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TAXATION LAW
FREQUENTLY ASKED QUESTIONS

TRENDING TOPICS IN TAXATION LAW 6. Addressed and served to the correct person
TO GET AT LEAST 85% in his/its registered or duly notified new
address.
1 Jeopardy Assessment
TAX PAYER’S REMEDIES
 Assessment without the benefit of
complete or partial audit by an authorized
ASSESSMENT
revenue officer
 Notice and demand for payment for the
amount due to the taxpayer. (Commissioner  Belief that assessment and collection of a
v. CTA, 27 SCRA 1159) deficiency tax will be jeopardized by delay
 Official action of an administrative officer.  Due to the taxpayer’s failure to comply
(Bisaya Land Transportation Co. v. Collector, with to present his pertinent records (Sec.
105 Phil. 1338) 3.1.a, Revenue Regulations 07-2001).
 Contains computation of tax liabilities, and  Ground to compromise a tax liability.
demand for payment within a prescribed (2011 Bar)
period. (Tupaz v. Ulep, 316 SCRA 118)
Delinquency Tax
Purpose of Assessment a. Self-assessed tax per return filed by the
 To ascertain the amount that each taxpayer on the prescribed date was not paid
taxpayer is to pay (ibid). at all or only partially paid; or
b. Deficiency tax assessed by the BIR becomes
Requisites for Valid Assessment final and executory.
1. The Final Assessment Notice (FAN) (BIR
Form 17.08)
 contains the name Deficiency Tax
 address a. Amount that exceeds the amount shown
 TIN of the taxpayer upon the taxpayer’s return. ; or
 kind of tax b. Amount of tax which exceeds the amounts
 period covered previously assessed or collected without
 basic tax assessment. (Sec. 56, NIRC)
 penalties
 signed by the authorized BIR official, Assessment Process
 date of payment of the tax  Issuance of a letter of authority;
 Demand letter  Audit stage;
 Factual and legal bases of the
 Issuance of notice of informal conference;
assessment
2. Issued on account of or covered by a  Informal conference;
validly issued letter of authority  Issuance of preliminary assessment notice;
3. State the factual and legal bases of the and
assessment and jurisprudence on  Issuance of formal letter of demand and
which it is based; otherwise, the assessment notice. (Sec. 228, NIRC)
assessment shall be void;
4. Signed by the Commissioner or his
duly authorized representative;
5. Issued within the original prescriptive
period prescribed by law or within the
extended prescriptive period as validly Issuance of preliminary assessment notice
agreed between the BIR and the taxpayer; Concept of a Pre-Assessment Notice
and served by personal delivery or by (PAN)
registered mail; and
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TAXATION LAW
FREQUENTLY ASKED QUESTIONS

 Issued by the Regional  To determine the taxpayer’s correct


Assessment Division, or any internal revenue tax liabilities.
other concerned BIR Office
GENERAL RULE:
 Informing a taxpayer of the
findings of the RO.  One examination per taxable year. (Sec.
235, NIRC)
Requirements of a Valid PAN
 In writing; and EXCEPTIONS:
 Must show the law and the facts on  CIR determines that fraud,
which the assessment is made. (Sec. 228, irregularities, or mistakes were
NIRC) committed by the taxpayer;
 Taxpayer’s request for the re-
Instances when PAN no longer required: investigation or re-examination of his
 Mathematical error in the computation books of accounts was granted by the
of tax; or commissioner;
 Excise tax due on excisable articles has  Taxpayer’s liabilities must be verified;
not been paid; or and
 Discrepancy between the tax withheld  Commissioner chooses to
and the amount actually remitted by the exercise his power to obtain
withholding agent; or information relative to the
 An article locally purchased or imported examination of other taxpayers.
by an exempt person has been sold, (Secs. 5 and 235, NIRC)
traded or transferred to non-exempt
persons; or Carry over or automatic Disputed Assessment
application of excess CWT against the
 taxpayer indicates protest against
estimated tax liabilities for the taxable
the delinquent assessment
quarter or quarters of the succeeding
taxable year. (Sec 3.1.3, RR 12-99)  requests for reconsideration,
 assessment becomes a disputed
assessment. (CIR vs. Isabela Cultural
Tax Audit Corp., GR 135210, July 11, 2001)
 120 days to conduct the audit
When is a tax assessment made or
 submit the required report of deemed made?
investigation from the date of receipt of
 When released, mailed or sent by
a Letter of Authority
the Collector of Internal Revenue to
 If unable to submit his final report of
the taxpayer
investigation within the 120-day period
he must then submit a Progress Report  within the three-year or ten -year
to his Head Office period, as the case may be (CIR v.
 Surrender the LA for revalidation. Pascor, G.R. 128315, June 29, 1999)
 upon the expiration of the
prescriptive period. (Basilan Estates,
Inc. v. Collector, 21 SCRA 17 [1967])
Letter of Authority (LA)
 Official document NOTES:
 To examine and scrutinize a taxpayer’s  Necessarily anterior to the date
books of accounts and other accounting of the actual release or mailing of
records the demand letter.
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TAXATION LAW
FREQUENTLY ASKED QUESTIONS

 Estate is under administration,  If CIR and taxpayer, may agree in


the notice of assessment must be writing, for an extension of the period
sent to the administrator. before the expiration of the 3 year
 Since the administrator had not period.
received the notice of assessment
 Return was amended substantially.
 He could not appeal the
assessment to the CTA within
False, fraudulent, and non-filing of returns
thirty (30) days from date of
Prescriptive period
mailing of notice. (Republic v.
Leonor dela Roma, G.R. No. L-  Ten (10) years from the discovery of
21108, November 29, 1956) the falsity, fraud or from the
 The law does not require that the omission to file the return. (Sec. 222,
demand or notice be received NIRC)
within the prescriptive period. False vis-a-vis Fraudulent returns
(Republic v. Tan Kim En, CA-G.R. False Return Fraudulent Return
SP No. 28743, February 29, 1964). - a deviation from the - intentional and
 Receipt of the tax notice by the truth or fact whether deceitful with the sole
taxpayer’s attorney-in-fact is binding intentional or not. aim of evading the
upon the taxpayer. (Gibbs vs. correct tax due.
Commissioner, 15 SCRA 318 [1965]) Suspension of running of statute of
Limitations
Grounds:
Prescriptive period for assessment  Taxpayer cannot be located in the address
Where a return was filed: given by him in the return, unless he
GENERAL RULE: informs the CIR of any change in his
 Assessments made beyond the address thru a written notice to the BIR;
prescribed period would not be binding  Taxpayer is out of the Philippines;
on the taxpayer (Tupaz v. Ulep, supra).  Warrant of distraint and levy is duly served
 Period for assessment = within three (3) upon the taxpayer, his authorized
years after the date the return was due representative or a member of his
or household with sufficient discretion and no
 if the return is filed after the due date property is located (proper only for
prescription will start to run on the date suspension of the period to collect);
the return was filed.  When the CIR is prohibited from making
the assessment or beginning distraint or
EXCEPTIONS: levy or a proceeding in court for 60 days
 If there is failure to file the required thereafter, such as when there is a pending
return, the period is within 10 years after petition for review in the CTA from the
the date of discovery of the omission to decision on the protested assessment
file the return. (Republic v. Ker & Co., GR L-21609,
 Date of discovery must be within the September 29, 1966);
three-year period.  When CIR and the taxpayer agreed in
 If the return is false or fraudulent with writing for the extension of the assessment,
intent to evade the payment of tax, the the tax may be assessed within the period
period is 10 years from the date of so agreed upon (Sec. 222 (b), NIRC);
discovery.  When the taxpayer requests for
reinvestigation which is granted by the
Commissioner
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TAXATION LAW
FREQUENTLY ASKED QUESTIONS

 When an Answer filed by the BIR to the


petition for review in the CTA. Submission of documents within sixty (60)
days from filing of protest
Protesting an Assessment  Counted from the filling of the protest.
 act by the taxpayer  Non-submission of the documents
 questioning the validity of the imposition of renders the assessment final, executory
delinquency increments and demandable.
Supporting documents
 for internal revenue taxes
 documents to support his protest.
 shown in the notice of assessment and letter of
demand. Effect of failure to protest
Procedure to be followed in protesting an  renders FAN final and executory
assessment:  taxpayer loses right to contest
a. BIR issues assessment notice;
b. The taxpayer files a protest. Either be a Note:
request for reconsideration or for  filing of the protest within thirty
reinvestigation. Such must be filed (30) days from the receipt of the
within 30 days from receipt of assessment would be mandatory for
assessment; the taxpayer to use the other
c. All relevant documents must be administrative and judicial
submitted within sixty (60) days from remedies.
filing of protest; otherwise, the
assessment shall become final and Remedies of Taxpayer Regarding Action by
unappealable; Commissioner
d. If CIR decides adversely or if no In case of denial of protest
decision yet at the lapse of 180 days,  Appeal to the CTA
the taxpayer may appeal to the CTA  within thirty (30) days from receipt of
Division, thirty (30) days from the the decision
receipt of the decision or from the
lapse of the 180 days otherwise the NOTE: If the taxpayer appeals to the CIR within
decision shall become final, executory thirty (30) days from date of receipt of the final
and demandable; (RCBC v. CIR, G.R. decision of the CIR’s duly authorized
No. 168498, Apr. 24, 2007) representative, such decision will not be final and
e. If the decision is adverse to the executory.
taxpayer, he may file a motion for In case of inaction by Commissioner within 180
reconsideration or new trial before the days from submission of documents
same Division of the CTA within  Petition for review with the CTA within
fifteen (15) days from notice thereof; thirty (30) days after the expiration of the
f. If the decision of Division of the CTA 180-day period; or
on a motion for reconsideration or new  appeal the final decision to the CTA within
trial is adverse to the taxpayer, he may thirty (30) days.
file a petition for review with the CTA
en banc; and
g. The ruling or decision of the CTA en
banc may be appealed with the TAX REFUND
Supreme Court, through a verified  money that a taxpayer overpaid
petition for review on certiorari  Returned by the taxing authority.
pursuant to Rule 45 of the 1997 Rules (Fort Bonifacio Development Corp. v.
of Civil Procedure.
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TAXATION LAW
FREQUENTLY ASKED QUESTIONS

CIR, G.R. No. 173425, September 4,  The 2-year prescriptive period is


2012) explicitly intended to apply only to suits
or proceedings for the recovery of taxes,
Nature of a tax refund penalties, or sums erroneously,
GENERAL RULE: excessively, illegally or wrongfully
 Construed strictly against the collected.
taxpayer.  A claim for tax credit authorized by law
 Claimants have the burden of  Unless otherwise provided for the Tax
proof to establish basis of their Code, would instead prescribed within
claims. (Hitachi Global vs. Comm. ten (10) years under Art. 1144 of the
G.R. No. 174212, [2010]) Civil Code. ( Victorias Milling Co. vs.
Central Bank, 13 SCRA 479)
EXEMPTION:
 Premised on erroneous payment
of tax. COLLECTION
 Tax refund is based either on a  Upon issuance of a final assessment
tax exemption or tax refund made for the determination of the tax
statute. (Comm. vs. Fortune Tobacco,
due.
Corp., G.R. No. 167274-75,
[2008]) Assessments are deemed final when:
 The taxpayer fails to file a protest;
Grounds for refund  After the 180 day period and the CIR has
not yet acted on the protest, the taxpayer
 Tax is erroneously collected
fails to appeal it; and
 Tax is illegally collected
 After thirty (30) days from the receipt of
 Sum collected is excessive or in the decision of the CIR the taxpayer fails
any manner wrongfully to appeal.
collected.
 Penalty is collected without authority.
Prescriptive periods
GENERAL RULE:
 three (3) years following the
Requirements for refund: assessment has been released,
 Written claim with the CIR to correct mailed, or sent (BPI v. CIR, G.R.
the errors of his subordinate and to No. 139736, Oct. 17, 2005); and
notify the government;  at any time within ten (10) years
 Categorical claim for refund or credit; after the discovery of the falsity,
 Filed within two (2) years after the fraud or omission. (Sec.222 (a),
payment of the tax or penalty otherwise NIRC)
no refund or credit could be taken.
 No suit or proceeding shall be instituted EXCEPTIONS:
after the expiration of the two-year  The same exceptions relative to
period regardless of any supervening the prescriptive periods for
cause that may arise after payment; and assessment;
 Present proof of payment of the tax.  If the government makes another
assessment or the assessment
NOTE: made is revised, the prescriptive
period for collection of such tax
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TAXATION LAW
FREQUENTLY ASKED QUESTIONS

is counted from the date the last  Royalties;


or revised assessment was made;  Dividends;
and  Annuities;
 In an action brought to enforce a  Prizes and winnings;
compromise, it is 10 years from
 Pensions; and
the time the right of action
accrues as fixed in the Civil Code.  Partner's distributive share from the net
(Art. 1144 [1], CC) income of the general professional
partnership. (Sec. 32(A), NIRC)
Civil Actions
Civil actions available to the taxpayer: SOURCES OF INCOME SUBJECT TO TAX:
 Appeal to the CTA in division within thirty Compensation Income
(30) days;  All remuneration for services
 Appeal to the CTA en banc within fifteen (15) performed by an employee for his
days from receipt of the decision; employer under an employer-employee
 Appeal to the SC – within fifteen (15) days; relationship
 Unless specifically excluded by the
 Petition for certiorari, prohibition and
Code (National Internal Revenue Code
mandamus to the SC in cases of grave abuse of
[NIRC]). (Sec. 2.78.1. (A), RR No. 2-98,
discretion, lack or excess of jurisdiction.
as amended)
 Action to contest forfeiture of chattel - within
six (6) months, an action to recover the net
proceeds realized at the sale (Sec. 231, NIRC); NOTE:
 Action for damages against a RO by reason of  The basis on which the remuneration is
any act done in the performance of official duty paid is immaterial in determining whether
(Sec. 227, NIRC); and the remuneration constitutes
 Injunction – when the CTA is in the opinion compensation.
that the collection by the BIR may jeopardize  Paid on the basis of piece-work, or a
taxpayer. percentage of profits, and may be paid
hourly, daily, weekly, monthly or annually.
(Ibid)
Fringe Benefits
General Rule:
2  Any good, service or other benefit
GROSS INCOME furnished or granted in cash or in kind
by an employer to an individual
Income derived from whatever source, including employee
but not limited to the following:
 Compensation for services in whatever Exception:
form paid, including, but not limited to  except rank and file employees
fees, salaries, wages, commissions, and
similar items; Professional Income
 Gross income derived from the conduct of General Rule:
trade or business or the exercise of a Income derived from the exercise of a
profession; profession
 Gains derived from dealings in property;
 Interests; Condition:
 Rents;
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TAXATION LAW
FREQUENTLY ASKED QUESTIONS

No employer-employee relationship market value,


between him and his client. whichever is higher.

