grits, and sugarcane into raw sugar (not
NIRC) subject to VAT)
(7) Proprietors, operators, or keepers of
“Constructive receipt” occurs when the money hotels, motels, rest houses, pension
consideration or its equivalent is placed at the houses, inns, resorts, theaters, and movie
control of the person who rendered the service houses
without restrictions by the payor. (8) Proprietors or operators of restaurants,
(a) Deposit in banks which are made available refreshment parlors, cafes and other
to the seller of services without restrictions eating places, including clubs and
(b) Issuance by the debtor of a notice to offset caterers
any debt or obligation and acceptance (9) Dealers in securities including pre-need
thereof by the seller as payment for companies
services rendered “Gross receipts” means gross selling
(c) Transfer of the amounts retained by the price less cost of the securities sold. RR 7-
contractee to the account of the contractor. 95:
(RR 16-2005) (10) Lending investors: All persons OTHER
than banks, non-bank financial
Requisites for taxability intermediaries, finance companies and
(1) The service must be performed or is to be other financial intermediaries NOT
performed (which may be performed by a performing quasi-banking functions who
subcontractor) in the course of trade or make a practice of lending money for
business in the Philippines; themselves or others at interest.
(2) For a valuable consideration actually or (11) Transportation contractors on their
constructively received; and transport of goods or cargoes, including
(3) The service is not exempt under the Tax persons who transport goods or cargoes
Code, special law or international for hire and other domestic common
agreement carriers by land relative to their transport
(4) Person selling or rendering service is liable of goods or cargoes
to VAT (12) Common carriers by air and sea relative to
their transport of passengers, goods or

24 Security deposit Security deposit to


SUBJECT TO NOT SUBJECT TO when applied to insure the faithful
VAT VAT the rental performance of
Loan to the lessor certain obligations
from the lessee of the lessee to the
Pre-Paid Rental Option money for lessor
the property
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cargoes from one place in the Philippines executed if the property is leased or used in the
to another place in the Philippines Philippines.
(13) Sales of electricity by generation, (1) The lease or the use of or the right or
transmission, and/or distribution privilege to use any copyright, patent,
companies design or model, plan secret
EXCEPT sale of power or fuel (2) formula or process, goodwill, trademark,
generated through renewable sources of trade brand or other like property or right
energy, such as, but not limited to, (3) The lease of the use of, or the right to use
biomass, solar, wind hydropower, of any industrial, commercial or scientific
geothermal, ocean energy, and other equipment
emerging energy sources using (4) The supply of scientific, technical,
technologies such as fuel cells and industrial or commercial knowledge or
hydrogen fuels, which shall be subject to information
0% rate of VAT (zero-rated). (5) The supply of any assistance that is
(14) Franchise grantees of electric utilities, ancillary and subsidiary to and is furnished
telephone and telegraph, radio and/or as a means of enabling the application or
television broadcasting and all other enjoyment of any such property, or right as
franchise grantees (including PAGCOR is mentioned in #2 or any such knowledge
and its licensees/franchisees) or information as is mentioned in #3
EXCEPT franchise grantees of radio (6) The supply of services by a nonresident
and/or television broadcasting whose person or his employee in connection with
annual gross receipts of the preceding the use of property or rights belonging to,
year do not exceed Ten Million Pesos or the installation or operation of any
(P10,000,000.00) (which shall be subject brand, machinery or other apparatus
to 3% franchise tax under Sec. 119, subject purchased from such nonresident person
to optional registration), and franchise (7) The supply of technical advice, assistance
grantees of gas and water utilities (under or services rendered in connection with
Sec. 109, subject to 2% franchise tax) technical management or administration
With respect to franchise grantees of of any scientific, industrial or commercial
telephone and telegraph services, undertaking, venture, project or scheme
amounts received for overseas dispatch, (8) The lease of motion picture films, films,
message, or conversation originating from tapes and discs
the Philippines are subject to the (9) The lease or the use of or the right to use
percentage tax under Sec. 120 and hence radio, television, satellite transmission
exempt from VAT and cable television time
(15) Non-life insurance companies including
surety, fidelity, indemnity and bonding Additional services subject to VAT:
companies; (1) Services performed in the exercise or
EXCEPT crop insurance, life and practice of profession or calling by
disability insurance, and health and individuals subject to professional tax
accident insurance under the LGC, and professional services
Insurance and reinsurance rendered by general professional
commissions, as opposed to premiums, partnerships (GPPs);
whether life or non-life, are subject to VAT (2) Services performed by actors/actresses,
while non-life insurance premiums are talents, singers, emcees, radio/television
subject to VAT. broadcasters, choreographers,
(16) Similar services regardless of whether or musical/radio/movie/television/stage
not the performance thereof calls for the directors, and professional athletes;
exercise or use of the physical or mental (3) Services rendered by customs, real estate,
faculties stock, immigration and commercial
brokers;
“Lease of Properties“: subject to the VAT (4) Services rendered by doctors, and lawyers.
imposed irrespective of the place where the (5) Association dues or membership fees and
contract of lease or licensing agreement was other assessment or charges for the

