You are on page 1of 11

What are the Itemized deductions from gross income and who may avail of them ?

A. Ordinary and necessary trade, business or professional expenses.

RQSTS:
1. It constitutes as ordinary and business expenses;
2. Reasonable in amount;
3. It is paid or incurred during the taxable year
4. It is paid or incurred in carrying on the trade or business, or the exercise of profession by the taxpayer, or
attributable to the development, management, or operation of the TBP
5. Substantiated by sales invoice or official receipts showing the amount of expenses and the direct connection
to the business
6. Not contrary to law, morals, public policy, or public order; and not in the form of bribe, kickbacks, and other
similar forms of payment
7. If the payment is subject to withholding, the corresponding withholding tax must have been withheld to the
BIR.

Ordinary – payment that is normal in relation to the business of the taxpayer and the surrounding circumstances.
Necessary – expenditure is appropriate and helpful in the development of the business. Day to day expenses.
Paid or incurred during taxable year – deduction shall be taken from the taxable year in which it is paid or accrued
or paid or incurred depending on accounting method.

O&N Expenses include:

1. Salaries and other forms of compensation for personal services actually rendered

a. The recipient actually rendered the services which are ordinary and necessary to the business.
b. The aggregate remuneration paid are reasonable or more or less commensurate to the value of his services.

2. GMV of Fringe Benefit given to managers/supervisors

3. Traveling expenses
1. The expense must be reasonable and necessary
2. Incurred while away from home;
3. Paid for and incurred in the conduct of trade and business;
4. Must be substantiated by receipts.

4. Rental Expense
1. Ordinary and necessary expense.
2. Incurred during the taxable year.
3. Related or connected to the trade, business or profession.
4. It must be substantiated with receipts.
5. It is required as a condition for the continued use or possession of the property being leased
6. Taxpayer has not taken or is not taking title to the property and has no equity other than that of a lessee
7. The rentals should be subjected to 5% withholding tax.

5. Entertainment, amusement and representation expenses


1. Incurred during the taxable year;
2. Reasonable amount;
3. Not contrary to law and Must not constitute a bribe;
4. Must be substantiated (SUBSTANTIATION RULE);
5. The appropriate withholding taxes must be withheld
6. Must be connected to the development, management and operation of the TRB or directly related to or in
furtherance of the conduct of his TBP.
7. Must not exceed the ceiling:

A. If the taxpayer is engaged in the selling of goods:

MAXIMUM AMOUNT: 1/2% OF THE TOTAL NET SALES

B. If the taxpayer is a seller of services:

MAXIMUM AMOUNT: 1% OF THE NET REVENUES

6. Minor or ordinary repairs and maintenance

Incidental repairs which neither materially add to the value of the property or appreciable prolong its life but keep it
in an ordinary efficient operating condition may be DEDUCTED as expense PROVIDED the property is not increased
by the amount of such expenditure.

Repairs in the nature of REPLACEMENT, to the extent that it appreciably prolongs the life of the property of increase
its value are CAPITAL EXPENDITURES and should be charged AGAINST THE DEPRECIATION RESERVES.

7. Cost of materials and supplies

Materials and supplies on hand – included in expenses the charges for materials and supplies ONLY TO THE
AMOUNT THEY ARE ACTUALLY CONSUMED AND USED IN OPERATION DURING THAT YEAR
PROVIDED that the cost of materials has not been deducted in the net income for any previous year.

8. Advertising expenses and other selling expenses

2 types of advertising expense, namely:

(1) Advertising to simulate/boost current sales; or


 It will benefit only the current tax period;
 can immediately be taxed as an outright expense;
 Allowable deductions under main business expenses.

(2) Advertising to simulate/boost future sales.


 benefits not only the present but also future sales;
 this is the time where you treat advertising expense as a capital expenditure;
 you can still claim deductions by amortizing the amount of advertising expense by spreading it out for a
certain number of years, as long as it is reasonable

Expenses allowed to Private Educational Institutions


It has the option to elect either:
a. To deduct as expenditure during the taxable year
b. To deduct allowance for depreciation

B. The amount of interest paid or incurred within a taxable year on indebtedness in connection with the taxpayer’s
profession, trade or business.