Income from Business Net capital gain, net capital loss


 Total sales Net capital gain Net capital loss
 less the cost of goods sold Excess of the capital Excess of capital losses
 Plus any income from investments gain over capital loss. from capital gain. (Sec.
and from incidental or outside (Sec. 39(A)(2), NIRC) 39(A)(3), NIRC)
operations or sources. (Sec. 43,
Revenue Regulations [RR] No. 02-40)
Income tax treatment of capital loss
Formula
Capital loss limitation rule (applicable to
Gross Income = (Total Sales – Cost of goods)
both corporations and individuals)
Income from investments  Deductible only to the extent of the capital
gain.
Income from Dealings In Property  If no capital gain, no deduction is allowed.
Types of Properties  Ordinary loss deducted from the capital
gain
 Ordinary Assets
 Capital Assets Net loss carry-over rule (applicable only to
individuals)
ORDINARY CAPITAL ASSET  Loss shall be treated in the succeeding
ASSET taxable year as a loss from the sale or
Property held by the Defined by an exchange of a capital asset.
taxpayer used in exclusion of all
 Held for not more than twelve (12)
connection with his ordinary assets.
months. (Sec. 39(D), NIRC)
trade or business
NOTES:
Types of gains from dealings in property  This applies only to individual
taxpayers
Ordinary income vis-à-vis capital gains
 Not to corporate taxpayers. (Ibid)
ORDINARY CAPTIAL
INCOME TAX GAINS TAX  Exception to the general rule that
losses shall be deducted from the gross
 to be paid if the  To be paid if the
income in the same taxable year in
property is an property is a
ordinary asset capital asset (RR which the losses were incurred. (CIR v.
PAL, G.R. No. 179259, September 25,
 Regardless of the No. 9- 2012).
2013)
type of
proceedings and
personality of
mortgagees or Dealings in real property situated in the
selling persons. Philippines
 Gain is income from the Philippines.
Actual gain vis-à-vis presumed gain Dealings in shares of stock of Philippine
Actual gain Presumed corporations
gain
 Excess of the cost  Seller realized gains, Shares listed and traded in the stock
from a sale of taxed at 6% of the exchange
asset. selling price or fair  Rate of one-half of one percent (1/2
of 1%) of the gross selling price
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TAXATION LAW
FREQUENTLY ASKED QUESTIONS

Shares not listed and traded in the stock General Rule:


exchange Tax rate is 20%

Rate Exception:
 capital gains tax or final tax of  Prizes amounting to P10,000 or less
five percent (5%); or (5%)
 ten percent (10%)
Income from Any Source Whatever
 during the taxable year. (Sec. Forgiveness of indebtedness
24(C) and Sec. 27(D)(2), NIRC)  It is income to the extent of the amount
realized by the debtor as compensation
IMPORTANT: for his services.
Whether the shares of stock are traded in the When treated as a gift.
local stock exchange and not where the actual
 Need not be included in the latter’s
sale happened are controlling(Del Rosario v.
income.
CIR, CTA Case no. 4796, December 1, 1994)

Passive Investment Income


Royalty Recovery of accounts previously written-
 Compensation for the use of property, off – when taxable/when not taxable
expressed as a percentage of receipts
 from using the property or as a payment General Rule:
for each unit produced.  It becomes taxable income.
Rental income
Rents Exception:
 Deduction did not result in any tax
 Paid for the use or lease or enjoyment
benefit to the taxpayer or in a reduction
of a property of income tax liability.
 whether real or personal
 To the owner of the property. Receipt of tax refunds or credit
Recovery of Tax Erroneously or Illegally
Annuities, Proceeds From Life Collected
Insurance Or Other Types Of Insurance General Rule:
Annuity  No suit or proceeding shall be
 The periodic installment during the life maintained until a claim for refund or
of a person for a fixed period of time, credit has been duly filed with the
whichever is longer, in consideration of Commissioner.
capital paid by him. Exception:
 Portion of proceeds from insurance  Suit or proceeding may be maintained,
whether or not such tax, penalty, or sum
not taxable while the portion that
has been paid under protest or duress.
represents the interests is taxable.
 Total premium returns exceed the General Rule:
aggregate premiums paid
 No such suit or proceeding shall
 The excess shall be included in the
be filed after the expiration of
gross income. (Sec. 62, RR No. 02-40)
two (2) years from the date of
payment of the tax or penalty.
Prizes and Awards
Exception:
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TAXATION LAW
FREQUENTLY ASKED QUESTIONS

 Commissioner may, even o only the actual value of


without a written claim therefor, such consideration and the
refund or credit any tax paid by the transferee are
 where on the face of the return exempt from taxation. (Sec.
62, RR No. 02-40)
upon which payment was made
 such payment appears clearly to Value of property acquired by gift,
have been erroneously paid. bequest, devise or descent
 Only donated property is
Source rules in determining income from excluded from gross income.
within and without  Income from such property,
Interests Residence of the shall be included in the gross
debtor or obligor income. (NIRC, Sec. 32(B)(3))
Dividends Residence of the
corporation paying Amount received through accident or
dividend health insurance
Services Place of Performance  Group life insurance proceeds, death
of service benefit payments
Rental & Royalties Location of property.  under the workmen’s compensation
insurance contract,
Exclusions from gross income
Taxpayers who may avail of the exclusions:  health or accident insurance contract
 All kinds of taxpayers  having the characteristics of life
o individuals (citizens or aliens), insurance proceeds payable by
o estates and trusts, and reason of death.
o corporate (residents or non-
residents) Income exempt under tax treaty
Exclusions under the Constitution  Income of any kind to the extent required
by any treaty obligation binding upon the
 Income derived by the government or
Government of the Philippines.
its political subdivisions from exercise
of any essential governmental  Provisions of a tax treaty must take
function precedence over and above the provisions
of the local taxing statute
Exclusions under the Tax Code  Tax treaties are accepted limitations to the
(a) Proceeds of life insurance policies power of taxation. (USAFE Veterans
 Must be paid to the heirs or Association, Inc. v. Treasurer, G.R. No. L-
beneficiaries 10500, June 30, 1959)
 by reason of death of the insured,
Retirement benefits, pensions,
 whether in a single sum or
gratuities, etc.
installment. (Sec. 32(B)(1), NIRC)
Included:
Return of premium paid  Received by officials and employees in the
Amounts received under life insurance, private sector in accordance with a
endowment or annuity contracts reasonable private benefit plan under R.A
 received as a return of 4917;
premiums paid.  Derived under R.A 7641 from private firms
 In case of a transfer for a without a BIR-approved reasonable
valuable consideration of a life retirement plan;
insurance,
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TAXATION LAW
FREQUENTLY ASKED QUESTIONS

 Separation pay due to death, sickness or Prizes and awards made primarily in recognition
other disability or any other cause beyond of religious, charitable, scientific, educational,
the control of the employee or the official artistic, literary, or civic achievement
(e.g., retrenchment);
 Social security benefits, retirement REQUIREMENTS:
gratuities, pensions and other similar  Selection was made without any action
benefits received by citizens or aliens who on the part of recepient; and
come to reside permanently in the  Recipient is not required to render
Philippines from foreign government substantial future services. (Sec.
agencies, private or public; 32(B)(7)(c), NIRC)
 Benefits due to residents under laws of the
United States administered by the United Deductions from gross income
States Veterans Administration;
 SSS benefits received in accordance with  Items or amounts which are allowed be to
R.A. 8282; and deducted from gross income.
 GSIS benefits received under R.A 8291.
(NIRC, Sec.32(B)(6)) Itemized deductions

Requirements for Exemption on Taxability of Expenses


Retirement Benefits
 The plan must be reasonable; Nature: ordinary and necessary
 The benefit plan must be approved by Ordinary expense necessary expense
the BIR; It connotes a Expensed is
 The retiring official or employee must payment, appropriate or
have been in the service of the same normal in relation to helpful in the
employer for at least ten (10) years and the business of the development of the
must at least be fifty (50) years old at the taxpayer. taxpayer’s business
time of retirement; and (General Electric Inc., or
 The retiring official or employee should v. Collector, CTA Case that the same is
not have previously availed of the privilege No. 1117, July 14, proper for the
under the retirement benefit plan of the 1963) purpose of realizing
same or another employer. (Sec. a profit or
minimizing a loss.
32(B)(6)(a), NIRC; Sec. 2.78.1(B)(1), RR
(Ibid)
No. 02-98)
(1) Salaries, wages and other forms of
NOTES:
compensation for personal services
Voluntary retirement is not a requirement.
actually rendered, including the grossed up
monetary value of the fringe benefit
HOWEVER:
subjected to fringe benefit tax which tax
There is no need to comply with the above
should have been paid
requirements before the retirement benefits
(2) Traveling/transportation expenses
would be excluded when retirement is
(3) Cost of materials
compulsory.
(4) Rentals and/or other payments for use or
possession of property
Winnings, prizes, and awards, including those (5) Repairs and maintenance
in sports (6) Expenses under lease agreements
(7) Expenses for professionals
GENERAL RULE: (8) Entertainment/Representation expenses
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TAXATION LAW
FREQUENTLY ASKED QUESTIONS

(9) Political Campaign Expenses in a taxable year. (Sec. 34 (D)(3),


(10) Training expenses NIRC; 2011)

(b) Interest Bad Debts


 Amount paid for the use or forbearance  Debts due to the taxpayer actually
of money. (Art. 1956, CC) ascertained to be worthless
(c) Taxes  charged off within the taxable year
GENERAL RULE: o EXCEPT those not
 Taxes paid or incurred within the connected with profession,
taxable year in connection with the trade or (Sec. 34(E)(1),
taxpayer’s profession, trade or business NIRC)
shall be allowed as deduction. (Sec.
34(C)(1), NIRC) NOTE:
Recovery of bad debts previously allowed
 Amounts paid shall be part of gross as deduction shall be included as part of
income when refunded or credited in the gross income in the year of recovery.
the year of receipt.
Depreciation
Limitation  Deduction a reasonable allowance
For a nonresident alien engaged in trade or for the exhaustion, wear and tear of
business and Resident foreign corporation: property used in the trade or
business. (Sec. 34 (F), NIRC)
 Deduction shall be allowed only if and In the case of property held by one person for
to the extent that they are connected
life with remainder to another person
with income from sources with the
Philippines. (Sec. 34(C)(2), NIRC)  Computed as if the life tenant were the
absolute owner of the property.(Ibid.)
Losses
 Incurred in a trade or business for profit;
In the case of property held in trust,
 Incurred in any transaction entered into
profit, although not connected with the  Apportioned between the income
trade or business; and beneficiaries and the trustees in
 Casualty losses that arise from fire, storm, accordance with the pertinent
shipwreck or other casualty, or for theft provisions of the instrument creating
or robbery, even though not connected the trust,
with the trade or business of the  In the absence of such provisions
taxpayer. o on the basis of the trust income
allowable to each. (Ibid.)
Other types of losses:
Charitable and other contributions
 Capital losses
 Subject to the limitation prescribed
 Securities becoming worthless
under Section 34(H)(1)
 Losses on wash sales of stocks or
securities  Deductible in full under paragraph 2
of the same section.
 Wagering losses
 Net Operating Loss Carry- Contributions to pension trusts
Over (NOLCO) Deduction in a reasonable amount
 The excess of allowable transferred or paid into such trust during the
deductions over gross income taxable year in excess of such contributions.
12
TAXATION LAW
FREQUENTLY ASKED QUESTIONS

GENERAL RULE:
Conditions: Capital outlay cannot be claimed as a deduction.
- Such amount has not theretofore been
allowed as a deduction, and EXCEPTION:
- It is apportioned in equal parts over a - Claimed by private educational
period of ten (10) consecutive years institutions, during the taxable year
beginning with the year in which the for the expansion of school
transfer or payment is made. (Sec. 34(J), facilities or
NIRC)
- deduct allowance for depreciation
Deductions under special laws thereof. (Sec. 34(A)(2), NIRC)
- Advertising expense to maintain some No deductions shall in any case be allowed in
form of goodwill. (General Foods respect of losses from sales or exchanges of
Corporation v. CIR, April 24, 2003)
property directly or indirectly:
- Payments made in exchange for the
revelation of a competitor’s trade. (3M
Philippines, Inc. v. CIR, September 26, - Between members of a family;
1988) - Between an individual and corporation
more than 50% in value of the
- Bribes, Kickbacks and Other Similar
outstanding stock of which is owned,
Payments.
directly or indirectly, by or for such
- Tax deduction reduces the taxable individual;
income while tax credits reduce the tax o Except in the case of
liability. (CIR v. Central Drug
distributions in liquidation
Corporation, G.R. No. 159647, April 15,
2005) - Between two corporations more than 50%
in value of the outstanding stock of
which is owned, directly or indirectly, by
Items NOT Deductible or for the same individual if either one
 Personal, living or family expenses of such corporations, with respect to the
 Any amount paid for new buildings taxable year of the corporation
or for permanent improvements preceding the date of the sale of
(capital expenditures); exchange was under the law applicable
to such taxable year, a personal holding
 Premiums paid on life insurance policy
company or a foreign personal holding
covering life or any other officer or
company;
employee financially interested in any trade o Except in the case of
or business carried on by the taxpayer, distributions in liquidation
individual or corporate, when the taxpayer is - Between the grantor and a fiduciary of
directly or indirectly a beneficiary under any trust;
such policy. - Between the fiduciary of and the fiduciary
 Interest expense, bad debts, and losses from of a trust and the fiduciary of another
sales of property between related parties trust if the same person is a grantor with
 Losses from sale or exchange of property respect to each trust; or
- Between a fiduciary of a trust and
beneficiary of such trust. (Sec. 36(B),
NOTE: NIRC)
 Capital expenditures and major repairs
are considered as capital outlays. Non-deductible interest
13
TAXATION LAW
FREQUENTLY ASKED QUESTIONS

No deduction shall be allowed in respect


of interest under the following situations: - No deduction for the loss shall be allowed
- Individual reporting income on cash under Section 34
basis incurs indebtedness on which o UNLESS the claim is made by a
an interest is paid in advanced. dealer in stock or securities and
with respect to a transaction made
NOTES: in the ordinary course of the
Such interest shall be allowed as a deduction in the business of such dealer. (Sec.
year the indebtedness is paid. 38(A), NIRC)

If the indebtedness is payable in periodic Personal and additional exemption (R.A. No.
amortizations, 9504, Minimum Wage Earner Law)
- Amount of interest shall be allowed as Coverage
deduction in such taxable year.  Citizens
o If both the taxpayer and the  resident aliens and
person to whom the payment has  non-resident aliens engaged in trade or
been made or is to be made are business
persons specified under Section .
36 (B); or Allowance of Personal Exemption for
o If the indebtedness is incurred to Individual Taxpayer:
finance petroleum exploration. - P50,000.00 for each individual taxpayer.
(Sec. 34(B), NIRC)
In the case of married individual where only
Non-deductible taxes one of the spouses is deriving gross income,
- Income taxes provided for under Title - only such spouse shall be allowed the
II of NIRC personal exemption. (Sec. 4, R.A. 9504)
- Income taxes imposed by authority of Additional exemptions for Dependents:
any foreign country, if taxpayer does not - P25,000.00 for each dependent
signify in his return his desire to have - Not exceeding four (4). (Sec. 38(B), NIRC)
any extent the benefits relating to
- Claimed by only one of the spouses in the
credits for taxes of foreign countries;
case of married individuals. (Ibid.)
- Estate and donor’s taxes; and
- Taxes assessed against local benefits of
a kind tending to increase the value of In the case of legally separated spouses,
the property assessed. (Sec. 34(C)(1), - only by the spouse who has custody of the
NIRC) child or children. (Ibid.)
 Total amount of additional exemptions
shall not exceed the maximum additional
Non-deductible losses exemptions allowed under R.A. 9504.
(Ibid.)
- No loss shall be allowed as a deduction
o if at the time of the filing of the Classification of income as to source:
return, such loss has been claimed  Within the Philippines
as a deduction for estate tax  Without the Philippines
purposes in the estate tax return.  Partly within or partly without the
(Sec. 34(D), NIRC) Philippines
Losses from wash sales of stock or securities
14
TAXATION LAW
FREQUENTLY ASKED QUESTIONS