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beneficial services of the homeowner’s transport operations, including leases of


association (RMC No. 9-2013) property for use thereof [as amended by
(6) Lease/use of sports facilities and RA 9337];
equipment (RA 6847) Provided, however, that the services
referred to herein shall not pertain to
The performance of the services should not be those made to common carriers by air and
in pursuit of an employer-employee sea relative to their transport of
relationship between the service-provider and passengers, goods or cargoes from one
the service-recipient. place in the Phil. to another place in the
Phil. (the same being subject to 12% VAT
N. ZERO-RATED SALE OF SERVICES under Sec. 108)
(5) Services performed by subcontractors
The following services performed in the and/or contractors in processing,
Philippines by VAT-registered persons are converting, or manufacturing goods for an
effectively 0% VAT sales of services: enterprise whose export sales exceed
(1) Processing, manufacturing or repacking seventy percent (70%) of total annual
goods for other persons doing business production.
outside the Philippines which goods are (6) Transport of passengers and cargo by air
subsequently exported, where the services or sea vessels from the Philippines to a
are paid for in acceptable foreign currency foreign country (as added by RA 9337)
AND accounted for in accordance with the and;
rules and regulations of the BSP (7) Sale of power or fuel generated through
(2) Services other than those mentioned in renewable sources of energy such as, but
the preceding paragraph rendered to a not limited to, biomass, solar, wind,
person engaged in business conducted hydropower, geothermal, ocean energy,
outside the Philippines or a nonresident and other emerging energy sources using
person not engaged in business who is technologies such as fuel cells and
outside the Philippines when the services hydrogen fuels. (as added by RA 9337)
are performed, the consideration for which Zero-rating shall apply strictly to the
is paid for in acceptable foreign currency sale of power or fuel generated through
AND accounted for in accordance with the renewable sources of energy, and shall
rules and regulations of the BSP not extend to the sale of services related
The services referring to ‘processing, to the maintenance or operation of plants
manufacturing, repacking’ and ‘services generating said power.
other than those in (1)’ both require
(i) payment in foreign currency; Effectively zero-rated sale of service – a local
(ii) inward remittance; sale of services by a VAT-registered person to
(iii) accounted for by the BSP; a person or entity granted indirect tax
(iv) AND that the service recipient is exemption under special laws or international
doing business outside the agreement.
Philippines.  The taxpayer must seek prior approval or
If this is not the case, taxpayers can prior confirmation from the appropriate
circumvent just by stipulating payment in offices of the BIR so that a transaction is
foreign currency. (CIR v. Burmeister, G.R. qualified for effective zero-rating except in
No. 153205 [2007[)) export sales and foreign denominated
(3) Services rendered to persons or entities sales.
whose exemption under special laws or  RR 4-2007 removed the distinction
international agreements to which the between automatic and effectively zero-
Philippines is a signatory effectively rated transactions found in prior Revenue
subjects the supply of such services to zero Regulations (inc. RR 16-2005) with
percent (0%) rate (as amended by RA respect to prior application from the BIR.
9337)
(4) Services rendered to persons engaged in O. VAT EXEMPT TRANSACTIONS
international shipping or international air
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Vat Exempt Transactions, in general (3) Importation of personal and household