Allowed to deduct:
1. Resident citizens, resident alien individuals and nonresident alien individuals who are
engaged in trade and business, on their gross incomes other from compensation income
2. Domestic corporations, estates and trusts may also deduct this expense.
3. Nonresident citizens and foreign corporations on their gross incomes

Not allowed to deduct:


Nonresident alien individuals not engaged in trade or business in the Philippines

RQSTS:

a. It must be connected in trade or business;


b. It is paid or incurred during the taxable year (the matching principle);
c. The debt is that of the taxpayer;
d. The interest stipulated is in writing;
e. The interest must be legally due.
f. The debt must not be between related taxpayers;
g. The interest payments must not be for financing petroleum operations;
h. In case the interest expense was incurred to procure a depreciable asset or acquire a
property used in the business, the same was not treated as a capital expenditure.

Rules on deductibility of interest expense


GR: Amount of interest expense is a deduction on the GI
Limitation on deduction: tax arbitrage rule

The taxpayer's otherwise allowable deduction for interest expense shall be reduced by 33% of the interest income
subjected to final tax.

RQSTS:
1. The taxpayer must have an interest expense deductible under the NIRC;
2. The taxpayer also has an interest income;
3. That interest income is subject to a final tax.

Non-deductible interest expense


1. Interest paid in advance by an individual taxpayer reported on the cash basis;
2. Interest expense between related taxpayers;
3. Interest expense incurred to finance petroleum explorations;
4. Interest expenses treated as a capital expenditure.

Interest paid in advance


Deducted only in the year the indebtedness is paid (cash basis)
If the indebtedness is payable in periodic amortizations:
the amount of interest which corresponds to the amount of the principal amortized or paid during the year
shall be allowed as deduction in such taxable year.

Interest expense between related taxpayers


a. Members of the same family. The family of an individual shall include only his brothers and sisters (whether by
the whole or half-blood), spouse, ancestors, and lineal descendants;
b. An individual and a corporation more than fifty percent (50%) in value of the outstanding stock of which is owned,
directly or indirectly, by or for such individual;
c. Two corporations more than fifty percent (50%) in value of the outstanding stock of which is owned, directly or
indirectly, by or for the same individual;
d. A grantor and a fiduciary of any trust; or
e. The fiduciary of a trust and the fiduciary of another trust if the same person is a grantor with respect to each
trust; or
f. A fiduciary of a trust and a beneficiary of such

Interest expense incurred to finance petroleum explorations


Interest expenses treated as a capital expenditure
At the option of the taxpayer, interest incurred to acquire property used in trade business or exercise of a profession
may be allowed as:
1. a deduction or
2. treated as a capital expenditure.

C. Taxes paid or incurred within the taxable year in connection with the taxpayer’s profession.

RQSTS:
Taxes must be paid or incurred in connection with the taxpayer’s trade or business or exercise of profession
Taxes must be imposed by law directly on the taxpayer
Taxes must be paid or incurred during the taxable year
Taxes must be those allowed and not disallowed to be deducted from gross income
Must be duly substantiated

What is deductible from GI:


GR: All taxes paid or incurred within the taxable year in connection with the taxpayer’s profession.
Indirect taxes payable to BIR
Payable to BOC
Local taxes payable to LGU
Autombile registration fees for vehicles used in business or practice of profession
EXP: Non deductible from GI
Income Tax EXP Fringe benegit tax
Foreign income taxes