GROSS INCOME AND TAXABLE Taxable income from sources within the
INCOME FROM SOURCES WITHIN Philippines
THE PHILIPPINES GENERAL RULE:
From the items of gross income within the
Gross income from sources within the Philippines,
Philippines  Deducted the expenses, losses and
Interests: other deductions properly allocated
 From sources within the Philippines and thereto and a ratable part of expenses,
interest on bonds, notes, or other interest- interests, losses and other deductions
bearing obligations of residents, effectively connected with the business
corporate or otherwise; or trade conducted exclusively within
the Philippines which cannot definitely
Dividends: be allocated to some items or class of
gross income:
 From the following:
Provided,
 Domestic corporation; and  Must be fully substantiated by all the
 Foreign corporation, unless information necessary for its
less than 50% of its income calculation.
for the 3-year period ending  The remainder, shall be treated in full as
with the close of its taxable taxable income from sources within the
year preceding the declaration Philippines. (Sec. 42(B)(1), NIRC)
of such dividends was derived
from sources within the EXCEPTION:
Philippines.  No deductions for interest paid or
incurred abroad
Unless, indebtedness was actually incurred
to provide funds for use in connection with
NOTE: the conduct or operation of trade or
 Limited only in an amount which bears business in the Philippines. (Sec. 42(B)(2),
the same ratio to such dividends as the NIRC)
gross income of the corporation for
such period derived from sources
within the Philippines bears to its gross GROSS INCOME AND TAXABLE
income from all sources. INCOME FROM SOURCES WITHOUT
Services: THE PHILIPPINES
 Compensation for labor or personal Gross income from sources without the
services performed in the Philippines; Philippines
 Interests other than those derived from
Rentals and royalties:
sources within the Philippines;
 From property located in the Philippines
 Dividends other than those derived from
or from any interest in such property; sources within the Philippines;
Sale of real property:
 Compensation for labor or personal
 Gains, profits and income from the sale of services performed without the
real property, located in the Philippines; Philippines;
and  Rentals or royalties for the use of or for
Sale of personal property: the privilege of using without the
 Gains, profits and income from the sale of Philippines, patents, copyrights, secret
personal property. (Sec. 42(A), NIRC) processes and formulas, goodwill,
15
TAXATION LAW
FREQUENTLY ASKED QUESTIONS

trademarks, trade brands, franchises and other deduction which cannot definitely be allocated
other like properties; and to some items or classes of gross income;
 Gains, profits and income from the sale Second, such portion of the taxable income
of real property located without the attributable to sources within the Philippines may be
Philippines. (Sec. 42(C), NIRC) determined by processes or formulas of general
apportionment prescribed by the Secretary of
Taxable income from sources without the Finance. (Ibid.)
Philippines Gross Income All income, gain, or
Items of gross income from sources without the profit subject to
Philippines, there shall be deducted the expenses, income tax under
losses, and other deductions properly apportioned Sec. 32(A), NIRC.
or allocated thereto and a ratable part of any Taxable Income items of gross
expense, loss or other deduction which cannot income specified in
definitely be allocated to some items or classes of the NIRC, less
gross income. deductions and/or
The remainders shall be treated in full as taxable personal and
income from sources without the Philippines. (Sec. additional
42(D), NIRC) exemptions if any ,
authorized for such
INCOME PARTLY WITHIN OR types of income by
PARTLY WITHOUT THE this Code or other
PHILIPPINES special laws (Sec. 31,
Income partly from sources within and partly NIRC)
from sources without the Philippines Net Income Gross income less
The following shall be treated as derived partly statutory deductions
from sources within and partly from sources and exemptions
without Philippines: (Sec.36, Revenue
 Gains, profits and income from the sale of Regulation No. 2)
personal property produced in whole or in
part by the taxpayer within and sold 3
without the Philippines, or produced in TAXATION OF RESIDENT, CITIZEN,
whole or in part by the taxpayer without NON-RESIDENT CITIZENS, AND
and sold within the Philippines; and RESIDENT ALIENS
 Gains, profits and income derived from Resident citizens are taxable on income from
the purchase of personal property within all sources within and without the
and its sale without the Philippines, or Philippines. (Sec. 23, NIRC)
from the purchase of personal property NRC is taxable only on income derived from
without and its sale within the Philippines. sources within the Philippines. (Ibid.)
(Sec. 42(E), NIRC) Aliens, whether a resident or not of the Philippines,
NOTE: Gain from the sale of shares of stock in is taxable only on income derived from sources
domestic corporations shall be treated as derived within the Philippines. (Ibid.)
entirely form sources within the Philippines Taxation on compensation income
regardless of where the said shares are sold. (Ibid.)
Taxable income partly from sources within and Inclusions
partly from sources without the Philippines
First, be computed by deducting the expenses, (a) Monetary compensation
losses or other deductions apportioned or allocated
Regular salary/wage
thereto and a ratable part of any expense, loss or
16
TAXATION LAW
FREQUENTLY ASKED QUESTIONS

 Statutory minimum wage refers to from taxable gross income. (Sec. 32(B),
the rate fixed by the Regional NIRC, as amended by R.A. No. 10653)
Tripartite Wage and Productivity Deductions
Personal exemptions and additional
Board as defined by the Bureau of
exemptions
Labor and Employment Statistics of
the Department of Labor and Basic personal exemption of P50,000.00
Employment. (Sec. 22 [GG]) for each individual taxpayer (Sec. 35(A),
 Separation pay/retirement benefit NIRC, as amended by R.A. No. 9504); and
not otherwise exempt Additional exemption amounting to
P25,000.00 for each qualified dependent
 Bonuses, 13th month pay, and other
not exceeding four (4) (Sec. 35(B), ibid,);
benefits not exempt
 Director’s fees Dependent: Any legitimate, illegitimate or
 Excluded from the gross income legally adopted child dependent and living
provided they do not exceed P upon the taxpayer who are not more than
twenty-one (21) years of age, unmarried and
82,000. (Sec. 32 B [7] e)
not gainfully employed or regardless of age
(b) Non-monetary compensation Exclusions if incapable of self-support because of
Fringe benefit subject to tax mental or physical defect. (Sec. 35, ibid.)
Employer is the one required to pay income
tax on fringe benefit . Health and hospitalization insurance
De minimis benefits Only an individual taxpayer may claim deduction
Facilities or privileges furnished or offered on premium payments of health and hospitalization
by an employer to his employees that are of insurance. However, in case of married taxpayers,
relatively small value and are offered or only the spouse claiming additional exemptions for
furnished by the employer, which are not dependents may claim (Sec. 34 (M), NIRC).
considered as compensation, but merely as a Taxation of compensation income of a
means of promoting the health, goodwill, minimum wage earner
contentment and efficiency of his
employees. (Revenue Regulations No. 10-2008) Statutory minimum wage: Rate fixed by
the Regional Tripartite Wage and
Productivity Board, as defined by the Bureau
NOTES: of Labor and Employment Statistics (BLES)
of the Department of Labor and
 Non-taxability of de minimis benefits
Employment (DOLE). (Sec. 22(GG), NIRC)
applies to both managerial and rank-and-
Minimum wage earner: workers paid with
file employees. (Ibid)
the statutory minimum wage.
 De minimis benefits are generally exempt Taxation of business income/income
from both fringe benefits tax and income tax. from practice of profession
(Revenue Regulations 02-98) Income derived from the exercise of a
 13th month pay and other benefits, profession (Sec. 32(A)(2), NIRC). Hence no
and payments specifically excluded from employee-employer relation.
taxable compensation income.
Passive income subject to final tax

Interest income
NOTE: Gross benefits received by officials Interest: Amount of compensation paid for
and employees of public and private entities the use of money from such use
not exceeding P82,000.00 shall be excluded
17
TAXATION LAW
FREQUENTLY ASKED QUESTIONS

GENERAL RULE: Subject to final tax  Joint-stock companies;


at the rate of 20%.  Joint accounts;
EXCEPTIONS:  Associations;
 If from a bank deposits provided the  Insurance companies. (Sec. 22 [b],
recipients are either a foreign NIRC)
government, a financing institutions
owned and controlled by foreign The following corporations are not
government, or a regional or financial considered corporations for tax
institutions established by foreign purposes:
government. (Sec. 25(2), NIRC)  General professional partnerships;
 Loans extended by any of the above  Joint venture or consortium formed
 Certificate of Indebtedness received by for the purpose of undertaking
any of the above such as bonds or construction projects, or engaging
debentures in petroleum, coal, geothermal and
 Bank deposit maintained under an other energy operations pursuant to
expanded foreign currency deposit unit an operating or consortium
 Long term investment with maturity agreement under a service contract
period of 5 years or more. with the government.
Royalties
NOTE: Distributive share of each partner
- consideration for the use of, or the right to
in a general professional partnership shall
use, any copyright of literary, artistic or
form of partner’s gross income in its
scientific work including cinematograph
individual tax returns subject to graduated
films, or films or tapes used for radio or income tax rates.
television broadcasting, any patent, trade
mark, design, or model, plan, secret TAX PAYABLE
formula or process, or for the use of, or Taxes and rates imposed on domestic
the right to use, industrial, commercial or corporations
scientific equipment, or for information
NCIT – 30% of taxable income from all
concerning industrial, commercial or sources within and without the
scientific experience (Revenue Memorandum Philippines
Circular No. 77-2003). MCIT – 2% of gross income if MCIT applies.
Rate (Sec. 27 (E) 1, NIRC)
- Ten percent (10%) of final tax. (Sec. 24(B), GIT (Optional Corporate Income Tax) –
15% of gross income ** (if qualified)
NIRC)
IAET – 10% of improperly
Prizes and Rewards accumulated earnings.
- Amount in cash or in kind received by Final tax on passive income.
chance or through luck are generally
taxable except if specifically mentioned NCIT or Regular tax
under the exclusion from computation of Normal Corporate income tax (NCIT) or Regular
gross income under Sec. 32 [B] of NIRC. Tax are is applicable to both domestic and foreign
corporations.
4 Minimum Corporate Income Tax (MCIT)
TAXATION OF DOMESTIC Application
CORPORATIONS MCIT applies to both domestic and resident
The term Corporation includes: foreign corporations which are deemed
 Partnership, no matter how created taxable under the law, beginning from the
or organized; fourth (4th) year of the commencement of its
18
TAXATION LAW
FREQUENTLY ASKED QUESTIONS

business operations (Sec. 27(A), NIRC), 40% of the gross sales or gross receipts
provided: of a qualified individual taxpayer; or
 They have zero or negative taxable 40% of the gross income of a qualified
income; or corporation. (Sec. 34 (L), NIRC)
 When the MCIT is greater than the normal
income tax due. (Revenue Regulations 09-98)

Carry Forward of Excess Minimum Tax Any TAXATION OF CAPITAL GAINS


excess of the MCIT over the normal corporate Kinds of capital gain:
income tax may be carried forward on an annual Capital Gains Subject to Final Tax – usually
basis and credited against the Normal Corporate imposed upon the sale, exchange or other
Income Tax for the three immediately succeeding disposition of:
taxable years (Sec. 27 (E)(2), NIRC). - Real property;
TAXATION OF PASSIVE INCOME - Shares of stock that are not traded
Passive income subject to tax through the stock exchange.
 Interest from deposits and yield, or any
other monetary benefit from deposit Capital Gains Included in Gross Income for
substitutes and from trust funds and similar Income Tax Purposes – includes sale and other
arrangements and royalties. disposition of capital assets other than those
 Capital gains from the sale of shares of enumerated above.
stock not traded in the stock exchange.
TAX ON PROPRIETARY
 Income derived under the expanded
foreign currency deposit system. EDUCATIONAL INSTITUTIONS AND
HOSPITALS
 Inter-corporate dividends.
Predominance Rule
 Capital gains realized from the sale,
Income realized from tuition or hospital services is
exchange, or disposition of lands and/or
higher than the income from unrelated trade,
buildings.
business, or other activity, special domestic
ALLOWABLE DEDUCTIONS corporations shall be taxed at 10%. Otherwise,
Itemized deductions those corporations shall be taxed at the regular rate
of 30%.
 Expenses;
 Interest; NOTE: Those corporations should segregate their
 Taxes; income realized from tuition/hospital services and
 Losses; their income realized from allied services like
 Bad debts; dormitory, canteen, gymnasium, pharmacy and
 Depreciation; small grocery store.
 Charitable and other Contribution; Rate
 Contributions to Pension Trusts; They shall pay a tax of ten percent (10%) on their
and taxable income. (Sec. 27(B), NIRC)
 Deduction under Special Laws. EXCEPTIONS
 Those passive income covered by Sec. 27 (D)
of the NIRC; and
Optional standard deduction  If the gross income from unrelated trade
- Fixed percentage deduction allowed exceeds fifty percent (50%) of the total
to certain taxpayers without regard gross income, the regular rate of thirty
to any expenditure. percent (30%) shall be imposed on the
The optional standard deduction is an entire taxable income. (ibid)
amount not exceeding:
19
TAXATION LAW
FREQUENTLY ASKED QUESTIONS

5 grave abuse of discretion, lack or excess of


EXCLUSIVE APPELLATE jurisdiction.
JURISDICTION OVER CIVIL TAX d. Action to contest forfeiture of chattel, at any time
CASES before the sale or destruction thereof, to
Rules on Assessment and Collection recover the same, and upon giving proper
bond, enjoin the sale; or after the sale and
Return filed was not false or fraudulent within 6 months, an action to recover the net
Collection with Prior Assessment proceeds realized at the sale. (Sec. 231, NIRC)
Assessment = within three (3) years from e. Action for damages against a RO by reason of any
the date of filing of the return or from the act done in the performance of official duty.
last day required by law for filing, whichever (Sec. 227, NIRC)
is later. (Sec. 203, NIRC)
f. Injunction – when the CTA is of the opinion that
Collection = within 3 years from the date of the collection by the BIR may jeopardize
assessment or from the filing of the return, taxpayer.
either by:
 Summary proceedings; or 6.
 Judicial proceedings. (Sec. 222 [c], NIRC) INCOME

Collection without Prior Assessment  Income refers to all wealth which flows
Assessment made within three (3) years into the taxpayer other than a mere
from the date of filing of the return or from return of capital. It includes the forms on
the last day required by law for filing, income specifically described as gains
whichever is later. (Sec. 203, NIRC) and profits, including gains derived from
No return was filed, or the return filed was false the sale or other disposition of capital
or fraudulent
Collection with Prior Assessment
assets. (Sec. 36, RR No. 2)
Assessment = within 10 years from the date of  An income is an amount of money
discovery of the failure to file the return, or the coming to a person or corporation within
falsity or fraud in the return. (Section 222 [a], NIRC) a specified time, whether as payment for
Collection without Prior Assessment services, interest or profit from
Collection = within 10 years after the discovery of investment. Unless otherwise specified, it
falsity or fraud or non-filing and it should only be means cash or its equivalent. (Hernando
by judicial proceeding (Sec. 222 [a], NIRC) Conwi vs. CIR G.R. No. 48532 August 31,
Appeal to the CTA in division – within 30 days from 1992)
receipt of decision on the protest or from the lapse
of 180 days due to inaction of the CIR. (Sec. 228, When Income Taxable
NIRC)
Requisites:
a. Appeal to the CTA en banc– the party adversely 1. Gain must be realized or received;
affected by the decision of a CTA division may 2. Gain must not be excluded by law or
file a motion for reconsideration or new trial treaty from taxation; and
within 15 days from receipt of the decision of 3. There must be gain whether in cash
the CTA division. If the MR is denied file a or its equivalent. (CIR v. Manning,
petition for review with the CTA en banc. G.R. No. L- 28398, August 6, 1975)
b. Appeal to the SC – within 15 days from the
receipt of the decision of the CTA. TESTS IN DETERMINING WHETHER
c. By way of special civil action – Petition for certiorari, INCOME IS EARNED FOR TAX PURPOSES
prohibition and mandamus to the SC in cases of
20
TAXATION LAW
FREQUENTLY ASKED QUESTIONS

