Taxation Review - Prefinals 2015

TAXATION
REVIEW – PRE-‐FINALS (A.Y. 2015 – 2016)

From the Discussions of Atty. Amago

TAX ADMINISTRATION AND REMEDIES

A. TAX ADMINISTRATION (Sections 1-‐21, NIRC)

Officials of the BIR:

1. Commissioner of Internal Revenue (CIR)
2. 4 Deputy Commissioners: Commissioners of Information Systems, Legal, Operations, and Resource Management
3. 19 Regional Directors coinciding with the 19 revenue regions
4. 184 Revenue District Officers
5. Revenue enforcement officers and examiners
A.1. Powers and Duties of the BIR (Section 2, NIRC)

1. To assess and collect national internal taxes, fees and charges;
2. To enforce all forfeitures, penalties and fines connected therewith;
3. To execute judgment in all cases decided in its favour by the CTA and the ordinary courts; and
4. To effect and administer the supervisory and police powers conferred upon it by the Tax Code or other special laws.

A. 2. General Powers of the CIR

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1. Power to Interpret the Tax Code and Other Tax Laws (exclusive and original jurisdiction) (Section 4 1 par., NIRC)
o Subject to review by the Secretary of Finance (SOF);
o CIR merely recommends to the SOF the issuance of a revenue regulation;
Who has the power to review and interpret the Tax Code and other tax laws? The Secretary of Finance. Whenever the BIR
issues a regulation which is adverse to you, you don’t go to the CTA to question it. What you do is to go to the SOF. The
power of the CIR to interpret in the form of revenue regulations is sort of recommendatory. The CIR recommends to the SOF
and it’s the latter who issues these revenue regulations. But it’s different with the revenue rulings because the ruling is really
set by the CIR, as a general rule.

How do we distinguish a revenue regulation from a revenue ruling?
o Revenue Regulations are general interpretations whereas Revenue Rulings are more specific and address to the to the
particular and actual needs of the taxpayer.
There is a particular set of facts on which the interpretation of the CIR is applied to. It could be that the ruling applies to you
granting that all the particular facts of said ruling are applicable to you. If not, then you cannot make use of the ruling as
basis for your position.

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2. Power to Decide Disputed Assessments, Refunds, Penalties and Other Matters (Section 4 2 par., NIRC)
o Subject to the appellate jurisdiction of the CTA
If there is a protest filed by the taxpayer and the CIR issues an adverse decision, the taxpayer will have to go to the CTA. You
make a differentiation. If it’s interpretation of a tax law in the form of a revenue ruling or regulation, you question it before
the SOF. If it’s an assessment made by the BIR, you question it before the CTA.

3. Power to obtain information and to summon, examine and take testimony of persons (Section 5, NIRC)
o To examine any book, paper, record, or other date which may be relevant or material to such inquiry;

If you’ve heard about taxpayers having been subjected to a review of the BIR, the BIR actually issues a letter requiring the
presentation of books. The BIR can always require submission of all documents relating to accounting.

o To obtain information from:
i. The taxpayer himself;
ii. Any office or officer of the national and local governments, government agencies and instrumentalities
including the BSP and GOCCs
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Tax is (repeat wanmilyon times J )
TAXATION REVIEW – PRE-‐FINALS (A.Y. 2015 – 2016)

iii. Third Party Information
E.g. The BIR was able to look into Judy Ann Santos’s tax information by making use of third parties who had
transacted with her on commercial or endorsement matters. The BIR made a comparison between the
declarations of those companies and what she reported. They tried to match it and since it did not match,
someone must not have reported correctly. Before, you don’t require the tax identification number of all
parties involved in a transaction. Currently, if you want to file certain documents with the BIR, it’s a
requirement that you should be able to know the TIN of all parties involved in the transaction.

o To summon the person liable for tax or required to file a return, or any officer or employee of such person or any person
having possession, custody or care of the books of accounts and other accounting records containing entries relating to the
business of the person liable for tax, or any other person, to appear before the CIR or his duly authorized representative at
a time and place specified in the summons and to produce such books, papers records or other data, and to give testimony;

o To take such testimony of the persons concerned under oath as may be relevant or material to such inquiry; and

o To cause revenue officers and employees to make a canvass from time to time of any revenue district or region and inquire
after and concerning all persons therein who may be liable to pay any internal revenue tax, and all persons owning or
having the care, management or possession of any object with respect to which a tax is imposed.
4. Power to Make Assessment (Section 6, NIRC)

a. Examination of Returns and Determination of Tax Due
o If no return is filed, there will still be an assessment based on the Best Evidence Obtainable.
b. Assess the proper tax on the Best Evidence Obtainable