 d. Ordinary losses, losses from casualty, theft or embezzlement; and net operating losses.
Resident citizens, resident alien individuals and nonresident alien individuals who are engaged in trade and
business, on their gross incomes other from compensation income are allowed to deduct these expenses.
Domestic corporations, estates and trusts may also deduct this expense. Nonresident citizens and foreign
corporations on their gross incomes from within may also deduct this expense.
Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed to deduct
this expense.
 e. Bad debts due to the taxpayer, actually ascertained to be worthless and charged off
within the taxable year, connected with profession, trade or business, not sustained between related parties.
Resident citizens, resident alien individuals and nonresident alien individuals who are engaged in trade and
business, on their gross incomes other from compensation income are allowed to deduct these expenses.
Domestic corporations, estates and trusts may also deduct this expense. Nonresident citizens and foreign
corporations on their gross incomes from within may also deduct this expense.
Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed to deduct
this expense.
f. Depreciation or a reasonable allowance for the exhaustion, wear and tear (including reasonable
allowance for obsolescence) of property used in trade or business.
Resident citizens, resident alien individuals and nonresident alien individuals who are engaged in trade and
business, on their gross incomes other from compensation income are allowed to deduct these expenses.
Domestic corporations, estates and trusts may also deduct this expense. Nonresident citizens and foreign
corporations on their gross incomes from within may also deduct this expense.
Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed to deduct
this expense.
g. Depletion or deduction arising from the exhaustion of a non-replaceable asset, usually a natural
resource.
Resident citizens, resident alien individuals and nonresident alien individuals who are engaged in trade and
business, on their gross incomes other from compensation income are allowed to deduct these expenses.
Domestic corporations, estates and trusts may also deduct this expense. Nonresident citizens and foreign
corporations on their gross incomes from within may also deduct this expense.
Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed to deduct
this expense.
 h. Charitable and other contributions. Resident citizens, resident alien individuals and nonresident
alien individuals who are engaged in trade and business, on their gross incomes other from compensation income
are allowed to deduct these expenses. Domestic corporations, estates and trusts may also deduct this expense.
Nonresident citizens and foreign corporations on their gross incomes from within may also deduct this expense.
Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed to deduct
this expense.
i. Research and development expenditures treated as deferred expenses paid or incurred by the taxpayer
in connection with his trade, business or profession, not deducted as expenses and chargeable to capital account
but not chargeable to property of a character which is subject to depreciation or depletion.
Resident citizens, resident alien individuals and nonresident alien individuals who are engaged in trade and
business, on their gross incomes other from compensation income are allowed to deduct these expenses.
Domestic corporations, estates and trusts may also deduct this expense. Nonresident citizens and foreign
corporations on their gross incomes from within may also deduct this expense.
Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed to deduct
this expense.
j. Contributions to pension trusts. Resident citizens, resident alien individuals and nonresident alien
individuals who are engaged in trade and business, on their gross incomes other from compensation income are
allowed to deduct these expenses. Domestic corporations, estates and trusts may also deduct this expense.
Nonresident citizens and foreign corporations on their gross incomes from within may also deduct this expense.
Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed to deduct
this expense.
k. Insurance premiums for health and hospitalization. Resident citizens, resident alien individuals and
nonresident alien individuals who are engaged in trade and business, on their gross incomes other from
compensation income are allowed to deduct these expenses. Nonresident citizens and nonresident alien individual
engaged in trade or business in the Philippine on their gross incomes from within may also deduct these premiums.
Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed to deduct
these premiums.
l. Personal and additional exemptions. Resident citizens, and resident alien on their gross incomes and
from compensation income are allowed to deduct these premiums. Nonresident citizens on their gross incomes
from within may also deduct this expense. Nonresident alien individuals engaged in trade or business in the
Philippines are allowed to deduct these exemptions under reciprocity.
Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed to deduct
this expense.

 29. Distinguish ordinary expenses from capital expenditures.


SUGGESTED ANSWER: Ordinary expenses are those which are common to incur in the trade or business
of the taxpayer WHILE capital expenditures are those incurred to improve assets and benefits for more than one
taxable year. Ordinary expenses are usually incurred during a taxable year and benefits such taxable year.
Necessary expenses are those which are appropriate or helpful to the business.

 30. What are the requisites for the deductibility of business expenses ?
SUGGESTED ANSWER: The following are the requisites for deductibility of business expenses:
a. Compliance with the business test:
1) Must be ordinary and necessary;
2) Must be paid or incurred within the taxable year;
3) Must be paid or incurred in carrying on a trade or business.
4) Must not be bribes, kickbacks or other illegal expenditures
b. Compliance with the substantiation test. Proof by evidence or records of the deductions allowed by law
including compliance with the business test.