(1) Realization Test – Revenue is generally payment of the tax rests primarily on the
recognized when both of the following payor as a withholding agent. In case of his
conditions are met: failure to withhold or in case of under
a. The earning process is complete or withholding, deficiency shall be collected
virtually complete; and against the payor. (Sec. 2.57 (A), Revenue
b. An exchange has taken place. (Manila Regulations, 02-98)
Mandarin Hotels, Inc. vs. CIR, CTA case  The finality of the withholding tax is limited
no. 5046, March 24, 1997) only to the payee’s income tax liability on
(2) Claim of Right Doctrine – A taxable gain the particular income. (ibid)
is conditioned upon the presence of a claim
of right to the alleged gain and the absence 8.
of a definite unconditional obligation to
return or repay. COMPROMISE AND ABATEMENT OF TAXES
(3) Economic Benefit Test, Doctrine of
Proprietary Interest – taking into COMPROMISE
consideration the pertinent provisions of  It is an agreement between two or more
law, income realized is taxable only to the persons who, amicably settle their
extent that the taxpayer is economically differences on such terms and conditions as
benefited. they may agree on to avoid any lawsuit
(4) Severance Test – income is recognized between them. It implies the mutual
when there is separation of something agreement by the parties in regard to the
which is of exchangeable value. (Eisner vs. thing or subject matter which is to be
Macomber, 252 US 189, 1920) compromised.
(5) All-events test
Requirements:
a. Fixing of a right to income or liability Requisites for compromise:
to pay; and 1. Tax liability of the taxpayer;
b. Availability of reasonable accurate 2. An offer of compromise is rejected by the
determination of such income or taxpayer of an amount to be paid by him;
liability. (CIR vs. Isabela Cultural and
Corporation, February 12, 2007) 3. The acceptance (the CIR or the taxpayer) of
the offer in the settlement of the claim.
NOTE: The amount of liability does not have to be
determined exactly, it must be determined with ABATEMENT
reasonable accuracy. Reasonable accuracy implies  It is the cancellation of a tax liability.
something less than an exact or completely accurate
amount. (ibid) Instances when the CIR is authorized to abate or
cancel a tax liability:
7. 1. The tax or any portion thereof appears to be
unjustly or excessively assessed; or
WITHHOLDING TAX 2. The administration and collection costs
involved do not justify the collection of the
Concept amount due. (Sec. 204 [B], NIRC)
 Taxes imposed by the NIRC are to be
deducted and withheld by the payor- 9.
corporations and or persons for the former
to pay the same directly to the BIR. ITEMS TO BE INCLUDED IN GROSS
 It is not a tax but a means of collecting taxes ESTATE
in advance of the payment of tax.
(1) Decedent’s interest;
Final Withholding Tax (2) Transfers in contemplation of death;
 Amount of income tax withheld by the (3) Revocable transfers;
withholding agent is constituted as a full and (4) Property passing under general power of
final payment of the income tax due from appointment;
the payee on said income. The liability for (5) Proceeds of life insurance;
(6) Prior interests;
21
TAXATION LAW
FREQUENTLY ASKED QUESTIONS

(7) Transfers for insufficient consideration; and


(8) Capital of the surviving spouse. (Sec. 85, GENERAL RULE: A transfer is a revocable
NIRC) transfer where:
(1) There is a transfer by trust or otherwise; and
Kinds of Property Embraced under Decedent’s (2) The enjoyment thereof was subject at the
Interest date of his death to any change through the
1. Property owned. – The decedent possesses all exercise of a power (in whatever capacity
the attributes of ownership. exercisable) by: (i) the decedent alone; (ii)
2. Interest in property possessed. – The law the decedent in conjunction with any other
contemplates any interest or right in the person without regard to when or from
nature of property, but less than title having what source the decedent acquired such
value or capable of being valued, transferred power, to alter, amend, revoke or terminate;
by the decedent at his death. If the decedent or (iii) Where any such power is relinquished
owns only a proportionate share in the in contemplation of the decedent’s death.
property, only the value of such share has to (Sec. 85 (C), NIRC)
be included in the gross estate. If he is EXCEPTION: Bona fide sale for an adequate and full
entitled only to the use of the property, it is consideration in money or money’s worth. (Ibid.)
the value of that use that has to be included.
3. Property or interest transferred. (Sec. 85, Property Passing under General Power of
NIRC) Appointment

Power of Appointment – refers to a right to


Transfer in Contemplation of Death designate the person or persons who shall enjoy or
possess certain property from the estate of a prior
GENERAL RULE: The transfer shall be decedent.
considered as a transfer in contemplation of death if,
during the lifetime of the decedent, he still retained in “General” – when it gives to the donee the power to
the property the following: appoint any person he pleases, including himself, his
1. Possession or enjoyment thereof; spouse, his estate, executor or administrator, and his
2. Receipt of the income or the fruits creditor, thus having as full dominion over the
notwithstanding the transfer; or property as though he owned it.
3. Right either alone or in conjunction with
any person, to designate the person who “Special” – when the donee can appoint only among
shall possess or enjoy the said property or a restricted or designated class of persons other than
income therefrom. (Sec. 85 (B), NIRC) himself. (Morgan v. Commissioner, 309 U.S. 78 [1940])
EXCEPTIONS: Bona fide sale for an adequate and
full consideration in money or money’s worth. GENERAL RULE: Property over which the
Circumstances taken into account include: decedent held a power of appointment is not
(1) Age and state of health of the decedent at includible in his gross estate unless such power is
the time of gift, especially where he was general.
aware of a serious illness; EXCEPTION: Bona fide sale for an adequate and full
(2) Length of time between the gift and date of consideration in money or money’s worth.
death (Dison vs. Posadas, 57 Phil. 465, G.R.
No. 36770, November 4, 1932). A short The general power of appointment may be
interval suggests the conclusion that the exercised by the decedent:
thought of death was in the decedent’s (1) By will;
mind, and a long interval suggests the (2) By deed executed in contemplation of, or
opposite (Estate of Mary Cushman, 40 B.T.A. intended to take effect in possession or
948 [1940]); enjoyment, or after his death; or
(3) Concurrent making of a will or a gift within (3) By deed under which he has retained for his
a short time after the transfer. (Roces v. life or any period not ascertainable without
Posadas, 58 Phil. 108, G.R. No. 34937, March reference to his death or for any period
13, 1933) which does not in fact end before his death:

Revocable Transfers
22
TAXATION LAW
FREQUENTLY ASKED QUESTIONS

(a) the possession or enjoyment of the property at the time of the decedent’s death
right to the income from the property; over the consideration received. (Ibid.)
or
(b) the right, either alone or in conjunction Capital of the Surviving Spouse
with any person, to designate the  Refers to the exclusive property of the
persons who shall possess or enjoy the surviving spouse and shall not, for estate tax
property or the income. (Sec. 85 (D), purposes, be deemed as part of his or her
NIRC) gross estate, such as:
(1) That which is brought to the marriage
Proceeds of Life Insurance as his/her own;
 Taxation of the proceeds of life insurance will (2) That which each acquires during the
depend on the designated beneficiary, the marriage by lucrative title;
manner of designation of such beneficiary (3) That which is acquired by right of
(whether revocable or irrevocable), and the redemption or by exchange with other
period and source of the funds used in paying property belonging to only one of the
the premiums on the insurance contract. (Sec. spouses;
85 (E), NIRC) (4) That which is purchased with exclusive
money of the surviving spouse;
Requisites to be included in the Gross Estate: (5) The sums collected by installments
(1) The decedent takes an insurance policy on during the marriage from credit payable
his own life; and in a certain number of years are
(2) The amounts are receivable by: considered property of the spouse to
(a) the estate, his executor, or whom the credit belongs; and
administrator irrespective of whether (6) The right to an annuity, whether
or not the insured retained the power perpetual or for life, and the right of
of revocation; or usufruct, belonging to one of the
(b) any beneficiary designated as revocable. spouses, form part of his/her separate
(Ibid.) property, but the fruits, pensions and
interests, due during the marriage
The proceeds of life insurance are not included belong to the partnership. (Sec. 85 (H),
in a decedent’s gross estate hence, not subject to NIRC)
estate tax when:
(1) The beneficiary is other than the estate, his 10.
executor, or administrator; and
(2) The designation is irrevocable. (Ibid.) DETERMINATION OF GROSS ESTATE AND
NET ESTATE
NOTE: Life insurance proceeds are always excluded
from gross income of the recipient whether the Gross Estate - refers to all properties and interests
designation of the beneficiary is revocable or in properties of the decedent at the time of his death.
irrevocable.
Net Estate - refers to the value of the estate after all
Transfers for Insufficient Consideration deductions have been made against the gross estate;
 Transfers, trusts, interests, rights or powers but it will be subject to the graduated tax rates. (Sec.
(denominated as transfer in contemplation 86, NIRC)
of death, revocable transfer and property
passing under general power of Gross Estate is determined:
appointment) made, created, exercised or  If the decedent is a resident or non-resident
relinquished for a consideration in money or citizen, or a resident alien – All properties, real
money’s worth. (Sec. 85 (G), NIRC) or personal, tangible or intangible, wherever
EXCEPTION: a bona fide sale for an adequate situated.
and full consideration in money or money’s  If the decedent is a non-resident alien –Only
worth. properties situated in the Philippines provided
 The value to be included in the gross estate that, intangible personal property is subject to
is the excess of the fair market value of the the rule of reciprocity provided for under
Section 104 of the NIRC. (Sec. 85, NIRC)
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TAXATION LAW
FREQUENTLY ASKED QUESTIONS

it will be prejudicial to the taxpayers, except


Basis for the Valuation of Gross Estate in the following cases:
(1) Where the taxpayer deliberately
As to real property - Whichever is higher between misstates or omits material facts from
the fair market value: his return or any document required of
(1) As determined by the Commissioner (zonal him by the BIR;
value); or (2) Where the facts subsequently gathered
(2) As shown in the schedule of values fixed by by the BIR are materially different from
the provincial and city assessors. (Sec. 88 (B), the facts on which the ruling is based;
NIRC) or
(3) Where the taxpayer acted in bad faith.
NOTE: If there is no zonal value, use the (Sec. 246, NIRC)
FMV in the latest tax declaration.
12.
As to personal property - Whether tangible or EXEMPTIONS OF GIFTS FROM DONOR’S
intangible, appraised at FMV . “Sentimental value” is TAX
practically disregarded.
1. Dowries to the extent of the first 10,000.00 per
As to shares of stock – parent if made out of conjugal funds.
(1) Unlisted
(a) unlisted common - book value (b) 2. Athlete’s Prizes and Awards in local and
unlisted preferred - par value international sports tournaments sanctioned by their
(2) Listed - Arithmetic mean between the respective national sports associations. (Sec. 1,
highest and lowest quotation at a date R.A.7549)
nearest the date of death, if none is available
on the date of death itself. (RR No. 2-2003) 3. Any contribution in cash or in kind to any
candidate, political party or coalition of parties for
campaign purposes, duly reported to the
Commission. (Sec. 13, RA 7166)
As to right to usufruct, use or habitation, as well
as that of annuity - Shall take into account the
probable life of the beneficiary in accordance with the 13.
latest basic standard mortality table, to be approved
by the Secretary of Finance, upon recommendation SPECIFIC TAXING POWER OF LOCAL
of the Insurance Commissioner. (RR No. 2- 2003) GOVERNMENT UNITS
TAXING POWERS OF PROVINCES
11.
Province may levy only the following taxes, fees, and
RULE-MAKING AUTHORITY OF THE charges:
SECRETARY OF FINANCE
1. Tax on transfer of real property ownership
Authority of Secretary of Finance to promulgate (Sec. 135, LGC);
rules and regulations 2. Tax on business of printing and publication
(Sec. 137, LGC);
 Upon recommendation of the CIR, the
3. Franchise tax (Sec. 137, LGC);
Secretary of Finance shall promulgate all
4. Tax on sand, gravel and other quarry
needful rules and regulations for the effective
resources (Sec. 138, LGC);
enforcement of the provisions of the NIRC.
5. Professional tax (Sec. 139, LGC);
(Sec. 244, NIRC)
6. Amusement tax (Sec. 140, LGC); and
7. Annual fixed tax for every delivery truck or
Non-retroactivity of rulings
van of manufacturers or producers,
 The rulings of the BIR are not retroactive. wholesalers of, dealers, or retailers in,
Any revocation, modification or reversal of certain products. (Sec. 141, LGC)
any of the rules and regulations or any of the
rulings or circulars promulgated by the CIR TAXING POWERS OF CITIES
shall not be given retroactive application if
24
TAXATION LAW
FREQUENTLY ASKED QUESTIONS

TAXING POWERS OF MUNICIPALITIES 2. The following sales allocation shall apply to


 Levy taxes, fees, and charges not otherwise manufacturers, assemblers, contractors,
levied by the provinces. (Sec. 142, LGC) producers, and exporters with factories, project
offices, plants, and plantations in the pursuit of
Municipalities may impose taxes on the following their business:
businesses:
1. Manufacturers, assemblers, repackers, a. 30% of all sales recorded in the principal
processors, etc. of any article of commerce office - taxable by the city or municipality
of whatever kind or nature (Sec. 143(a), where the principal office is located; and
LGC); b. 70% of all sales recorded in the principal
2. Wholesalers, distributors, or dealers in any office - taxable by the city or municipality
article of commerce (Sec. 143(b), LGC); where the factory, project office, plant, or
3. Exporters, and manufacturers, millers, plantation is located.
producers, wholesalers, etc. of essential
commodities (Sec. 143(c), LGC); 3. Plantation located at a place other than the
4. Retailers (Sec. 143(d), LGC); place where the factory is located, said 70%
5. Contractors (Sec. 143(e), LGC); mentioned in subparagraph (b) of subsection
6. Banks and other financial institutions (Sec. (2) above shall be divided as follows:
143(f), LGC);
7. Peddlers of any merchandise or article of a. 60% to the city or municipality where the
commerce (Sec. 143(g), LGC); and factory is located; and
8. Any business, not otherwise specified in the b. 40% to the city or municipality where the
preceding paragraphs. Business subject to plantation is located.
excise, value added tax, or percentage tax
under the NIRC, the rate shall be 2% of 4. Where a manufacturer, assembler, producer,
gross sales or receipts (Sec. 143(h), LGC). exporter or contractor has two (2) or more
factories, project offices, plants, or plantations
 Impose and collect reasonable fees and charges located in different localities, the 70% sales
on business and occupation and, except as allocation mentioned in subparagraph (b) of
reserved to the province, on the practice of any subsection (2) above shall be prorated among
profession or calling, commensurate with the the localities where the factories, project
cost of regulation, inspection and licensing offices, plants, and plantations are located in
before any person may engage in such business proportion to their respective volumes of
or occupation, or practice such profession or production during the period for which the tax
calling. (Sec. 147, LGC) is due.
 If within the Metropolitan Manila Area, may
levy taxes at rates not exceeding 50% the 5. The foregoing sales allocation shall be applied
maximum rates prescribed for municipalities. irrespective of whether or not sales are made in
(Sec. 144, LGC) the locality where the factory, project office,
plant, or plantation is located. (Sec. 150, LGC)
SITUS OF TAX COLLECTED
TAXING POWERS OF BARANGAYS
1. Businesses, maintaining or operating branch or
sales outlet elsewhere The barangays may levy taxes, fees, and
charges which shall exclusively accrue to them:
 Tax shall accrue and shall be paid to the 1. Taxes: On stores or retailers with fixed
municipality where such branch or sales business establishments with gross sales or
outlet making the sale or transaction is receipts of the preceding calendar year of
located; P50,000.00 or less, in the case of cities and
 If no branch or sales outlet in the city or P30,000.00 or less, in the case of
municipality where the sale or transaction is municipalities, at a rate not exceeding 1% on
made, tax due shall accrue and shall be paid such gross sales or receipts.
to the city or municipality where the 2. Service Fees or Charges: For services
principal office is located rendered in connection with the regulations
25
TAXATION LAW
FREQUENTLY ASKED QUESTIONS

or the use of barangay-owned properties or assessed value of P1,000.00 or


service facilities such as palay, copra, or more; or
tobacco dryers. c. required by law to file an income
3. Barangay Clearance: Obtained from the tax return shall pay an annual
barangay for a reasonable fee as a additional tax of P5.00 and an
precondition for the issuance of permit or annual additional tax of P1.00
license for any business or activity for every P1,000.00 of income
4. Other fees and charges: The barangay regardless of whether from
may levy reasonable fees and charges: business, exercise of profession or
a. On commercial breeding of fighting from property not exceeding
cocks, cockfights and cockpits; P5,000.00.
b. On places of recreation which charge b. Husband and wife: Additional tax
admission fees; and imposed is based upon the total property
c. On billboards, signboards, neon signs, owned by them and the total gross receipts
and outdoor advertisements. (Sec. 152, or earnings derived by them. (Sec. 157, LGC)
LGC)
Juridical Persons
COMMON REVENUE RAISING  Every corporation no matter how created or
POWERS organized, domestic or resident foreign, engaged in
or doing business in the Philippines shall pay an
1. Service fees and charges (Sec. 153, LGC); annual community tax of P500.00 and an annual
2. Public utility charges – for operation of additional tax, not exceeding P10,000.00 in
public utilities owned, operated and accordance with the following schedule:
maintained by LGUs (Sec. 154, LGC); and
3. Toll fees or charges – for use of any public a. For every P5,000.00 worth of real property
road, pier, or wharf, waterway, bridge, ferry in the Philippines owned by it during the
or telecommunication system funded and preceding year - P2.00; and
constructed by the LGU concerned. (Sec. b. For every P5,000.00 of gross receipts or
155, LGC) earnings derived by it from its business in
the Philippines during the preceding year -
 NOTE: No toll fees or charges shall be collected P2.00. (Sec. 158, LGC)
from the following:
 NOTE: Dividends received by a corporation
- Officers and enlisted men of the AFP and from another corporation shall, for purposes
members of the PNP on mission; of the additional tax, be considered as part of
- Post office personnel delivering mail; the gross receipts or earnings of said
- physically-handicapped; corporation. (Ibid.)
- and disabled citizens who are 65 years or older.  Exemptions:
(Sec. 155, LGC) 1. Diplomatic and consular representatives;
and
COMMUNITY TAX 2. Transient visitors when their stay in the
Philippines does not exceed (3) months.
 Cities or municipalities may levy a community
tax (Sec. 156, LGC): 14.