(a) Sale of goods or properties and/or effects belonging to Philippine residents
services and the use or lease of properties returning from abroad and non-resident
that is NOT subject to VAT (output tax) citizens coming to resettle in the
and the seller is not allowed any tax credit Philippines; provided, that such goods are
of VAT (input tax) on purchases. also exempt from customs duties under
(b) The person making the exempt sale of the TCC (now CMTA)
goods, properties or services shall not bill (4) Importation of professional instruments
any output tax to his customers. (RR 16- and implements, wearing apparel,
2005) domestic animals, and personal
(c) But, the VAT-registered person may elect household effects belonging to persons
that the exemption not apply to its sale of coming to settle in the Philippines, for
goods or properties or services; provided their own use and not for sale, barter or
that the election made shall be irrevocable exchange, accompanying such persons, or
for a period of three (3) years from the arriving within 90 days before or after their
quarter the election was made (Sec. 109(2), arrival, upon production of evidence
NIRC). satisfactory to the CIR that such persons
are actually coming to settle in the
Exempt Transactions Enumerated Philippines and that the change of
[4.109-1 of RR 16-2005] residence is bona fide;
(1) Sale/import of agricultural and marine  EXCEPT vehicles, vessels, aircrafts,
food products in their original state, machineries, and other goods for use
livestock and poultry of a kind generally in manufacturing and merchandise of
used as or yielding or producing foods for any kind in commercial quantity)
human consumption and breeding stock (5) Services subject to percentage tax under
and genetic materials therefor; the NIRC;
 Original state even if they have (6) Services by agricultural contract growers
undergone the simple processes of and milling for others of palay into rice,
preparation or preservation for the corn into grits, and sugar cane into raw
market, such as freezing, drying, sugar;
salting, broiling, roasting, smoking or (7) Medical, dental, hospital and veterinary
stripping. Also includes preservation services, except those rendered by
using advanced technological means professionals:
of packaging, such as shrink wrapping  Laboratory services are exempted. If
in plastics, vacuum packing, tetra- the hospital or clinic operates a
pack, and other similar packaging pharmacy or drug store, the sale of
methods (RR 16-2005) drugs and medicine is subject to VAT.
 Polished and/or husked rice, corn [RR 16-2005]
grits, raw cane sugar and molasses,  Note: RR-2004 granting VAT-
ordinary salt, AND COPRA shall be exemption to doctors registered with
considered in their original state the PRC and lawyers registered with
 Livestock or poultry do not include the IBP was superseded by RA 9337
fighting cocks, race horses, zoo and RR 16-2005.
animals and other animals generally (8) Educational services rendered by private
considered as pets. educational institutions, duly accredited
(2) Sale/ importation of fertilizers, seeds, by DepED, CHED, TESDA, and those
seedlings and fingerlings, fish, prawn, rendered by government educational
livestock and poultry feeds including institutions;
ingredients, whether locally produced or  “Educational services” does not
imported, used in the manufacture of include seminars, in-service training,
finished feeds (EXCEPT specialty feeds for review classes and other similar
race horses, fighting cocks, aquarium fish, services rendered by persons who are
zoo animals, and other animals generally not accredited by the DepED, CHED,
considered pets); and/or TESDA. [RR 16-2005]
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(9) Services rendered by individuals pursuant lease in the ordinary course of trade or
to an employer-employee relationship; business.
(10) Services rendered by regional or area  However, even if the real property
headquarters established in the is not primarily held for sale to
Philippines by multinational corporations customers or held for lease in the
which act as supervisory, communications ordinary course of trade or
and coordinating centers for their business but the same is used in
affiliates, subsidiaries or branches in the the trade or business of the seller,
Asia-Pacific Region and do not earn or the sale thereof shall be subject to
derive income from the Philippines; VAT being a transaction incidental
(11) Transactions which are exempt under to the taxpayer’s main business.
international agreements to which the [RR 4-2007]
Philippines is a signatory or under special (b) Sale of real properties utilized for low-
laws, except those under PD No. 529 cost housing as defined by RA 7279,
(Petroleum Exploration Concessionaires ("Urban Development and Housing
under the Petroleum Act of 1949); Act of 1992") and other related laws,
(12) Sales by agricultural cooperatives duly such as RA 7835 and RA 8763;
registered with the Cooperative  “Low-cost housing" refers to
Development Authority (CDA) to their housing projects intended for
members, as well as sale of their produce, homeless low-income family
whether it is original state or processed beneficiaries, undertaken by the
form, to non-members; their importation Government or private developers,
of direct farm inputs, machineries and which may either be a subdivision
equipment, including spare parts thereof, or a condominium registered and
to be used directly and exclusively in the licensed by the Housing and Land
production and/or processing of their Use Regulatory Board/Housing
produce. (HLURB) under BP 220, PD 957 or
 Sale by agricultural cooperatives to any other similar law, wherein the
non-members can only be exempted unit selling price is within the
from VAT if the producer of the selling price ceiling per unit of
agricultural products sold is the P750,000.00 under RA 7279, and
cooperative itself. If the cooperative is other laws, such as RA 7835 and
not the producer (e.g., trader), then RA 8763.
only those sales to its members shall (c) Sale of real properties utilized for
be exempted from VAT. [RR 16-2005] socialized housing as defined under
(13) Gross receipts from lending activities by RA 7279, and other related laws, such
credit or multi-purpose cooperatives duly as RA 7835 and RA 8763, wherein the
registered with the CDA price ceiling per unit is P225,000 or as
(14) Sales by non-agricultural, non- electric may from time to time be determined
and non-credit cooperatives duly by the HUDCC and the NEDA and
registered and in good standing with the other related laws.
CDA; Provided, that the share capital  "Socialized housing" refers to
contribution of each member does not housing programs and projects
exceed P15,000 and regardless of the covering houses and lots or home
agrgregate capital and net surplus ratably lots only undertaken by the
distributed among the members. BUT Government or the private sector
their importation of machineries and for the underprivileged and
equipment, including spare parts thereof, homeless citizens which shall
to be used by them are SUBJECT to VAT. include sites and services
(15) Export sales by persons who are not VAT- development, long-term
registered; financing, liberated terms on
(16) Sale of real properties as follows: interest payments, and such other
(a) Sale of real properties NOT primarily benefits in accordance with the
held for sale to customers or held for
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provisions of RA 7279 and RA residential lot/dwelling. Hence, it