 31. What are the requisites for the deductibility of ordinary and necessary trade, business,
or professional expenses, like expenses paid for legal and auditing services ?
SUGGESTED ANSWER:
a. the expense must be ordinary and necessary;
b. it must have been paid or incurred during the taxable year dependent upon the method of
accounting upon the basis of which the net income is computed.
c. it must be supported by receipts, records or other pertinent papers.
Who are related parties ?
SUGGESTED ANSWER: The following are related parties:
a. Members of the same family. The family of an individual shall include only his brothers and sisters
(whether by the whole or half-blood), spouse, ancestors, and lineal descendants;
b. An individual and a corporation more than fifty percent (50%) in value of the outstanding stock of
which is owned, directly or indirectly, by or for such individual;
c. Two corporations more than fifty percent (50%) in value of the outstanding stock of which is
owned, directly or indirectly, by or for the same individual;
d. A grantor and a fiduciary of any trust; or
e. The fiduciary of a trust and the fiduciary of another trust if the same person is a grantor with
respect to each trust; or
f. A fiduciary of a trust and a beneficiary of such. [Sec. 36 (B), NIRC of 1997]

 40. What are the requisites for valid deduction of bad debts from gross income ?
SUGGESTED ANSWER:
a. There must be an existing indebtedness due to the taxpayer which must be valid and legally demandable;
b. The same must be connected with the taxpayer’s trade, business or practice of profession;
c. The same must not be sustained in a transaction entered into between related parties;
d. The same must be actually charged off the books of accounts of the taxpayer as of the end of the taxable
year; and
e. The debt must be actually ascertained to be worthless and uncollectible during the taxable year;
f. The debts are uncollectible despite diligent effort exerted by the taxpayer. [Sec. 34 (E) (1), NIRC of 1997;
Sec. 3, Rev. Regs. No. 5-99 reiterated in Rev. Regs. No. 25-2002; Philippine Refining Corporation v. Court of Appeals,
et al., 256 SCRA 667]
g. Must have been reported as receivables in the income tax return of the current or prior years.

 41. What is the “tax benefit” rule ?


SUGGESTED ANSWER: The “tax benefit rule” posits that the recovery of bad debts previously allowed as
deduction in the preceding year or years shall be included as part of the taxpayer’s gross income in the year of such
recovery to the extent of the income tax benefit of said deduction.
NOTES AND COMMENTS:
a. If in the year the taxpayer claimed deduction of bad debts written-off, he realized a reduction of
the income tax due from him on account of the said deduction, his subsequent recovery thereof from his debtor
shall be treated as a receipt of realized taxable income. (Sec. 4, Rev. Regs. 5-99)
b. If the said taxpayer did not benefit from the deduction of the said bad debt written-off because
it did not result to any reduction of his income tax in the year of such deduction (i.e. where the result of his business
operation was a net loss even without deduction of the bad debts written-off), then his subsequent recovery
thereof shall be treated as a mere recovery or a return of capital, hence, not treated as receipt of realized taxable
income. (Sec. 4, Rev. Regs. 5-99)

42. Depreciation is the gradual diminution in the useful value of tangible property resulting from
ordinary wear and tear and from normal obsolescence. The term is also applied to amortization of the value of
intangible assets the use of which in the trade or business is definitely limited in duration.

43. The methods of depreciation are the following:


a. Straight line method;
b. Declining balance method;
c. Sum of years digits method; and
d. Any other method prescribed by the Secretary of Finance upon the recommendation of the
Commissioner of Internal Revenue:
1) Apportionment to units of production;
2) Hours of productive use;
3) Revaluation method; and
4) Sinking fund method.