Individuals: GOVERNMENT

a. Every inhabitant of the Philippines 18 Administrative


years of age or over:
a. Regularly employed for at least 30 1. Enforcement of Tax lien
consecutive working days during  Attaches on the goods regardless of
any calendar years; or ownership while still in the custody of the
b. Engaged in in business or Government.
occupation, or who owns real
property with an aggregate
26
TAXATION LAW
FREQUENTLY ASKED QUESTIONS

 Availed of when the importation is neither GOVERNMENT REMEDIES


prohibited nor improperly made. (Sec. 1204,
Tariff and Customs Code [TCC]) POWERS AND DUTIES OF BIR:
1. Assess and collect all national internal
2. Compromise/Reduction of custom duties – revenue taxes, fees, and charges;
Upon approval of Secretary of Finance, the 2. Enforce all forfeitures, penalties, and fines
Commissioner of Customs may compromise any case connected therewith;
arising under this Code or other laws or parts of laws 3. Execute judgments in all cases decided in its
enforced by the Bureau of Customs involving the favor by the Court of Tax Appeals and the
imposition of fines, surcharges and forfeitures unless ordinary courts;
otherwise specified by law. (Sec. 2306, TCC) 4. Effect and administer the supervisory and
police powers conferred upon it by the Tax
3. Administrative fines and forfeitures Code and other special laws. (Sec. 2, NIRC)
 Available only when the importation is
unlawful. ADMINISTRATIVE REMEDIES
 May be exercised when the articles are no
longer under the custody of the BOC (Sec. 1. Tax lien
2530, TCC)  enforced as payment of tax, interest,
penalties, costs upon the entire property
4. Seizure, search, forfeiture and arrest and rights to property of the taxpayer
 BOC has exclusive administrative  To be valid against a mortgagee, purchaser
jurisdiction to conduct searches, seizures or judgment creditor, notice of such lien
and forfeitures of contraband without the has to be filed with by the CIR and with
interference from the courts. the Registry of Deeds. (Sec. 219, NIRC)
 BOC could conduct searches and seizures
without judicial warrant except if search is 2. Levy and Sale of real property –
to be conducted in a dwelling place. (Sec.
2208 & 2209, TCC) Requisites for valid exercise:
NOTE: warehouse does not become a dwelling a. Taxpayer is delinquent in payment of tax;
merely by reason of the fact that a person b. Subsequent demand;
employed as watchman lives in the warehouse. c. Taxpayer failed to pay delinquent tax on
(Sec. 2208, TCC) time;
Subject of customs search and seizure: d. Period within which to assess and collect
a. Land or inclosure or any warehouse, the tax due has not yet prescribed.
store or other building, not being a
dwelling house. (Sec. 2208, TCC) 3. Forfeiture of real property to the
b. Dwelling house. (Sec. 2209, TCC) government for want of bidder
c. Vessels or aircrafts and persons or  If no bidder for real property exposed for
articles conveyed therein. (Sec. 2210, sale or if the highest bid is for an amount
TCC) insufficient to pay the taxes, penalties and
d. Vehicles, beasts and persons. (Sec. costs, Internal Revenue Officer conducting
2211, TCC) the sale shall declare the property forfeited
e. Persons arriving from foreign to the Government.
countries. (Sec. 2212, TCC)  Within 1 year from the date of forfeiture,
taxpayer shall a right to redeem the property
Judicial Remedy by paying full amount of taxes, penalties,
 May either be civil or criminal action. interest and costs of sale.
 Availed of when the tax lien is lost by the  If not redeemed, forfeiture becomes
release of the goods. absolute.
 Tax liability of the importer constitutes a
personal debt to the government. 4. Further distraint and Levy
 Remedy by distraint of personal property
15. and levy on realty may be repeated if
necessary, until the full amount due,
27
TAXATION LAW
FREQUENTLY ASKED QUESTIONS

including all expenses, is collected. (Sec. 217, Persons liable to VAT imposed in Sections 106 to 108
NIRC) of Tax Code:
1. Any person who, in the course of his trade
5. Suspension of business operations – or business, sells, barters, exchanges, or
leases or properties, or renders services;
The CIR may suspend business operations when: 2. Any person who imports goods.
a. In case of a VAT-registered person:
i. Failure to issue receipts or invoices; 17.
ii. Failure to file a VAT return as required NATURE AND SOURCE OF TAXING POWER
under Sec. 114; or Grant of local taxing power under the
iii. Understatement of taxable sales or Local Government Code
receipts by 30% or more of his correct
taxable sales or receipts for the taxable Local Taxation
quarter.  Each LGU has the power to create its own
b. Failure of any person to Register as sources of revenues and to levy taxes, fees and
required under Sec. 236 of NIRC. charges subject to such guidelines and
limitations as the Congress may provide,
(6) Non-availability of injunction to consistent with the basic policy of local
retrain collection of taxes – autonomy.
 Such taxes, fees, and charges shall accrue
GR: No court shall have the authority to grant an exclusively to the LGUs. (Sec. 5, Art. X, 1987
injunction to restrain the collection of any national Constitution)
internal revenue, tax, fee or charge. (Sec. 219, RA No.
8424) Authority to prescribe penalties for tax violations
EXPNS:
a. Filing of injunction with the CTA as an 1. Sanggunian of a Local Government Unit
incident to its appellate jurisdiction:  Authorized to prescribe fines or other
i. showing that collection of the tax may penalties for violation of tax ordinances.
jeopardize the interest of the
government and/or the taxpayer; Limitations:
ii. deposit of the amount claimed or file a a. Fines shall not be less than P1,000.00 nor
surety bond; more than P5,000.00, nor shall
iii. showing by taxpayer that appeal is not imprisonment be less than 1 month nor
frivolous nor dilatory. more than 6 months.
b. The SC, on exceptional cases of suits b. Fine or other penalty, or both, shall be
questioning the constitutionality of a tax imposed at the discretion of the court.
law;
c. In local taxes, RTC’s may issue an
injunction upon a suit questioning their 2. Sangguniang barangay
validity.
 may prescribe a fine not less than P100.00
nor more than P1,000.00.
JUDICIAL REMEDIES
1. Ordinary civil action
Authority and Powers of LGUs
2. Criminal action
1. Authority to grant local tax exemptions (Sec.
 Approval of CIR is a requisite before civil or 192, LGC)
criminal action is filed in court for the recovery 2. Authority to adjust local tax rates of tax
of taxes or the enforcement of any fine penalty ordinances (Sec. 191, LGC)
or forfeiture under the NIRC (Sec. 220, NIRC)  Adjustments shall not be not
oftener than once every 5 years
16. and not to exceed 10% of the
rates fixed under the NIRC.
PERSONS LIABLE
3. Residual taxing power of local
governments (Sec. 186, LGC)
28
TAXATION LAW
FREQUENTLY ASKED QUESTIONS

Limitations: services to clients from which growing of


a. Taxes, fees, or charges shall not be animals were contracted)
unjust, excessive, oppressive, 7. Medical, dental, hospital and veterinary
confiscatory or contrary to services. (But sale of drugs or
declared national policy. (Ibid.) pharmaceutical items of the hospital
b. Ordinance levying such taxes, fees pharmacy to in-patients of hospitals
or charges shall not be enacted considered part of hospital service which is
without any prior public hearing exempt from VAT)
conducted for the purpose. (Ibid.) 8. Educational services rendered by private
4. Authority to issue local tax ordinances and government educational institutions.
 Exercised by the sanggunian of the 9. Services rendered by individual employees
LGU concerned through an to their employers pursuant to an employer-
appropriate ordinance. (Sec. 132, employee relationship.
LGC) 10. Services being rendered by regional or area
headquarters of multinational corporations.
Withdrawal of exemptions 11. Transactions which are exempt under
 Tax exemptions or incentives granted to, or international agreements or special laws.
presently enjoyed by all persons, whether (President of the Philippines may not grant
natural or juridical, including GOCCs, except tax exemptions thru an Executive
local water districts, cooperatives duly Agreement)
registered under R.A. No. 6938, non-stock and 12. VAT-exempt transactions of cooperatives.
nonprofit hospitals and educational 13. Export sales which are exempt from VAT.
institutions, are hereby withdrawn upon the 14. Real property transactions which are
effectivity of the NIRC. (Sec. 193, LGC) exempt from VAT.
15. Sale, importation, printing, or publication of
18. books, newspapers, magazines, reviews or
bulletins.
VAT-EXEMPT TRANSACTIONS 16. Transport of passengers by international
carriers.
17. Sale or importation of vessels and aircrafts,
 Refers to the sale of goods or properties
including engine, equipment and spare parts
and/or services and the use or lease of
of domestic or international transport
properties that is not subject to VAT (output
operations. (Sec. 109, NIRC)
tax) and the seller is not allowed any tax credit
of VAT (input tax) on purchases.
19.
 The person making the exempt sale of goods
properties or services shall not bill any output DEDUCTIONS FROM ESTATE
tax to his customers because the said
transaction is not subject to VAT. (Sec. 4. 109-
Allowable deductions from the gross estate
1(A), RR 16-2005)
 The value of the net estate of a citizen
resident alien of the Philippines shall be
Exempt Transactions
determined by deducting from the value of
1. Agricultural and marine food products in
the gross estate the following items of
their original state;
deduction:
2. Fertilizers, seeds and feeds;
1. Expenses, losses, indebtedness,
3. Importations of Returning Residents and
and taxes;
Resettlers (provided, that such goods are
2. Property previously taxed
EXEMPT from customs duties);
(Vanishing deductions);
4. Importation of Settlers in the Philippines
3. Transfer for public use;
(provided, for own use and NOT for sale,
4. Family home;
barter or exchange);
5. Standard deduction;
5. Services subject to the Percentage Tax
6. Medical expenses;
6. Services of agricultural contract growers and
7. Amount received by heirs under
millers. (But the toll processing services
R.A. 4917 (Retirement Benefits of
which are exempt from VAT pertain only to
employees of private firms shall
29
TAXATION LAW
FREQUENTLY ASKED QUESTIONS

not be subject to attachment, levy, deceased before his death. Therefore, the
execution, or any tax.); (Sec. 86, claims existing at the time of his death are
NIRC) significant to, and should be made the basis
8. Net share of the surviving spouse of, the determination of allowable
in the conjugal partnership or deductions. (Rafael Arsenio S. Dizon vs CTA,
community property. (Sec. 6, RR 2- G.R. No. 140944, April 30, 2008; Gutierrez vs.
2003) BarrettoDatu, 5 SCRA 757; Aguas vs. Llemos,
5 SCRA 959)
Note: This is an exclusion rather than a deduction.
Requisites for the deductibility of claims against
Expenses, losses, indebtedness, and taxes the estate:
(a) Funeral expenses – Actual funeral 1. The liability represents a personal obligation
expenses (whether paid or unpaid) up to the of the deceased existing at the time of his
time of interment, or an amount equal to death except unpaid obligation incurred
five (5%) of the gross estate, whichever is incident to his death, such as unpaid funeral
lower, but in no case to exceed P200,000. expenses (i.e. expenses incurred up to the
(Sec. 86(A)(1)(a), NIRC) time of interment) and unpaid medical
(b) Judicial expenses of the testamentary or expenses which are classified under a
intestate proceedings – Expenses allowed different category of deductions pursuant to
as deduction under this category are those these Regulations;
incurred in the inventory-taking of assets 2. The liability was contracted in good faith
comprising the gross estate, their and for adequate and full consideration in
administration, the payment of debts of the money or money’s worth;
estate, as well as the distribution of the 3. The claim must be a debt or claim which is
estate among the heirs. In short, these valid in law and enforceable in courts; and
deductible items are expenses incurred 4. The indebtedness must not have been
during the settlement of the estate but not condoned by the creditor or the action to
beyond the last day prescribed by law, or the collect from the decedent must not have
extension thereof, for the filling of the estate prescribed. (Sec. 6 (A)(3)(i), RR 2-2003)
tax return. It may include:
i. fees of executor or administrator; Requisites for the deductibility of claims of the
ii. attorney’s fees; deceased against insolvent persons:
iii. court fees; 1. The value of the claims against insolvent
iv. accountant’s fees; person should have been included as part of
v. appraiser’s fees; the gross estate; and
vi. clerk hire; 2. It must be shown that the debtors are
vii. cost of preserving and distributing incapable of paying their indebtedness. (Sec.
the estate; 6(A)(4), RR2-2003)
viii. cost of storing or maintaining
property of the estate; Requisites for the deductibility of unpaid
ix. brokerage fees for selling property mortgages or indebtedness:
of the estate; and 1. Unpaid mortgages upon, or any
x. commissions for selling or indebtedness in respect to, property where
disposing of the estate, and the the value of the decedent’s interest therein,
like. (CIR vs CA, CTA & Josefina P. undiminished by such mortgage or
Pajonar, as Administratrix of the indebtedness, should be included in the
Estate of Pedro P. Pajonar, G.R. No. value of the gross estate.
123206, March 22, 2000) 2. The deduction herein allowed in the case of
(c) Claims against the estate – The term claims against the estate, unpaid mortgages
“claims against the estate” required to be or any indebtedness shall, when founded
presented against a decedent’s estate is upon a promise or agreement, be limited to
generally construed to mean debts or the extent that they were contracted bona
demands of a pecuniary nature which could fide and for an adequate and full
have been enforced against the deceased in consideration of money’s worth.
his lifetime, or liability contracted by the
30
TAXATION LAW
FREQUENTLY ASKED QUESTIONS