7835 and RA 8763. shall be subject to VAT regardless
 "Socialized housing" shall also of its selling price. [RR 13-2012]
refer to projects intended for the (17) Lease of residential units with a monthly
underprivileged and homeless rental per unit not exceeding P12,800,
wherein the housing package regardless of the amount of aggregate
selling price is within the lowest rentals received by the lessor during the
interest rates under the Unified year.
Home Lending Program (UHLP) or  Lease of residential units where the
any equivalent housing program monthly rental per unit exceeds
of the Government, the private P12,800 but the aggregate of such
sector or non-government rentals of the lessor during the year do
organizations. not exceed P1,919,500 shall likewise
(d) Sale of residential lot valued at be exempt from VAT, however, the
P1,919,500 and below, or house & lot same shall be subjected to 3%
and other residential dwellings valued percentage tax.
at P3,199,200 and below  In cases where a lessor has several
 If two or more adjacent residential residential units for lease, some are
lots are sold or disposed in favor of leased out for a monthly rental per
one buyer, for the purpose of unit of not exceeding P12,800 while
utilizing the lots as one residential others are leased out for more than
lot, the sale shall be exempt from P12,800 per unit, his tax liability will
VAT only if the aggregate value of be as follows:
the lots does not exceed (a) The gross receipts from rentals
P1,919,500. [RR 13-2012] not exceeding P12,800 per
 Adjacent residential lots, month per unit shall be exempt
although covered by separate from VAT regardless of the
titles and/or separate tax aggregate annual gross receipts.
declarations, when sold or (b) The gross receipts from rentals
disposed to one and the same exceeding P12,800 per month
buyer, whether covered by one or per unit shall be subject to VAT IF
separate Deed of Conveyance, the aggregate annual gross
shall be presumed as a sale of one receipts from said units only (not
residential lot. [RR 16-2005] including the gross receipts from
 Sale, transfer or disposal within a units leased for not more than
12-month period of 2 or more P12,800) exceeds P1,919,500.
adjacent residential lots, house Otherwise, the gross receipts will
and lots or other residential be subject to the 3% tax imposed
dwellings to one buyer, whether under Sec. 116 of the Tax Code.
from the same or from different  The term 'residential units' shall refer
sellers shall be considered one to apartments and houses & lots used
single transaction. Hence, the sale for residential purposes, and buildings
of the adjacent lots shall be or parts or units thereof used solely as
subject to VAT if the aggregate dwelling places (e.g., dormitories,
value exceeds P1,919,500 for rooms and bed spaces) except motels,
residential lots and P3,199,200 motel rooms, hotels and hotel rooms.
for residential house lots or  The term 'unit' shall mean an
residential dwellings, apartment unit in the case of
notwithstanding that the value of apartments, house in the case of
the individual properties do not residential houses; per person in the
exceed the VAT exemption case of dormitories, boarding houses
thresholds. and bed spaces; and per room in case
 Sale/purchase of parking lots of rooms for rent. [RR 16-2005]
shall not be considered a sale of
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(18) Sale, importation, printing or publication financial intermediaries subject to


of books and any newspaper, magazine Percentage Tax; and
review or bulletin which appears at (23) Sale or lease of goods or properties or the
regular intervals with fixed prices for performance of services other than the
subscription and sale and which is not transactions mentioned in the preceding
devoted principally to the publication of paragraphs, the gross annual sales
paid advertisements; and/or receipts do not exceed the amount
(19) Transport of passengers by international of P1,919,500
carriers [Added by RA 10378 (2013)]  For purposes of the threshold of
(20) Sale, importation or lease of passenger P1,919,500, the husband and the wife
or cargo vessels and aircraft, including shall be considered separate
engine, equipment and spare parts taxpayers. However, the aggregation
thereof for domestic or international rule for each taxpayer shall apply.
transport operations [added by RA 9337];  For instance, if a professional, aside
 The exemption from VAT on the from the practice of his profession,
importation and local purchase of also derives revenue from other lines
passenger and/or cargo vessels shall of business which are otherwise
be limited to those of 150 tons and subject to VAT, the same shall be
above, including engine and spare combined for purposes of determining
parts of said vessels; whether the threshold has been
 The vessels to be imported shall exceeded.
comply with the age limit requirement,  The VAT-exempt sales shall NOT be
at the time of acquisition counted included in determining the threshold.
from the date of the vessel's original [RR 16-2005]
commissioning, as follows:
o for passenger and/or cargo Other Services Exempt from VAT – such
vessels, the age limit is 15 years services are those subject to percentage tax
old, (infra)
o for tankers, the age limit is 10 (1) Services rendered by domestic common
years old, and carriers by land for the transport of
o for high-speed passenger crafts, passengers and keepers of garages;
the age limit is 5 years old [RR 16- (2) Services rendered by international
2005] air/shipping carriers;
(21) Importation of fuel, goods, and supplies (3) Services rendered by franchise grantees of
by persons engaged in international radio and/or television broadcasting
shipping or air transport operations; whose annual gross receipts of the
[added by RA 9337] preceding year do not exceed
 The said fuel, goods and supplies shall P10,000,000 and by franchise grantees of
be used exclusively or shall pertain to gas and water utilities; [N.B. – Compare
the transport of goods and/or with other franchise grantees which are
passenger from a port in the subject to VAT]
Philippines directly to a foreign port (4) Services rendered for overseas dispatch,
without stopping at any other port in message, by franchise grantees or
the Philippines; conversation originating from the
 If any portion of such fuel, goods or Philippines;
supplies is used for purposes other (5) Services by any person, company or
than that mentioned in this paragraph, corporation (except purely cooperative
such portion of fuel, goods and (6) companies or associations) doing life
supplies shall be subject to 12% VAT insurance business of any sort in the
starting Feb. 1, 2006. [RR 16-2005] Philippines;
(22) Services of banks, non-bank financial (7) Services rendered by fire, marine or
intermediaries performing quasi- miscellaneous insurance agents of foreign
banking functions and other non-bank insurance companies;

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(8) Services rendered by proprietors, lessees


or operators of cockpits, cabarets, night or
day clubs, boxing exhibitions, professional
basketball games, jai-alai and race tracks;
and
(9) Receipts on sale, barter for exchange of
shares of stock listed and traded through
the local stock exchange or through initial
public offering.