44. What are personal and additional exemptions ?


SUGGESTED ANSWER: These are the theoretical persona, living and family expenses of an individual allowed
to be deducted from the gross or net income of an individual taxpayer.
These are arbitrary amounts which have been calculated by our lawmakers to be roughly equivalent to the
minimum of subsistence, taking into account the personal status and additional qualified dependents of the
taxpayer. They are fixed amounts in the sense that the amounts have been predetermined by our lawmakers and
until our lawmakers make new adjustments on these personal exemptions, the amounts allowed to be deducted
by a taxpayer are fixed as predetermined by Congress. [Pansacola v. Commissioner of Internal Revenue, G. R. No. 159991,
November 16, 2006 citing Madrigal and Paterno v. Rafferty and Concepcion, 38 Phil. 414, 418 (1918)]

45. What is the amount allowed as basic personal exemption ?


SUGGESTED ANSWER: There shall be allowed a basic personal exemption amounting to Fifty thousand
pesos (P50,000) for each individual taxpayer.
In the case of married individuals where only one of the spouse is deriving gross income, only such spouse
shall be allowed the personal exemption. [Sec. 35 (A), NIRC of 1997 as amended by Rep. Act No. 9504; Sec. 2.79 (I) (1)
(a), Rev. Regs. No. 2-98 as amended by Rev. Regs. No. 10-2008]
NOTES AND COMMENTS: It is clear from Rep. Act No. 9504 that each of the spouses may claim the
P50,000.00. Thus, the total familial basic personal exemption for spouses is P100,000.00.
Furthermore, the distinctions between the concepts of single, married and head of the family for purpose
of availing of the basic personal exemption has already been eliminated by Rep. Act No. 9504.
RETURNS AND WITHHOLDING

1. Income tax returns being public documents, until controverted by competent evidence, are
competent evidence, are prima facie correct with respect to the entries therein. (Ropali Trading v. NLRC, et al., 296 SCRA
309, 317)

2. Individuals required to file an income tax return.


a. Every Filipino citizen residing in the Philippines;
b. Every Filipino citizen residing outside the Philippines on his income from sources within the
Philippines;
c. Every alien residing in the Philippines on income derived from sources within the Philippines; and
d. Every nonresident alien engaged in trade or business or in the exercise of profession in the
Philippines. [Sec. 51 (A) (1), NIRC of 1997]
3. Married individuals who are earning purely compensation income allowed to file
separate returns.

4. Married individuals, whether citizens, resident or non-resident aliens, who do not


derive income purely from compensation shall file a consolidated return for the taxable year to include
the income of both spouses, but where it is impracticable for the spouses to file one return, each spouse may
file a separate return of income but the returns so filed shall be consolidated by the Bureau for purposes of
verification.” [Section 51 (D) of the NIRC of 1997]

5. Computation of income tax for married individuals whether citizens, resident or non-
resident aliens, who do not derive income purely from compensation required file a consolidated
return for the taxable year but could not do so. For married individuals, the husband and wife, subject to
no. 2, supra,, shall compute separately their individual income tax based on their respective total taxable income:
Provided, that if any income cannot be definitely attributed to or identified as income exclusively earned or
realized by either of the spouses, the same shall be divided equally between the spouses for the purpose of
determining their respective taxable income. [2nd to the last par., Sec. 24 (A) (2), NIRC of 1997 as amended by Rep. Act
No. 9504]

6. Individuals who are not required to file an income tax return.


a. An individual whose gross income does not exceed his total personal and additional exemptions
for dependents, Provided, That a citizen of the Philippines and any alien individual engaged in business or practice
of profession within the Philippines shall file an income tax return regardless of the amount of gross income [Sec.
51 (A) (2), NIRC of 1997]
b. An individual with respect to pure compensation income, derived from such sources within the
Philippines, the income tax on which has been correctly withheld: Provided, That an individual deriving
compensation concurrently from two or more employers at any time during the taxable year shall file an income
tax return [Sec. 51 (A) (2), NIRC of 1997, as amended by Rep. Act No. 9504, paraphrasing supplied]
c. An individual whose sole income has been subject to final withholding tax;
d. A minimum wage earner (is a worker in the private sector paid the statutory minimum wage,
or is an employee in the public sector with compensation income of not more than the statutory minimum wage
in the non-agricultural sector where he/she is assigned), an individual who is exempt from income tax pursuant
to the provisions of the Tax Code and other laws, general or special. [Sec. 51 (A) (2), NIRC of 1997 in relation to Sec. 22
(HH), both as amended by Rep. Act. 9504]