3. In case of unpaid mortgage payable being  On the property left behind by the decedent
claimed by the estate, verification must be which he had acquired previously by
made as to who was the beneficiary of the inheritance or donation.
loan proceeds. If the loan is found to be  Thus, vanishing deduction is deducted only
merely an accommodation of loan where from the exclusive properties of the decedent
the loans proceeds went to another person, which from part of his gross estate. (Sec. 86 [A-
the value of the unpaid loan must be 2], NIRC)
included as a receivable of the estate. If
there is a legal impediment to recognize the Requisites for deductibility of vanishing
same as receivable of the estate, said unpaid deduction:
obligation/mortgage payable shall not be 1. The present decedent died within five (5)
allowable as a deduction from the gross years from receipt of the property from the
estate. prior decedent or donor;
4. In all instances, the mortgaged property, to 2. The property on which vanishing deduction
the extent of the decedent’s interest therein, is being claimed is located within the
should always form part of the gross taxable Philippines;
estate. (RR No. 2-2003) 3. The property formed part of the taxable
estate of the prior decedent or of the taxable
Requisites for the deductibility of taxes from the gift of the donor;
gross estate: 4. The estate tax on the prior succession or
1. Said taxes must have been accrued as of the donor’s tax on the gift must have been
time of death of the decedent; finally determined and paid;
2. Said taxes were unpaid as of the time of 5. The property on which the vanishing
death; deduction is taken must be identified as the
3. These taxes will NOT include: one received or acquired; and
a. Income tax upon income received 6. No vanishing deduction was allowed on the
after death; same property on the prior decedent’s
b. Property taxes not accrued before estate. (Ibid.)
his death; or The estate tax due
from the transmission of his Requisites for the deductibility of transfers for
estate. (De la Vina vs. CIR, 65 Phil public use:
520) 1. The disposition is in the last will and
testament;
Requisites for the deductibility of losses from the 2. Disposition should take effect after death;
gross estate: 3. In favor of the Government of the
1. Losses must be incurred settlement of the Philippines or any of its political
estate; subdivision;
2. Losses arose from fires, storms, shipwreck, 4. Exclusively for public purpose; and
or other casualties, or from robbery, theft or 5. The value of the property given is included
embezzlement; in the gross estate. (Sec. 86 (A-3), NIRC)
3. Said losses are not compensated for by
insurance or otherwise; Special Deductions
4. Losses claimed must not have been claimed
as deduction from gross income for income Family Home
tax purposes under Section 34(D)(1)(c) of  The place where the family actually resides.
the Tax Code; and
 Under the Civil Code, a family home has to be
5. Such losses were incurred not later than the
constituted judicially or extra- judicial.
last day for the payment of the estate tax.
(Sec. 6(A)(5)(c), RR 2-2003)  Under the Family Code, there is no need to
constitute it as a family home, as it is deemed
constituted thereunder.
Property previously taxed (Vanishing deduction)
Vanishing deduction
Conditions for the allowance of family home
 Refers to the diminishing deductibility allowed
(FH) as deduction from the gross
from the gross estate of the decedent
1. The FH must be the actual residential home
of the decedent and his family at the time of
31
TAXATION LAW
FREQUENTLY ASKED QUESTIONS

his death, as certified by the Barangay deduction from the gross estate, provided that
Captain of the locality where the FH is such amount is included in the gross estate of
situated; the decedent. (Sec. 86 [A-7], NIRC, RR 2-2003)
2. Total value of the FH must be included as
part of the gross estate of the decedent; and Net share of the surviving spouse in the conjugal
3. Allowable deduction must be in an amount partnership or community property
equivalent to the current fair market value  After deducting the allowable deductions
of the FH as declared or included in the appertaining to the conjugal or community
gross estate, or the extent of the decedent’s properties included in the gross estate
interest (whether conjugal/community or  The share of the surviving spouse must be
exclusive property), whichever is lower, but removed to ensure that only the decedent’s
not exceeding P1,000,000. (Sec. 86 [A-4], interest in the estate is taxed. (RR 2-2003)
NIRC, RR 2-2003)
20.
Standard Deduction
 A deduction in the amount of P1, 000,000 shall POWER OF THE COMMISSIONER TO
be allowed as an additional deduction from the SUSPEND THE BUSINESS OPERATION OF A
gross estate without need of substantiation. TAXPAYER
 The full amount of P1, 000,000 shall be
allowed as deduction for the benefit of the  The Commissioner or his authorized
decedent. (Sec. 86 [A-4], NIRC, RR 2-2003) representative has the power to suspend the
business operations and temporarily close the
Requisites for the deductibility of medical business establishment of any person for any of
expenses from the gross estate of the decedent: the following violations:
1. The medical expenses (cost of medicines, 1. For VAT-registered persons:
hospital bills, doctors’ fees, etc.) were a. Failure to issue receipts or invoices;
incurred (whether paid or unpaid) within b. Failure to file a VAT return as required
one (1) year prior to the death of the said under Section 114; or
decedent. c. Understatement of taxable sales or
2. The said medical expenses are duly receipts by 30% or more of his correct
substantiated with official receipts for taxable sales or receipts for the taxable
services rendered by the decedent’s quarter
attending physicians, invoices, statements of 2. Failure of any person to register as required
account duly certified by the hospital, and under Section 236
such other documents in support thereof;
and  The temporary closure of the establishment
3. That the total amount thereof, whether paid shall be for the duration of not less than five
or unpaid, does not exceed P500, 000. Any (5) days and shall be lifted only upon
amount of medical expenses incurred within compliance with whatever requirements
one (1) year prior to the death in excess of prescribed by the Commissioner in the closure
P500,000 shall not be allowed as a order. (Sec. 115, NIRC)
deduction under this subsection. Neither
can any unpaid amount thereof in excess of 21.
the P500,000 threshold nor any unpaid
amount for medical expenses incurred prior COLLECTION OF BUSINESS
to the one (1)-year period from the date of
death be allowed to be deducted from the Tax Period and Manner of Payment:
gross estate as a claim against the estate. (Sec.  The tax period of all local taxes, fees and
86 [A-6], NIRC) charges shall be the calendar year.
 Such taxes, fees and charges may be paid in
 Amount received by heirs under R.A. 4917– quarterly installments. (Sec. 165, LGC)
Any amount received by the heirs from the
decedent’s employer as a consequence of the Accrual of Tax:
death of the decedent-employee in accordance
with RA 4917 shall also be allowed as
32
TAXATION LAW
FREQUENTLY ASKED QUESTIONS

 Unless otherwise provided in the LGC, all


local taxes, fees, and charges shall accrue on Nature and Definition
the first (1st) day of January of each year.  There is double taxation when the same
 However, new taxes, fees or charges, or taxpayer is taxed twice when he should be
changes in the rates thereof, shall accrue on taxed only once
the first (1st) day of the quarter next  For the same purpose by the same taxing
following the effectivity of the ordinance authority within the same jurisdiction
imposing such new levies or rates. (Sec. 166, during the same taxing period, and the taxes
LGC) are of the same kind or character.
 Double taxation is obnoxious. (Nursery
Time of Payment: Care Corporation v. Anthony Acevedo,
 All local taxes, fees, and charges shall be G.R. No. 180651, July 30, 2014)
paid within the first twenty (20) days of
January or of each subsequent quarter, as
the case may be. CIR v. Bank of the Philippine Islands, G.R. No.
 The sanggunian concerned may, for a 147375, June 26, 2006
justifiable reason or cause, extend the time  Double taxation means taxing the same
for payment of such taxes, fees, or charges property twice
without surcharges or penalties, but only for  When it should be taxed only once (direct
a period not exceeding six (6) months. (Sec. duplicate taxation)
167, LGC)
Constitutionality of Double Taxation
Surcharges and Penalties on unpaid taxes, fees or  There is no constitutional prohibition against
charges double taxation in the Philippines. (La Suerte
 The sanggunian may impose a surcharge not Cigar & Cigarette Factory v. Court of
exceeding 25% of the amount of taxes, fees Appeals, G.R. No. 125346, November 11,
or charges not paid on time 2014)
 And an interest at the rate not exceeding 2%
per month of the unpaid taxes, fees or Note:
charges including surcharges, until such
amount is fully paid. (Sec. 168, LGC) Ericcson Telecommunications v. City of Pasig,
Limitation G.R. No. 176667, November 22, 2007
 In no case shall the total interest on the  The imposition of local business tax based
unpaid amount or portion thereof exceed 36 on gross revenue
months. (Ibid.)  Will inevitably result in the constitutionally
proscribed double taxation – taxing of the
Authority of treasurer in collection and inspection same person twice by the same jurisdiction
of books for the same thing
 All local taxes, fees, and charges shall be  As petitioner’s gross revenue or income for
collected by the provincial, city, municipal, or a taxable year will definitely include its gross
barangay treasurer, or their duly authorized receipts already reported during the
deputies. (Sec. 170, LGC) previous year
 The provincial, city or municipal treasurer may  And for which local business tax has already
designate the barangay treasurer as his deputy been paid.
to collect local taxes, fees, or charges.
 In case a bond is required for the purpose, the Bar Question 2015
provincial, city or municipal government shall
pay the premiums thereon in addition to the Differentiate between double taxation in the
premiums of bond that may be required under strict sense and in a broad sense and give an
this Code. (Ibid.) example of each. (4%)

22. ANSWER:
 Double taxation in its strict sense means the
DOUBLE TAXATION taxpayer is:
33
TAXATION LAW
FREQUENTLY ASKED QUESTIONS

- taxed twice institutions used actually, directly


- by the same taxing authority and exclusively for educational
- within the same taxing jurisdiction purpose shall be exempt from
taxes and duties. Upon the
- for the same property, and
dissolution and cessation of the
- for the same purpose. corporate existence of such
 On the other hand, double taxation in its institutions, their assets shall be
broad sense is indirect double taxation. disposed of in the manner
 It extends to all cases in which case there is provided by law. (Sec. 4(3), Art.
a burden of two or more impositions. XVI, 1987 Constitution)
o Proprietary educational
23. institutions, including those
cooperatively owned may likewise
CONSTITUTIONAL LIMITATIONS be entitled to such exemptions,
subject to the limitations provided
PROVISIONS DIRECTLY AFFECTING by law, including restrictions on
TAXATION dividends and provisions for
reinvestments. (Ibid.)
1. Prohibition against taxation of religious, o Subject to the conditions
charitable entities, and educational prescribed by law, all grants,
entities endowments, donations or
o Tax exemption of properties contributions used actually,
actually, directly and exclusively directly and exclusively for
used for religious, charitable and educational purposes shall be
educational purpose. exempt from tax. (Ibid.)
o Charitable institutions, churches
and parsonages or convents 4. Grant of power to the local government
appurtenant thereto, mosques, units to create its own sources of
non- profit cemeteries, and all revenue
lands, buildings and o Each local government unit shall
improvements actually, directly, have the power to create its own
and exclusively used for religious, sources of revenues and to levy
charitable, or educational taxes, fees and charges
purposes shall be exempt from o subject to such guidelines and
taxation. (Sec. 28[3], Art. VI, 1987 limitations as the Congress may
Constitution) provide
o consistent with the basic policy of
2. Prohibition against imprisonment for local autonomy.
non- payment of poll tax o Such taxes, fees, and charges shall
o No person shall be imprisoned for accrue exclusively to the local
non- payment of a debt or poll tax. governments. (Sec. 5, Art. X,
(Sec. 20, Art. III, 1987 Constitution) Constitution)

Note: While a person may not be Pepsi Cola v. City of Butuan, G.R. No. L-
imprisoned for non-payment of a 22814, August 28, 1968
cedula or poll tax (People v. - The general principle against the delegation
Linsangan, 62 Phil. 646), he may be of legislative powers as a consequence of the
imprisoned for non-payment of principle of separation of powers is subject
other kinds of taxes where the law to one well-established exception: legislative
so expressly provides. powers may be delegated to local
government units.
3. Prohibition against taxation of non- - Included in this grant of legislative power is
stock, non-profit institutions the grant of local taxing power.
o All revenues and assets of non-
stock, non- profit educational Appropriation of Public Money
34
TAXATION LAW
FREQUENTLY ASKED QUESTIONS

the amount is fully paid. (Sec.


General Rule: No public money or property shall be 249, NIRC)
appropriated, applied, paid or employed directly or b. Deficiency Interest - Any
indirectly for the use, benefit or support of any sect, deficiency in the tax due, as
church, denomination, sectarian institution, or system the term is defined in the Tax
of religion or of any priest, preacher, minister, or Code, shall be subject to the
other religious teacher or dignitary. interest prescribed in
Exception: When such priest, preacher, minister or Subsection (A) hereof, which
dignitary is assigned to the armed forces or to any interest shall be assessed and
penal institution or government orphanage or collected from the date
leprosatium. (Sec. 29[1], Art. VI, 1987 Constitution) prescribed for its payment
until the full payment thereof.
Legal Basis of the Grant of Exemptions (Ibid.)
 No law granting any tax exemption shall be c. Delinquency Interest - In
passed without the concurrence of a majority case of failure to pay:
of all members of Congress. (Sec. 28(4), Art. i. The amount of the
VI, 1987 Constitution) tax due on any
return required to
24. be filed; or
ii. The amount of the
TAXATION OF NON-RESIDENT FOREIGN tax due for which no
CORPORATIONS return is required; or
iii. A deficiency tax, or
General Rule: Corporation which is not domestic any surcharge or
and not engaged in trade or business in the interest thereon on
Philippines is liable for income from sources within the due date
the Philippines. (Sec. 22(I), NIRC) appearing in the
notice and demand
25. of the
Commissioner,
STATUTORY OFFENSES AND PENALTIES there shall be
assessed and
Civil penalties collected on the
 These are imposed in addition to the tax unpaid amount,
required to be paid. interest at the rate
(1) Surcharges – a civil penalty imposed prescribed in
as an addition to the main tax required Subsection (A)
to be paid. It is a civil administrative hereof until the
sanction provided as a safeguard for amount is fully paid,
the protection of state revenue and to which interest shall
reimburse the government for the form part of the tax.
expenses of investigation and the loss (Ibid.)
resulting from the taxpayer’s fraud. It is d. Interest on Extended
also subject to interest. Payment - If any person
(2) Interest – required to pay the tax is
a. In general - there shall be qualified and elects to pay the
assessed and collected on any tax on installment under the
unpaid amount of tax, interest provisions of this Code, but
at the rate of twenty percent fails to pay the tax or any
(20%) per annum, or such installment hereof, or any part
higher rate as may be of such amount or installment
prescribed by rules and on or before the date
regulations, from the date prescribed for its payment, or
prescribed for payment until where the Commissioner has
authorized an extension of
35
TAXATION LAW
FREQUENTLY ASKED QUESTIONS

time within which to pay a tax resident foreign corporation. The residential house
or a deficiency tax or any part and lot will be used by officials of EEE, Inc. during
thereof, there shall be their visit to the Philippines. The lease agreement was
assessed and collected interest signed by representatives from DDD Corp. and
at the rate hereinabove EEE, Inc. in Singapore. DDD Corp. did not subject
prescribed on the tax or the said lease to VAT believing that it was not a
deficiency tax or any part domestic service contract.
thereof unpaid from the date
of notice and demand until it Was DDD Corp. correct? Explain. (3%)
is paid. (Ibid.)
ANSWER:
 DDD Corporation is not correct
26.  Leasing of properties is subject to VAT
 Irrespective of the place where the contract
VAT ON SALE OF GOODS OR PROPERTIES of lease was executed if the property is
leased or used in the Philippines.
General Principle
 VAT is imposed and collected on every sale, Goods or properties which are subject to VAT
barter or exchange, or transactions “deemed
sale” of taxable goods or properties All tangible and intangible objects which are
 At the rate of 12% of the gross selling price or capable of pecuniary estimation and shall
gross value in money of the goods or include:
properties sold, bartered, or exchanged, or 1. Real properties held primarily for sale to
deemed sold in the Philippines. (Sec. 4.106-1, customers or held for lease in the ordinary
RR 16-2005, as amended by RR 4-2007) course of trade or business;
2. The right or the privilege to use patent,
Requisites of taxability of sale of goods or copyright, design or model, plan secret
properties: formula or process, goodwill, trademark,
1. The seller must be VAT-registered, or even trade brand or other like property or right;
if not, he/it is a VAT-registrable person and 3. The right or the privilege to use in the
his/its gross annual sales (i.e., gross selling Philippines of any industrial, commercial or
price) exceeds 1,919,500.00; scientific equipment;
2. The goods or properties sold may either be 4. The right or the privilege to use motion
tangible or intangible objects which are picture films, films, tapes and disc; and
capable of pecuniary estimation; 5. Radio, television, satellite transmission and
3. The sale must be an actual or constructive cable television time. (Sec. 106[A][1], NIRC)
sale or a transaction deemed sale;
4. The sale must be undertaken in the course 27.
of trade or business;
5. The sale must have been done in the COLLECTION OF REAL PROPERTY TAX
Philippines;
6. The sale must be for use or consumption in Date of Accrual of Real Property Tax and Special
the Philippines; Levy
7. The sale must not be considered as a zero-
rated sale; and General Rule: Local taxes, fees and charges accrue
8. The sale must not be exempt from VAT on the first day of the calendar year.
under the Tax Code, special law, or Exception: In case the effectivity of any new tax
international agreement. (R.A. No. 8424) ordinance falls on any date other than the beginning
of the quarter, the same shall be considered as falling
Bar Question 2015 at the beginning of the next ensuing quarter and the
new tax levy or revised rate due shall begin to accrue
In June 2013, DDD Corp., a domestic corporation therefrom. (Sec. 166, LGC)
engaged in the business of leasing real properties in
the Philippines, entered into a lease agreement of a Note: The collection of real property tax, interests and
residential house and lot with EEE, Inc., a non- the enforcement of remedies shall be the responsibility
36
TAXATION LAW
FREQUENTLY ASKED QUESTIONS