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SUMMARY TABLE OF VAT-EXEMPTIONS (SEC. 109)

A Of agricultural and marine products in their original state


Sale or Of fertilizers; seeds, seedlings and fingerlings; prawn, livestock and poultry feeds. XPN
B importation  specialty feeds for race horses, fighting cocks, aquarium fish, zoo animals, and other
animals generally considered pets.
Of personal and household effects belonging to the residents of the Philippines
C
returning from abroad
Importation Of professional instruments and implements, wearing apparel, domestic animals and
D personal household effects, belong to persons coming to settle for the first time in the
Philippines for their own use and not for sale, barter or exchange.
E Subject to percentage tax
By agricultural contract growers and milling for others of palay into rice, corn into grits
F
and sugarcane into raw sugar
G Medical, dental, hospital and veterinary services XPN  those rendered by professionals
Services
Educational services rendered by private educational institutions duly accredited by
H
DepEd, CHED, and TESDA, and those by governmental educational institutions
I Rendered pursuant to an employer-employee relationship
J Rendered by a RAHQ established in the Philippines
Transactions which are exempt under international agreements to which the Philippines
K is a signatory or under special laws, except those under PD 529 (Petroleum
concessionaires)
L Sales By agricultural cooperatives duly registered with the CDA
Gross receipts from lending activities by credit or multi-purpose cooperatives duly
M Services
registered with the CDA whose lending is limited to members
By non-agricultural, non-electric, and non-credit cooperatives duly registered and in
N Sales good standing with the CDA. Provided, the share capital contribution of each member
does not exceed 15K
By persons who are not VAT-registered
O Export sales
Of real property not primarily held for sale to customers or held for lease in the ordinary
P Sales course of business or sales within the low-cost cap of below P1,919,500 for a residential
lot and P3,199,200 for a house and lot and other residential building
Q Lease Of a residential unit with a monthly rental not exceeding P12,800
Sale,
Books and any newspaper, magazine, review or bulletin which appears at regular
importation,
R intervals with fixed prices for subscription and sale and is not devoted principally to
printing, or
publication of paid advertisements.
publication
S Transport of passengers by international carriers (RA 10378)
Sale,
Of passenger or cargo vessels and aircraft, including engine, equipment and spare parts
T importation,
thereof for domestic or international transport operations
or lease
Fuel, goods, and supplies by persons engaged in international shipping or air transport
U Importation
operations
Of banks, non-bank financial intermediaries performing quasi-banking functions and
V Services
other non-bank financial intermediaries
Sale or lease Of goods or properties
Performance of services other than the transactions mentioned in the preceding
W
Services paragraphs, the gross annual sales and/or receipts do not exceed the amount of
1,919,500

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Q. SOURCES OF INPUT TAX Tax base: The value allowed for income tax
purposes on inventories shall be the basis for the
(1) Purchase or importation of goods (evidenced computation of the 2% transitional input tax,
by VAT invoice/receipt) EXCLUDING goods that are exempt from VAT
(a) For sale; or under Sec. 109 of the Tax Code. (RR 16-2005)
(b) For conversion into or intended to form
part of a finished product for sale Note: A real estate dealer is entitled to claim
including packaging materials; or transitional input VAT based on the value of the
(c) For use as supplies in the course of entire (including the value of the land and the
business; or improvements thereon) real property sold
(d) For use as materials supplied in the sale regardless of whether there was in fact actual
of service; or payment of VAT on the purchase of the real
(e) For use in trade or business for which property. At the time the purchase was made,
deduction for depreciation or there was still no VAT imposed. (Fort Bonifacio
amortization is allowed under the Code. Development Corp. v. CIR)
(2) Purchase of real properties for which VAT has
actually been paid R. PERSONS WHO CAN AVAIL OF INPUT
(3) Purchase of services in which VAT has TAX CREDIT
actually been paid
(4) Transactions deemed sale Input tax on domestic purchase or importation of
(5) Presumptive Input Tax goods or properties shall be creditable:
(6) Transitional Input Tax (1) To the purchaser upon consummation of sale
and on importation of goods or properties;
Presumptive Input Tax (Sec. 111(B)) and
Persons or firms engaged in the processing of (2) To the importer upon payment of the VAT
sardines, mackerel and milk, and in prior to the release of the goods from the
manufacturing refined sugar and cooking oil and custody of the Bureau of Customs.
packed noodle based instant meals, shall be (a) The input tax on goods purchased or
allowed a presumptive input tax, creditable imported in a calendar month for use in
against the output tax, equivalent to FOUR trade or business for which deduction for
PERCENT (4%) of the gross value in money of depreciation is allowed under the Code,
their purchases of primary agricultural products shall be spread evenly over the month of
which are used as inputs to their production. acquisition and the fifty-nine (59)
succeeding months if the aggregate
“Processing” means pasteurization, canning and acquisition cost for such goods, excluding
activities which through physical or chemical the VAT component thereof, exceeds One
process alter the exterior texture or form or inner million pesos (P1,000,000). If the
substance of a product in such manner as to aggregate acquisition cost does not
prepare it for special use to which it could not exceed P1,000,000, the total input taxes
have been put in its original form or condition. will be allowable as credit against output
tax in the month of acquisition.19
Transitional Input Tax (Sec 111) (b) However, if the estimated useful life of
Who may avail: (i) By a person who becomes VAT- the capital good is less than five (5) years,
liable for the 1st time, or (ii) any person who elects as used for depreciation purposes, then
to be a VAT-registered person the input VAT shall be spread over such a
Rate: 2% Input VAT of the value of the beginning shorter period
inventory on hand or actual VAT paid on such, (3) To the purchaser of services or the lessee or
goods, materials and supplies, whichever is licensee upon payment of the compensation,
HIGHER, which amount shall be creditable rental, royalty or fee.
against the output tax of VAT-registered person.
Input tax on purchase of services, lease or use of
properties shall be creditable:

19 Please refer below for the example.


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(1) To the purchaser upon payment of the other adjustments, such as purchase returns
compensation, royalty or fee or allowances and input tax attributable to
(2) To lessee or licensee upon payment of the exempt sale.
compensation, royalty or fee
(2) The claim for tax credit referred to includes
Claiming of input Tax on motor vehicles subject to not only those filed with the BIR but also
the following conditions: those filed with other government agencies,
(1) Purchase of vehicle must be substantiated such as the Board of Investments the Bureau
with official receipts and other records; of Customs.
(2) Taxpayer has to prove the direct connection
of the motor vehicle to the business; S.3. ALLOCATION OF INPUT TAX ON MIXED
(3) Only one vehicle for land transport is allowed TRANSACTIONS20
for the use of an official/employee with value
not exceeding P2.4 million; There are four possible transactions a VAT-
(4) No depreciation shall be allowed for yachts, registered person may enter into:
helicopters, airplanes (i) VAT taxable,
(ii) VAT-exempt,
S. DETERMINATION OF OUTPUT/INPUT (iii) zero-rated VAT and
TAX; VAT PAYABLE; EXCESS INPUT TAX (iv) sale to governments.
CREDITS
A VAT-registered person who is also engaged in
transactions not subject to VAT shall be allowed
to recognize input tax credit on transactions
Output VAT – Input VAT = VAT Payable
subject to VAT as follows:
(1) All the input taxes that can be directly
attributed to transactions subject to VAT may
S.1. DETERMINATION OF OUTPUT TAX be recognized for input tax credit. Input taxes
(RR 16-2005) that can be directly attributable to VAT
taxable sales of goods and services to the
Output VAT in a sale of goods/properties shall be Government or any of its political
computed by multiplying the total amount subdivisions, instrumentalities or agencies,
indicated in the invoice or receipt by 12%. including GOCCs shall not be credited
against output taxes arising from sales to
OUTPUT VAT= non-Government entities
Gross Selling Price x Rate of VAT (or 12%) (2) If any input tax cannot be directly attributed
to either a VAT taxable or VAT-exempt
Output VAT in a sale of services shall be transaction, the input tax shall be pro-rated
computed by multiplying the total amount to the VAT taxable and VAT-exempt
indicated in the invoice or receipt by 12%. transactions and ONLY the ratable portion
pertaining to transactions subject to VAT may
OUTPUT VAT= be recognized for input tax credit.
Gross Receipts x Rate of VAT (or 12%)
T. SUBSTANTIATION OF INPUT TAX
S.2. DETERMINATION OF INPUT TAX CREDITS
CREDITABLE
(1) INPUT TAXES must be substantiated and
(1) The sum of the excess input tax carried over supported by the following documents, and
from the preceding month or quarter and the must be reported in the information returns
input tax creditable to a VAT-registered required to be submitted to the Bureau:
person during the taxable month or quarter (a) For the importation of goods = Import
shall be reduced by the amount of claim for entry or other equivalent document
refund or tax credit for value-added tax and