7. Minimum wage earners are exempt from income taxation. That minimum wage earners
(is a worker in the private sector paid the statutory minimum wage, or is an employee in the public sector with
compensation income of not more than the statutory minimum wage in the non-agricultural sector where he/she
is assigned) 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. [Sec. 51 (A) (2), NIRC of 1997 in relation to Sec. 22 (HH), both as amended
by Rep. Act. 9504]

8. An individual who is not required to file an income tax return may nevertheless be
required to file an information return. [Sec. 51 (A) (3), NIRC of 1997]

9. A corporation files its income tax return and pays its income tax four (4) times during
a single taxable year. Quarterly returns are required to be filed for the first three quarters, then a final adjustment
return is filed covering the total taxable income for the whole taxable year, be it calendar or fiscal.

10. An individual earning from the practice of his profession or who engages in trade or
business files his income tax return and pays his income tax four (4) times during a single taxable year.
Quarterly returns are required to be filed for the first three quarters, then an annual income tax return is filed
covering the total taxable income for the whole of the previous calendar year.

11. The purpose of the above four (4) times a year requirement is to make available
sufficient funds to meet the budgetary requirements, on a quarterly basis thereby increasing government
liquidity. It also eases hardships on the part of individuals who are required to make this four time return. Thus, the
taxpayer does not have to raise large sums of money in order to pay the tax.

12. An individual earning purely compensation income files only one annual income tax
return covering the total taxable compensation income for the whole of the previous calendar year.

13. Under the withholding tax system, taxes imposed or prescribed by the NIRC of 1997 are
to be deducted and withheld by the payors from payments made to payees for the former to pay
directly to the Bureau of Internal Revenue. It is also known as collection of the tax at source.

14. A withholding agent is explicitly made personally liable under the Tax Code for the
payment of the tax required to be withheld, in order to compel the withholding agent to withhold the tax
under any and all circumstances. In effect, the responsibility for the collection of the tax as well as the payment
thereof is concentrated upon the person over whom the Government has jurisdiction. (Filipinas Synthetic Fiber
Corporation v. Court of Appeals, et al., G.R. Nos. 118498 & 124377, October 12, 1999) The system facilitates tax collection and
reduces tax evasion.

15. The two (2) types of withholding at source are the 1) final withholding tax; and 2)
creditable withholding tax.

16. Under the final withholding tax system the amount of income tax withheld by the
withholding agent is constituted as a full and final payment of the income due from the payee on the
said income. [1st sentence, 1st par., Sec. 2.57 (A), Rev. Regs. No. 2-98]
The liability for payment of the tax rests primarily on the payor or the withholding agent.. Thus, in case of
his failure to withhold the tax or in case of under withholding, the deficiency tax shall be collected from the payor
withholding agent. The payee is not required to file an income tax return for the particular income.

17. Under the creditable withholding tax system, taxes withheld on certain income
payments are intended to equal or at least approximate the tax due from the payee on the said income.
The income recipient is still required to file an income tax return and/or pay the difference between the tax withheld
and the tax due on the income. [1st and 2nd sentences, Sec. 257(B), Rev. Regs. No. 2-98]

18. The two kinds of creditable withholding taxes are (a) taxes withheld on income payments
covered by the expanded withholding tax; and (b) taxes withheld on compensation income.