of the city or municipal treasurer concerned. (Sec 247, 3. Calamity in any province, city, or
LGC) municipality (Sec. 276, LGC); or
4. When public interest so requires (Sec. 277,
Notice of time for collection of tax LGC)
1. To be posted by the city or municipal
treasurer in conspicuous and publicly By whom condoned and reduced; and process
accessible place at the city or municipal hall thereof
on: 1. For grounds (1), (2) and (3) as mentioned
a. For basic RPT and additional tax for above, by the Sanggunian concerned, by
Special Education Fund (SEF) - Before ordinance, and upon recommendation of
January 31 of each year; the Local Disaster Coordinating Council
b. For any other tax - any other date (Ibid.); or
provided in the ordinance. 2. For ground (4), by the President of the
2. Publication in a newspaper of general Philippines.
circulation in the locality once a week for
two (2) consecutive weeks. (Sec. 249, LGC) REMEDIES OF LOCAL GOVERNMENT
UNITS FOR COLLECTION OF RPT
Periods within which to Collect Real Property Tax
(1) Local government lien
General Rule:  It is superior to all liens, charges or
 The basic RPT and any other tax levied shall encumbrances in favor of any
be collected within five (5) years from the person,
date they become due.  Irrespective of the owner or
 No action for the collection of the tax, possessor
whether administrative or judicial, shall be  Enforceable by administrative or
instituted after expiration of such period. judicial action, and
(Sec. 270, LGC)  May only be extinguished upon
Exception: payment of the tax and the related
 In case of fraud or intent to evade payment interests and expenses. (Sec. 257,
of the tax, LGC)
 Such action may be instituted for the (2) Administrative action of levy
collection thereof within ten (10) years from  The real property subject to such
discovery of such fraud or intent to evade tax may be levied upon through
payment. (Ibid.) the issuance of a warrant
 On or before, or simultaneously
When period of prescription is suspended with, the institution of the civil
1. The local treasurer is legally prevented from action for the collection of the
collecting the tax; delinquent tax. (Sec. 258, LGC)
2. The owner of the property or the person (3) Judicial action
having legal interest therein request for  Talusan v. Tayag, G.R. No.
reinvestigation and executes a waiver in 133698, April 04, 2001
writing before the expiration of the period
- The registered owner of
within which to collect; and
a property is deemed the
3. The owner of the property or the person
taxpayer
having legal interest therein is out of the
country or otherwise cannot be located. - And, hence, the only one
(Ibid.) entitled to a notice of tax
delinquency
CONDONATION OR REDUCTION OF REAL - And the resultant
PROPERTY TAX proceedings relative to
an auction sale.
Grounds of Condonation or Reduction - Petitioners, who
1. General failure of crops; allegedly acquired the
2. Substantial decrease in the price of property through an
agricultural products;
37
TAXATION LAW
FREQUENTLY ASKED QUESTIONS

unregistered deed of or by whom unlawful abortion is


sale, produced.
- Are not entitled to such e. Roulette wheels, gambling outfits,
notice, because they are loaded dice, marked cards, machines,
not the registered apparatus or mechanical devices used
owners in gambling or the distribution of
money, cigars, cigarettes or other
28. articles when such distribution is
dependent on chance, including
CLASSIFICATION OF GOODS jackpot and pinball machines or similar
contrivances, or parts thereof.
 The term “Articles” refer to goods, wares and f. Lottery and sweepstakes tickets except
merchandise and in general, anything that may those authorized by the Philippine
be the subject of importation or exportation. Government, advertisements thereof,
(Sec. 3574, TCC) and lists of drawings therein.
g. Any article manufactured in whole or in
Classification of articles subject to tariff and part of gold, silver or other precious
customs laws metals or alloys thereof, the stamps,
brands or marks or which do not
(1) Articles subject to Duty – All articles indicate the actual fineness of quality of
when imported from a foreign country said metals or alloys.
including those previously exported from h. Any adulterated or misbranded articles
the Philippines are subject to duty unless of food or any adulterated or
otherwise specifically provided for in the misbranded drug in violation of the
Tariff and Customs Code. (Sec. 100, TCC) provisions of the "Food and Drugs
(2) Articles of prohibited importation – The Act."
importation into the Philippines of the i. Marijuana, opium, pipes, coca leaves,
following articles is prohibited: heroin or any other narcotics or
a. Dynamite, gunpowder, ammunitions synthetic drugs which are or may
and other explosives, firearms and hereafter be declared habit forming by
weapons of war, and parts thereof, the President of the Philippines, or any
except when authorized by law. compound, manufactured salt,
b. Written or printed articles in any form derivative, or preparation thereof,
containing any matter advocating or except when imported by the
inciting treason, or rebellion, or Government of the Philippines or any
insurrection, sedition or subversion person duly authorized by the
against the Government of the Dangerous Drugs Board, for medicinal
Philippines, or forcible resistance to purposes only.
any law of the Philippines, or j. Opium pipes and parts thereof, of
containing any threat to take the life of, whatever material.
or inflict bodily harm upon any person k. All other articles and parts thereof, the
in the Philippines. importation of which prohibited by law
c. Written or printed articles, negatives or or rules and regulations issued by
cinematographic film, photographs, competent authority. (Sec. 101, TCC)
engravings, lithographs, objects, (3) Conditionally-free importations –
paintings, drawings or other  These are imported articles that
representation of an obscene or are allowed to enter the
immoral character. Philippines free of duties and
d. Articles, instruments, drugs and taxes
substances designed, intended or  After compliance with certain
adapted for producing unlawful conditions as imposed by the
abortion, or any printed matter which Tariff and Customs Code and
advertises or describes or gives directly other Customs regulation.
or indirectly information where, how, (4) Duty free articles - Enterprises located in
special economic zones are allowed to
38
TAXATION LAW
FREQUENTLY ASKED QUESTIONS

import capital equipment and raw materials levy, distraint, and/or sale of any property of
free from duties, taxes and other import the taxpayer for the satisfaction of his tax
restrictions. (R.A. No. 7916) liability as provided by existing law. When in
the opinion of the Court, the collection by the
29. aforementioned government agencies may
jeopardize the interest of the Government
REQUIREMENTS OF IMPORTATION and/or taxpayer either to deposit the amount
claimed or to file a surety bond for not more
Obligations of Importer than double the amount with the court. (Sec. 9,
R.A. No. 9282)
Cargo Manifest
 It is a document used in shipping, containing a Who may appeal?
list of the contents, value, origin, carrier and
destination of the goods to be shipped. Any party adversely affected by a decision, ruling or
 It refers to a written document required to be inaction of the Commissioner of Internal Revenue,
carried by merchant vessels, containing an the Commissioner of Customs, The Secretary of
account of the cargo, with other particulars, for Finance, the Secretary of Trade and Industry or the
the facility of the customs officers (Black’s Law Secretary of Agriculture or the Regional Trial Court,
Dictionary) may file an appeal with the CTA:
1. Withinthirty(30)daysafterreceiptofsuch
Beginning and ending of importation decision or ruling; or
 When importation begins 2. After the expiration of the period fixed by law
for action referred to in Section 7(a)[2] of
 Importation begins when the carrying
R.A.9282, in which case the inaction shall be
vessel or aircraft enters the
deemed a denial.
jurisdiction of the Philippines with
the intention to unload therein.
What is the mode of appeal?
 When importation ends
 Upon payment of duties, taxes and
1. Appeal may be made by filling a petition for
other charges due upon the articles,
review under a procedure analogous to that
or secured to be paid, at the port of
provided for under Rule 42 of the 1997 of
entry; and
Civil Procedure, within thirty (30) days from
 Upon grant of the legal permit for the receipt of the decision or ruling or from the
withdrawal; In case the articles are expiration of the period fixed by law for the
free of duties, taxes and other official concerned to act, in cases of
charges, until they have legally left the inaction, before the CTA. A Division of the
jurisdiction of the customs. (Sec. 1202, CTA shall hear the appeal.
TCC) 2. Appeals with respect to decisions or rulings
of the Central Board of Assessment Appeals and
30. the Regional Trial Court in the exercise of its
appellate jurisdiction, may be made by filing a
CIVIL CASES petition for review under a procedure
analogous to that provided for under Rule
Who may appeal, mode of appeal, effect of appeal? 43 of the 1997 Rules of Civil Procedure,
with CTA, which shall hear the case en banc.
Suspension of collection of tax 3. Petition for Review on Certiorari may be filed by
 Appeal to the CTA shall not suspend the a party adversely affected by a decision or
payment, levy, distraint and sale of taxpayer’s ruling of the CTA en banc, through a verified
property. petition before the Supreme Court, pursuant to
 No appeal taken to the CTA from the decision Rule 45 of the 1997 Rules of Civil
of the Commissioner of Internal Revenue or Procedure.
the Commissioner of the Customs or the RTC,
provincial, city, or municipal treasurer or the 31.
Secretary of Finance, the Secretary of Trade
and Industry or the Secretary of Agriculture, as
the case may be, shall suspend the payment,
39
TAXATION LAW
FREQUENTLY ASKED QUESTIONS

VAT ON SALE OF SERVICE AND USE OR


LEASE OF PROPERTIES Period to file claim/apply for issuance of tax credit
certificate
 Sale or exchange of services, as well as the use  The claim, which must be in writing, for both
or lease of properties, as defined in Section cases, must be filed within two (2) years after
108(A) of the Tax Code, shall be subject to the close of the taxable quarter when the sales
VAT, equivalent to 12% of the gross receipts were made and for which claim is being applied
(excluding VAT). (Sec. 4.108-1, RR 16-2005, as for:
amended) 1. The issuance of a tax credit certificate; or
2. Refund of creditable input tax due or paid
Requisites for Taxability attributable to such sales.
 In order that the sale of service may be  In case the taxpayer is engaged in zero-rated
subject to the 12% VAT, the following and also in taxable or exempt sale, and the
requisites must be complied with: amount of creditable input tax due or paid
1. The seller must be VAT-registered, or cannot be directly and entirely attributed to any
even if not, he/it is a VAT-registrable one of the transactions, it shall be allocated
person and his/its gross annual receipts proportionately on the basis of the volume of
exceeds 1,919,500.00 (effective January sales. (Sec. 112, NIRC)
1, 2012);
2. The sale must be performed in the Bar Question 2015
course of trade or business;
3. The sale of service must be for a For calendar year 2011, FFF, Inc., a VAT- registered
valuable consideration actually or corporation, reported unutilized excess input VAT in
constructively received; the amount of Php l,000,000.00 attributable to its
4. The sale must have been done and for zero-rated sales. Hoping to impress his boss, Mr. G,
use or consumption in the Philippines; the accountant of FFF, Inc., filed with the Bureau of
5. The sale must not be considered as a Internal Revenue (BIR) on January 31, 2013 a claim
zero- rated sale; and for tax refund/credit of the Pl,000,000.00 unutilized
6. The sale must not be exempt from excess input VAT of FFF, Inc. for 2011. Not having
VAT under the Tax Code, special law, received any communication from the BIR, Mr. G
or international agreement. filed a Petition for Review with the CTA on March
15, 2013, praying for the tax refund/credit of the Php
 In the case of lease of properties, the property l,000,000.00 unutilized excess input VAT of FFF, Inc.
being leased should be located in the for 2011.
Philippines irrespective of the place where the
contract of lease or licensing agreement was ANSWERS:
executed. a. Did the CTA acquire jurisdiction over
the Petition of FFF, Inc.? (2%)
32. o CTA did not acquire jurisdiction
because judicial claim was filed
REFUND OR TAX CREDIT OF EXCESS prematurely.
INPUT TAX o The Supreme Court ruled that the
30 day period after the expiration
Options available to a VAT-registered person, of the 120 day period fixed by law
whose sales are zero-rated or effectively zero- for the Commissioner of Internal
rated: Revenue to act on the claim for
1. To claim for tax credit; or refund is jurisdictional and failure
2. To claim for refund. (Sec. 112[A], NIRC) to comply would bar the appeal.
b. Discuss the proper procedure and
The taxpayer must prove the following: applicable time periods for
1. That it is a VAT-registered entity; and administrative and judicial claims for
2. It must substantiate the input VAT paid by refund/credit of unutilized excess input
purchase invoices or official receipts. VAT. (4%)
(Commissioner v. Manila Mining Corporation, o The administrative claim must be
G.R. No. 153204, Aug. 31,2005) filed with the CIR within 2 years
40
TAXATION LAW
FREQUENTLY ASKED QUESTIONS

from the close of the taxable excess input VAT attributable to its
quarter when zero rated sales were effectively zero- rated sales in 2012? (2%)
made. o No, my answer would not be
o The CIR has 120 days from the different if the claim for refund is
date of submission of complete for effectively zero rated sales in
documents in support of the claim 2012.
to decide. If the 120 days expires o The requirement to print the word
without the CIR acting on it, the zero rated is mandatory.
taxpayer has 30 days to file a o Failure to indicate is fatal to the
petition for review upon the claim for refund or tax credit.
expiration of the 120 day period.
33.
Bar Question 2015
ESTATE TAX RETURN
MMM, Inc., a domestic telecommunications
company, handles incoming telecommunications An estate tax return is required to be filed in the
services for non-resident foreign companies by following cases:
relaying international calls within the Philippines. To 1. In all cases of transfers subject to the estate
broaden the coverage of its telecommunications tax;
services throughout the country, MMM, Inc. entered 2. Where though exempt from tax, the gross
into various interconnection agreements with local value of the estate exceeds P200,000; or
carriers. The non-resident foreign corporations pay 3. Regardless of the gross value of the estate,
MMM, Inc. in US dollars inwardly remitted through where the said estate consists of registered
Philippine banks, in accordance with the rules and or registrable property, such as real
regulations of the Bangko Sentral ng Pilipinas. property, motor vehicle, shares of stock or
other similar property for which a clearance
MMM, Inc. filed its Quarterly VAT Returns for 2000. from the BIR is required as a condition
Subsequently, MMM, Inc. timely filed with the BIR precedent for the transfer of ownership
an administrative claim for the refund of the amount thereof in the name of the transferee. (Sec.
of P6,321,486.50, representing excess input VAT 90 [A], NIRC)
attributable to its effectively zero-rated sales in 2000.
The BIR ruled to deny the claim for refund of MMM, Contents of the Estate Tax Return
Inc. because the VAT official receipts submitted by 1. The value of the gross estate of the decedent
MMM, Inc. to substantiate said claim did not bear the at the time of his death, or in case of a
words “zero-rated” as required under Section 4.108- nonresident, non-citizen of the Philippines,
1 of Revenue Regulations (RR) No. 7-95. On appeal, of that part of his gross estate situated in the
the CTA division and the CTA en bane affirmed the Philippines;
BIR ruling. 2. The deductions allowed from gross estate in
determining the net taxable estate;
MMM, Inc. appealed to the Supreme Court arguing 3. Such part of such information as may at the
that the NIRC itself did not provide for such a time be ascertainable and such supplemental
requirement. RR No. 7-95 should not prevail over a data as may be necessary to establish the
taxpayer’s substantive right to claim tax refund or correct taxes; and
credit. 4. For estate tax returns showing a gross value
exceeding P2, 000,000, there must be a
ANSWERS: statement duly certified to by a Certified
a. Rule on the appeal of MMM, Inc. (3%) Public Accountant containing the following:
o The appeal of MMM must be a. aItemized assets of the decedent with
denied. MMM’s position that BIR their corresponding gross value at the
requirements do not prevail over time of his death, or in the case of a
taxpayer’s substantive rights to nonresident, not a citizen of the
claim tax credit or refund is Philippines, of that part of his gross
unavailing. estate situated in the Philippines;
b. Will your answer in (a) be any different b. Itemized deductions from gross estate
if MMM, Inc. was claiming refund of allowed in Section 86; and
41
TAXATION LAW
FREQUENTLY ASKED QUESTIONS

c. The amount of tax due whether paid or 36.