20 Please refer below for the example


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showing actual payment of VAT on the


imported goods. (2) TRANSITIONAL INPUT TAX shall be
(b) For the domestic purchase of goods and supported by an inventory of goods as shown
properties = Invoice showing the in a detailed list to be submitted to the BIR.
information required under Secs. 113
(Invoicing and Accounting Requirements (3) Input tax on "deemed sale" transactions shall
for VAT-Registered Persons) and 237 be substantiated with the invoice required.
(Issuance of Receipts or Sales or
Commercial Invoices) of the Tax Code. (4) Input tax from payments made to non-
(c) For the purchase of real property = public residents (such as for services, rentals and
instrument i.e., deed of absolute sale, royalties) shall be supported by a copy of the
deed of conditional sale, Monthly Remittance Return of Value Added
contract/agreement to sell, etc., together Tax Withheld (BIR Form 1600) filed by the
with VAT invoice issued by the seller. resident payor in behalf of the non-resident
(d) For the purchase of services = official evidencing remittance of VAT due which was
receipt showing the information required withheld by the payor.
under Secs. 113 and 237 of the Tax Code.
A cash register machine tape issued to (5) Advance VAT on sugar shall be supported by
a registered buyer shall constitute valid the Payment Order showing payment of the
proof of substantiation of tax credit only advance VAT.
if it shows the information required under
Secs. 113 and 237 of the Tax Code.

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Example regarding the input tax on goods where deduction for depreciation is allowed from RR 16-2005

Illustration: LBH Corporation sold capital goods on installment on October 1, 2005. It is agreed that
the selling price, including the VAT, shall be payable in five (5) equal monthly installments. The data
pertinent to the sold assets are as follows:

Selling Price - P 5,000,000.00 (exclusive of VAT)


Passed-on VAT - 500,000.00
Original Cost of Asset - 3,000,000.00
Accumulated Depreciation - 1,000,000.00
Unitilized Input Tax (Sold Asset) - 100,000.00

Accounting:
SELLER BUYER
Oct. 1, 2005 Oct. 1, 2005
Cash P 1,100,000.00 Asset P 5,000,000.00
Installment Receivable Input Tax 500,000.00
4,400,000.00 AccumulatedDepreciation
1,000,000.00 Cash 1,100,000.00
Output Tax Installment Payable 4,400,000.00
500,000.0
0 Asset 3,000,000.00
Gain on sale of asset 3,000,000.00
------------
To Record VAT Liability:
Output Tax 500,000.00
Input Tax 100,000.00
VAT Payable 400,000.00
Periodic Subsequent Payment:
Periodic Receipt of Installment: Installment Payable 1,100,000.00
Cash 1,100,000.00 Cash 1,100,000.00
Installment Receivable 1,100,000.00

* The input tax of P 500,000.00 on the bought capital goods worth P 5,000,000.00 shall be spread
evenly over a period of 60 months starting the month of purchase.

If the depreciable capital good is sold/transferred within a period of five (5) years or prior to the
exhaustion of the amortizable input tax thereon, the entire unamortized input tax on the capital goods
sold/transferred can be claimed as input tax credit during the month/quarter when the sale or transfer
was made but subject to the limitation prescribed under Sec. 4.110-7 of these Regulations.

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Example regarding the allocation of input tax on mixed transactions from RR 16-2005
Illustration: ERA Corporation has the following sales during the month:

Sale to private entities subject to 12% - P100,000.00


Sale to private entities subject to 0% - 100,000.00
Sale of exempt goods - 100,000.00
Sale to gov’t. subjected to 5% final VAT WH - 100,000.00
Total sales for the month - P400,000.00

The following input taxes were passed on by its VAT suppliers:

Input tax on taxable goods (12%) - P5,000.00


Input tax on zero-rated sales - 3,000.00
Input tax on sale of exempt goods - 2,000.00
Input tax on sale to government - 4,000.00
Input tax on depreciable capital good
not attributable to any specific activity
(monthly amortization for 60 months) - P20,000.00

A. The creditable input tax for the month shall be computed as follows:

Input tax on sale subject to 12% - P 5,000.00


Input tax on zero-rated sale 3,000.00
Ratable portion of the input tax not directly attributable to any activity:

Taxable sales (0% and 12%) X Amount of input tax not directly attributable
Total Sales

P100,000.00 X P20,000.00 - P5,000.00


400,000.00

Total input tax attributable to sales - P9,000.00


to government

B. The input tax attributable to sales to government for the month shall be computed as follows:

Input tax on sale to gov’t. - P 4,000.00


Ratable portion of the input tax not directly attributable to any activity:

Taxable sales to the government X Amount of input tax not directly attributable
Total Sales

P100,000.00 X P20,000.00 - P5,000.00


400,000.00

Total input tax attributable to sales - P 9,000.00


to government

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C. The input tax attributable to VAT-exempt sales for the month shall be computed as follows:

Input tax on VAT-exempt sales - P 2,000.00


Ratable portion of the input tax not directly attributable to any activity:

VAT-exempt sales X Amount of input tax not directly attributable


Total Sales

P100,000.00 X P20,000.00 - P 5,000.00


400,000.00

Total input tax attributable to - P 7,000.00


VAT-exempt sales

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U. REFUND OR TAX CREDIT OF EXCESS (iii) The claimed input tax must not have been
INPUT TAX (CF REFUND OF applied to any output tax during the period
ERRONEOUSLY PAID TAXES) covered and subsequent periods covered by
the claim.
Who may claim for refund/apply for issuance of (iv) The claimed input tax must have been
tax credit certificate declared from the VAT quarterly return.
(1) Zero-Rated Sales (Sec. 112(A), NIRC) (v) The claimed input tax are directly
(a) Any VAT-registered person, whose sales are attributable to 0%-rated transactions.
zero-rated or effectively zero-rated may (vi) Acceptable foreign currency exchange
apply for the issuance of a tax credit proceeds must have been duly accounted for
certificate/refund of creditable input tax due (vii) Claimed input tax must be duly supported by
or paid attributable to such sales, EXCEPT VAT invoices/receipts.
transitional input tax, to the extent that such (viii) VAT returns for the succeeding quarters
input tax has not been applied against must have been submitted.
output tax, within two (2) years after the
close of the taxable quarter when the sales (2) Cancellation of VAT Registration.
were made. The input tax that may be (a) A person whose registration has been
subject of the claim shall exclude the portion cancelled due to (i) retirement from or
of input tax that has been applied against cessation of business, or due to changes in or
the output tax. (ii) cessation of status under Section 106(C)
(b) The acceptable foreign currency exchange of the Code may, within two (2) years from
proceeds must have been duly accounted for the date of cancellation, apply for the
in accordance with the rules and regulations issuance of a tax credit certificate for any
of the Bangko Sentral ng Pilipinas (BSP) in unused input tax which may be used in
the case of zero-rated transactions paid for payment of his other internal revenue taxes.
in acceptable foreign currency and requiring (b) He shall be entitled to a refund if he has no
that such be accounted for in accordance internal revenue tax liabilities against which
with BSP rules & regulations (Secs. the tax credit certificate may be utilized.
106(A)(2)(a)(1) and (2), and Sec. 106(A)(2)(b)
and Sec. 108(B)(1) and (2), NIRC). Period to file claim/apply for issuance of tax credit
(c) Where the taxpayer is engaged in zero-rated certificate
or effectively zero-rated sale and also in This period must be distinguished from normal
taxable or exempt sale of goods of tax refunds for erroneous payments where an
properties or services, and the amount of administrative claim and judicial claim may be
creditable input tax due or paid cannot be made together, and the reckoning point of the 2
directly and entirely attributed to any one of years is from the date of the erroneous payment.
the transactions, it shall be allocated (1) Application for issuance of tax credit
proportionately on the basis of the volume of certificate or refund of creditable input tax
sales. (except transitional input tax)
(d) In the case of a person engaged in the  WITHIN 2 YEARS after the close of the
transport of passenger and cargo by air or taxable quarter when the sale was made,
sea vessels from the Philippines to a foreign not from the payment of the VAT. Sec.
country, the input taxes shall be allocated 229 is not applicable in claiming refunds
ratably between his zero-rated sales and for VAT.
non-zero-rated sales (sales subject to  If the VAT registration has been cancelled
regular rate, subject to final VAT withholding due to retirement or cessation of business,
and VAT-exempt sales). (RR 16-2005) or change of status, the 2 year period
shall be after the date of cancellation
Requirements: (Summary) (2) Administrative Claim
(i) The claimant should be a VAT-registered  The CIR shall grant the tax credit/refund
person within 120 days from the date of
(ii) There should be an application filed with the submission of complete documents in
BIR or DOF center, as the case may be, support of the application
within 2yrs after close of taxable quarter.
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 “Complete Documents” is determined by Note: VAT component of all transactions shall be


taxpayer himself. separately indicated in the VAT invoice or receipt.
 Taxpayer may only resort to a Judicial (RR 18-2011)
Claim within 30 days either after the end
of the 120 day period or after a decision is Information Contained in the VAT Invoice or VAT
made by the Commission, whichever Official Receipt:
comes first. (1) A statement that the seller is a VAT-
(3) Judicial Claim registered person, followed by his taxpayer's
 In case of denial of the application or the identification number (TIN);
expiry of the 120 days, the taxpayer may (2) The total amount which the purchaser pays
appeal to the CTA within 30 days from or is obligated to pay to the seller with the
the receipt of said denial or inaction. indication that such amount includes the
VAT:
Manner of refund (a) The amount of the tax shall be shown as
Revenue Memorandum Circular no. 57-2013 a separate item in the invoice/receipt;
(August 23, 2013): Unutilized creditable input (b) If the sale is exempt from VAT, the term
taxes attributed to zero-rated sales can only be "VAT-exempt sale" shall be written or
recovered through the application for refund or printed prominently on the invoice or
tax credit. There is no other mode of recovering receipt;
unapplied input taxes aside from an application (c) If the sale is subject to zero percent (0%)
for refund or tax credit. The Memorandum value-added tax, the term "zero-rated
Circular also instructed the disallowance of sale" shall be written or printed
unutilized creditable input taxes attributable to prominently on the invoice or receipt;
VAT zero-rated sales that is claimed as a (d) If the sale involves goods, properties or
deduction for income tax purposes. services some of which are subject to and
some of which are VAT zero-rated or
Refunds shall be made upon warrants drawn by VAT-exempt, the invoice or receipt shall
the CIR or by his duly authorized representativ