19. Payments to the following are exempt from the requirement of withholding or when
no withholding taxes required:
a. National Government and its instrumentalities including provincial, city, or municipal
governments;
b. Persons enjoying exemption from payment of income taxes pursuant to the provisions of any
law, general or special, such as but not limited to the following:
1) Sales of real property by a corporation which is registered with and certified by the HLURB or HUDCC
as engaged in socialized housing project where the selling price of the house and lot or only the lot does not
exceed P180,000.00 in Metro Manila and other highly urbanized areas and P150,000.00 in other areas or
such adjusted amount of selling price for socialized housing as may later be determined and adopted by the
HLURB;
2) Corporations registered with the Board of Investments and enjoying exemptions from income under
the Omnibus Investment Code of 1997;
3) Corporations exempt from income tax under Sec. 30, of the Tax Code, like the SSS, GSIS, the
PCSO, etc. However, income payments arising from any activity which is conducted for profit or income
derived from real or personal property shall be subject to a withholding tax. (Sec. 57.5, Rev. Regs. No. 2-98)

20. For tax amnesty purposes, the withholding agent is not a taxpayer. He is made to pay the
tax where he fails to withhold as a penalty and not because the tax is due from him. (Commissioner of Internal Revenue
v. Court of Appeals, et al., G.R. No. 108576, January 20, 1999, the Anscor case)

PENALTIES, INTERESTS AND SURCHARGES

1. Surtaxes or surcharges, also known as the civil penalties, are the amounts imposed in addition to
the tax required.
They are in the nature of penalties and shall be collected at the same time, in the same manner, and as part
of the tax. [Sec.248 (A), NIRC of 1997]

2. What are the two (2) kinds of civil penalties ?


SUGGESTED ANSWER:
a. the 25% surcharge for late filing or late payment [Sec. 248 (A), NIRC of 1997] (also known as the
delinquency surcharge), and
b. the 50% willful neglect or fraud surcharge. [Sec. 248 (B), Ibid.]

3. Define deficiency income tax.


SUGGESTED ANSWER: Deficiency income tax is the amount by which the tax imposed under the NIRC of
1997 exceeds the amount shown as the tax due by the taxpayer upon his return. [Sec. 56 (B) (1), NIRC of 1997]

4. Deficiency interest, defined. The interest assessed and collected on any unpaid amount of
tax at the rate of 20% per annum or such higher rate as may be prescribed by regulations, from the date prescribed
for payment until the amount is fully paid. [Sec. 249 (A) (B), NIRC of 1997]

5. Delinquency interest, defined. The interest assessed and collected on the unpaid amount
until fully paid where there is failure on the part of the taxpayer to pay the amount die on any return required to be
filed; or the amount of the tax due for which no return is required; or a deficiency tax, or any surcharge or interest
thereon, on the date appearing in the notice and demand by the Commissioner of Internal Revenue. [Sec.249 (c),
NIRC of 1997]

6. After resolving the issues the BIR Commissioner reduced the assessment. Was it
proper to impose delinquency interest despite the reduction of the assessment ? Why ?
SUGGESTED ANSWER: Yes. The intention of the law is to discourage delay in the payment of taxes due to
the State and in this sense the surcharge and interest charged are not penal but compensatory in nature – they are
compensation to the State for the delay in payment, or for the concomitant tuse of the funds by the taxpayer
beyond the date he is supposed to have paid them to the State. (Bank of the Philippine Islands v. Commissioner of Internal
Revenue, G. R. No. 137002, July 27, 2006)

7. Compromise penalty is the amount agreed upon between the taxpayer and the Government
to be paid as a penalty in cases of a compromise.

8. As a result of divergent rulings on whether it is subject to tax or not, the taxpayer was
not able to pay his taxes on time. Imposed surcharges and interests for such delay, the taxpayer not
invokes good faith with the BIR countering by saying that good faith is not a valid defense for violation
of a special law. Furthermore, the BIR further raises the defense that the government is not bound by
the errors of its agents. Who is correct ?
SUGGESTED ANSWER: The taxpayer is correct. The settled rule is that good faith and honest belief that one
is not subject to tax on the basis of previous interpretation of government agencies tasked to implement the tax,
are sufficient justification to delete the imposition of surcharges. (Michel J. Lhuillier Pawnshop, Inc. v. Commissioner of
Internal Revenue, G. R. No. 166786, September 11, 2006)