still due and outstanding. (Ibid.)
TAXPAYER'S REMEDIES
Time of filing of estate tax returns
 For purposes of determining the estate tax, the PAYMENT UNDER PROTEST
estate tax return shall be filed within six (6)
months from the decedent’s death. (Sec. 90 [B], a) Taxpayer who had already paid tax under
NIRC) protest - sue for refund in the component
 In case of judicial settlement of the estate, the CFI
Court approving the project of partition shall b) Erroneous assessment - file an appeal with
furnish the Commissioner with a certified copy the Provincial Board of Assessment
thereof and its order within 30 days after Appeals within 30 days from receipt of
promulgation of such order. (Sec. 90 [C], assessment
NIRC)
Illegal and void assessment
34.  Assessor has no power to act at all

DETERMINATION OF GROSS PROFIT Erroneous Assessment


 Assessor has the power but errs in the
 'Gross gifts' include real and personal property, exercise of that power.
whether tangible or intangible, or mixed,
wherever situated. (Sec. 104, NIRC) Process of payment under protest:
1. No protest shall be entertained unless the
Notes: taxpayer first pays the tax;
 Where the decedent or donor was a 2. The words “paid under protest shall be
nonresident alien at the time of his donation, his annotated on the tax receipt;
real and personal property so transferred but 3. Formal protest thereof must be made:
which are situated outside the Philippines shall a. For payment to the provincial, city or
not be included as part of his 'gross gift'. (Ibid.) municipal treasurer – within thirty (30)
 Franchise which must be exercised in the days from the payment of tax;
Philippines; shares, obligations or bonds issued b. For payment to a municipal or city
by any corporation or sociedad anonima treasurer in the Metro Manila area –
organized or constituted in the Philippines in within sixty (60) days from the payment
accordance with its laws; shares, obligations or of tax
bonds by any foreign corporation 85% of the
business of which is located in the Philippines; Contesting an assessment of value of real
shares, obligations or bonds issued by any property
foreign corporation if such shares, obligations
or bonds have acquired a business situs in the Personal liability is on any person who has such
Philippines; shares or rights in any partnership, beneficial or actual use at the time of the accrual of
business or industry established in the the tax when:
Philippines, shall be considered as situated in the
Philippines. (Ibid.) a. Tax liability is imposed on the beneficial use
of the real property (Sec. 234, LGC); or
35. b. Assessment is made on the basis of the
actual use thereof (Sec. 199 and 217, LGC)
TRANSFERS WHICH MAY BE
CONSTITUTED AS DONATION APPEAL TO THE LOCAL BOARD OF
ASSESSMENT APPEALS
 Sale/exchange/transfer of property (real
property other than capital assets) for less Who may appeal to the LBAA
than adequate and full consideration  Any owner or person having legal interest in
 Condonation/remission of debt the property who is not satisfied with the
action of the provincial, city or municipal
42
TAXATION LAW
FREQUENTLY ASKED QUESTIONS

assessor in the assessment of his property  Scheme used outside of those lawful means
(Sec. 226, LGC) and when availed of, it usually subjects the
taxpayer to further or additional civil or
Period of appeal criminal liabilities.
 Within sixty (60) days from the date of  Connotes the integration of three
receipt of the written notice of assessment factors:
(Ibid.) 1. The end to be achieved;
2. Accompanying state of mind
Notes: which is described as being “evil,”
in “bad faith” “willful,” or
 Doctrine of primacy of administrative “deliberate and not accidental”;
remedies - an error in the assessment must and
be administratively pursued to the exclusion 3. Course of action or failure of
of ordinary courts whose decisions would action which is unlawful.
be void for lack of jurisdiction.
38.
 Appeal on assessments of real property shall
not suspend the collection of the COMPENSATION AND SET OFF
corresponding realty taxes on the property
involved as assessed by the provincial or city
assessor. (Sec. 231, LGC) Compensation
 Take place when two persons, in their own
EXHAUSTION OF ADMINISTRATIVE right, are creditors and debtors of each
REMEDIES other. (Art. 1278, Civil Code)
 Note: Offsetting, when both of the
 GR: The doctrine of exhaustion of obligations have not yet been fully-
administrative remedies applies even to liquidated is not allowed under the law.
tax cases.
Doctrine of Equitable Recoupment
1. Allows a taxpayer whose claim for refund
 EXPNS: has prescribed to offset tax liabilities with
1. Questioning the validity or his claim of overpayment.
constitutionality of a rule or regulation
by an administrative agency 39.
2. Issue involves a purely legal question;
3. Action of the administrative agency is CONSTRUCTION AND INTERPRETATION:
patently illegal amounting to lack or LAWS, EXEMPTION, EXCLUSION, RULES,
excess of jurisdiction; or PENAL PROVISIONS, NON-RETROACTIVE
4. Violation of due process. APPLICATION

37. GR: Statues levying taxes are construed against the


government.
ESCAPE FROM TAXATION
Operation of rules imposing taxes
Most common ways in escaping taxation:  A revenue memorandum circular shall not begin
to be operative until after due notice thereof
1. Tax Avoidance maybe fairly presumed. (Commissioner of
 Tax saving device within the means Internal Revenue vs. Philippine Airlines, G.R.
sanctioned by law. This method should be No. 180066, July 8 2009)
used by the taxpayer in good faith and at
arm’s length. 40.

2. Tax Evasion STAGES OF TAXATION


43
TAXATION LAW
FREQUENTLY ASKED QUESTIONS

1. Levy (Tax Legislation): Enactment of a law by Taxes that are imposed or assessed upon
Congress, imposing a tax. merchandise from, exported to a foreign country for
2. Assessment and Collection (Tax the purpose of raising revenue.
Administration): Act of administration and
implementation of the tax law by the executive Kinds of customs duties
department through the administrative agencies. 1. Ad valorem duty: computed on the basis
3. Payment: Act of compliance by the taxpayer, of value of imported article.
including such options, schemes or remedies as may 2. Specific duty: computed on the basis of
be legally available. dutiable weight of good.
4. Refund: Recovery of any tax alleged to have been 3. Compound Duty: impose both ad
erroneously or illegally assessed or collected, or any valorem and specific customs duties.
penalty claimed to have been excessively, or in any 4. Alternative: alternates between ad valorem
manner wrongfully collected. and specific.

41. Special Duties


1. Anti-dumping duty
IMPORTATION IN VIOLATION OF TAX - product or commodity is imported in
CREDIT CERTIFICATE the Philippines at an export price less
than the normal value in the ordinary
Smuggling course of trade for the like product (Sec.
An act of any person who shall: 301, TCC, as amended by RA 8752)
1. fraudulently import any article contrary to 2. Countervailing duty
law; - product, commodity or article of
2. assist in so doing; commerce is granted directly or
3. receive, conceal, buy, sell, facilitate, indirectly by the government in the
transport, conceal or sell such article country or origin or exportation (Sec.
knowing its illegal importation (Sec. 3601, 302, TCC, as amended by RA 8751)
TCC); or 3. Marking duty
4. export articles in a manner contrary to law. - at the time of importation any article is
(Sec. 3519, TCC) not marked in any official language of
the Philippines
Other fraudulent practices - article is in a conspicuous place as
1. Entry of imported or exported article by legibly, indelibly and permanent as the
means of any false or fraudulent practices, nature of the article (or container). (Sec.
invoice, declaration, affidavit, or other 303, TCC)
documents; 4. Discriminatory duty
2. Entry of goods at less than their weights or - imposed on imported goods whenever
measures or upon a classification as to it is found as a fact that the country of
quality or value; origin discriminates against the
3. Payment of less than the amount due; commerce of the Philippines (Sec. 304,
4. Filing any false or fraudulent claim for the TCC)
payment of drawback or refund of duties 5. Safeguard duty:
upon the exportation of merchandise; and a. General – imposed upon goods or
5. Filing any affidavit, certificate or other products imported in increased
document to secure to him or others the quantities.
payment of any drawback, allowance or b. Special – volume of imports
refund of duties on the exportation of exceed a base trigger level or price
merchandise greater than that legally due falls below a trigger price. (RA
thereon. (Sec. 3602, TCC) 8800)

42.
43.
CLASSIFICATION OF DUTIES
INCOME TAXATION
Regular Duties
44
TAXATION LAW
FREQUENTLY ASKED QUESTIONS

Income tax
• Tax on all yearly profits arising from Joint venture and consortium
property, profession, trade or business • Corporation, for tax purposes, shall not
• Tax on person’s income, emoluments, include a joint venture or consortium
profits and the like. (Fisher v. Trinidad, formed for purposes of undertaking
G.R. No. L17518, October 20, 1922) construction projects engaging in
• Regarded as an excise tax petroleum, coal, geothermal and other
• Not levied upon persons, property, energy operations pursuant to an operating
funds or profits but on the privilege of or consortium agreement under a service
receiving said income or profit. contract with the Government. (Sec. 22(B),
NIRC)
State Partnership Theory
• Basis of the government in taxing income. 45.
It emanates from its partnership in the
production of income by providing the TAXABLE PERIOD
protection, resources, incentive and proper
climate for such production. (CIR v. Taxable Period
Lednicky, G.R. Nos. L 18169, L18262 & • Calendar year or the fiscal year ending
L21434, July 31, 1964) during such calendar year, upon the basis of
which the net income is computed for
44. income tax purposes.

KINDS OF TAXPAYERS Kinds

Importance of knowing the classification of a 1. Calendar period


tax payer is to determine the applicable: • Twelve (12) consecutive months starting
1. Gross Income; January 1 and ending on December 31.
2. Income tax rate; • Basis for computing net income when:
3. Exclusion from gross income; a. tax payer is an individual;
4. Exemptions; and b. tax payer does not keep books of
5. Deduction. account;
c. tax payer has no annual accounting
Classes of taxpayers: period; or
1. Individuals d. tax payer is an estate or trust.
a. Citizen • Required to be used by tax payers other than
i. Resident Citizen corporation.
ii. Non-resident Citizen
b. Aliens 2. Fiscal Period
i. Resident Alien • 12 months ending on the last day of any
ii. Non-Resident Alien- month other than December. (Sec. 22 (Q),
engaged in trade or NIRC)
business or not engaged • Final adjustment return shall be filed on or
in trade or business before the fifteenth (15th) day of the fourth
c. Special class of individual (4th) month following the close of the fiscal
employees – minimum wage year, as the case may be.
earner.
2. Corporations 3. Short Period
a. Domestic • Exemption from the general rule that a
b. Foreign-classified into resident or taxing period shall consist of twelve (12)
non-resident foreign corporation months.
c. Joint venture and consortium
3. Partnerships Tax payer may have a taxable period of less than
4. General Professional Partnerships twelve (12) months on the following:
5. Estates and Trust
6. Co-ownerships
45
TAXATION LAW
FREQUENTLY ASKED QUESTIONS

a. corporation is newly organized and 3. Fraternal Beneficiary Society, Order or


commenced operations on any day within a Association
year; 4. Cemetery Companies
b. corporation changes its accounting period; 5. Religious, Charitable, Scientific, Athletic or
c. corporation is dissolved; Cultural Corporations
d. Commissioner of Internal Revenue, by 6. Civic League
authority, terminates the taxable period of a 7. Non-stock, non-profit educational
taxpayer; and institutions;
e. Final return of the decedent and such period 8. Government educational institutions;
ends at the time of his death. 9. Mutual Fire Insurance Companies and Like
Organizations; and
46. 10. Farmers, Fruit Growers or Like
Associations
TAXATION OF NON-RESIDENT ALIENS
ENGAGED IN TRADE OR BUSINESS 49.

Income of non-resident alien engaged in trade or IMPACT AND INCIDENCE OF TAX


business derived from all sources within the
Philippines are: • While the liability on VAT is imposed on
• Taxable in the same manner as an individual one person, the burden may be passed on to
citizen or a resident alien individual another. (Sec. 4.105-2, RR 16-2005)
• Subject to the scheduled rate of 5- 32% • Impact is on the seller.
• Granted Personal and Additional • In importation, the importer is the one
Exemptions subject to the rule of liable for the VAT.
reciprocity. • Incidence of the tax is on the final consumer
where the tax comes to rest.
47. • Amount of the tax may be shifted or passed
on to the buyer, transferee or lessee of the
TAXATION OF GENERAL PROFESSIONAL goods, properties or services. (Sec. 105, RA
PARTNERSHIPS 8424)

General Professional Partnership 50.


• Not subject to income tax.
• Required to file information returns for its ZERO-RATED SALE OF SERVICES
income. (Sec. 55, NIRC)
• Partners are liable for income tax in their • Taxable transaction for VAT purposes.
separate and individual capacities. • Shall not result in any output tax.
• Input tax on purchases of goods, properties
48. or services related to such zero-rated sale
shall be available as tax credit in accordance
EXEMPTION FROM TAX ON with the Regulations. (Sec. 4.108-5(a), RR 16-
CORPORATIONS 2005)

Corporations are exempted from income tax under 51.


the NIRC, which are not organized for profit, neither
shall any part of the net income inures to the benefit VAT ON IMPORTATION OF GOODS (SEC.
of any member or individual; no capital is represented 107, NIRC)
by shares of stock; and they must be of educational
character: • VAT is imposed on goods brought into the
Philippines, whether for use in business or not.
1. Labor, agricultural or horticultural • Tax shall be based on the total value used by the
organization, not organized principally for Bureau of Customs (BOC) in determining tariff
profit; and customs duties, plus customs duties,
2. Mutual savings banks and cooperative excise tax, if any, and the other charges,
banks; such as postage, commission, and similar
46
TAXATION LAW
FREQUENTLY ASKED QUESTIONS

charges, prior to the release of the goods


from customs custody.
• If valuation used by the BOC in computing
customs duties is based on volume or
quantity of the imported goods, the landed
cost shall be the basis for computing VAT.
Landed Cost: consists of the invoice
amount, customs duties, freight, insurance
and other charges.
• If goods imported are subject to excise tax,
excise tax shall form part of the tax base.
• No VAT shall be collected on importation
of goods which are specifically exempted
under Section 109(1) of the Tax Code. (Sec.
4.107-1(a), RR 16-2005)

Transfer of goods by tax exempt persons

• If goods imported into the Philippines by


VAT-exempt persons, entities or agencies
which are subsequently sold, transferred or
exchanged in the Philippines to non-exempt
persons or entities, the latter shall be
considered the importers thereof and shall
be liable for VAT due on such importation.
• Tax due on such importation shall
constitute a lien on the goods, superior to all
charges/or liens, irrespective of the
possessor of said goods. (Sec. 4.107-1(c), RR
16-2005)