Only in the following cases:
i. If a person fails to file a return or other document at the time prescribed by law; or
ii. The taxpayer wilfully or otherwise files a false or fraudulent return or other document.
Best Evidence Obtainable – any data, record, papers, documents or any evidence gathered by the internal revenue
officers from government offices or agencies, corporations, employers, clients or patients, tenants, lessees, vendees
and from all other sources, with whom the taxpayer had previous transactions or from whom he received any income,
after ascertaining that a report required y law as basis for the assessment of any internal revenue tax has not been filed
or when there is reason to believe that any report is false, incomplete or erroneous.
Net Worth Method – method wherein the BIR can determine the proper taxes for a taxpayer who has not fully
declared its income or paid properly its taxes for a number of years.

c. Conduct Inventory-‐taking, Surveillance and to Prescribe Presumptive Gross Sales and Receipts
o Surveillance is undertaken when there is reason to believe that a person is not declating his correct income, sales
or receipts for internal revenue tax purposes;

o Presumptive Gross Sales and Receipts is imposed when there is reason to believe that the taxpayer is incorrectly
declaring his income, using data at similar businesses within the same industry [Averaging Method].

For example, you have a bakery. What the BIR can do is that within your area, they will look at the other bakeries,
try to get their data, do an averaging and on the basis thereof, if they determine that you reported less sales than
that of the average then the BIR can make an average sales for you and that would be used as data to determine
your tax liability. So you look at similar entities, do an averaging then compare it with your own data.
d. Issue Jeopardy Assessments and Terminate Taxable Period

GR: BIR can only make assessments after a complete and full audit has been made insofar as the documents obtainable are
concerned.

EXC: Jeopardy Assessment may be issued, without the benefit of a full and partial audit in light of the Revenue Officer’s
belief that the assessment and collection of the deficiency tax will be jeopardized by delay caused by the taxpayer’s failure
to:
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a. Comply with audit and investigation requirements to present his books of accounts and/or pertinent records;
b. Substantiate all or any of the deductions, exemptions or credit claimed in his return and the prescriptive period to
collect and/pr assess is about to elapse.

When tax period may be terminated: (should be accompanied by a request to immediately pay the taxes due):

1. The taxpayer is retiring from business subject to tax;
2. He intends to leave the Philippines or remove property therefrom;
3. He hides or conceals his property;
4. He performs an act tending to obstruct the proceedings for the collection of the tax for the past or current quarter
or year to render the same totally or partially ineffective unless such proceedings are begun immediately.
Other instances –
1. When the taxpayer changes his/her/its accounting period from calendar year to fiscal year or fiscal year to
calendar year;
2. When the taxpayer changes status from Non-‐VAT to VAT-‐registered.
Termination of taxable period means that you have to make a return right away even if your accounting period has not
yet been completed. But there are specific grounds mentioned in the Tax Code of when the CIR can actually terminate
the tax period as enumerated above.

5. Power to Prescribe Real Property Values (Section 6(E), NIRC)
For purposes of computing any internal revenue tax, the value of the property shall be whichever is higher of:
1. The fair market value as determined by the CIR; or
2. The fair market value as shown in the schedule of values of the Provincial and City Assessors for real estate tax
purposes.
6. Power to Inquire into Bank Deposits (Section 6(F), NIRC)

The CIR is authorized to inquire into bank deposits of:
1. A decedent to determine his gross estate;
2. Any taxpayer who has filed an application for compromise of his tax liability by reason of financial incapacity to pay his
tax liability and waives in writing his privilege under the Bank Secrecy Law or other laws; and
It’s as if this ground falls under the voluntary consent of the person who owns the bank account.
3. A specific taxpayer subject of a request for the supply of tax information from a foreign tax authority pursuant to an
international convention or agreement on tax matters to which the Philippines is a signatory or a party of (Section 6(F),
NIRC as amended by RA 10021).
The basis of this is RA 10021 (Exchange of Information on Tax Matters Act of 2009) where the foreign tax
authority can inquire into the bank account of a particular person in relation to taxes it ought to pay to that
foreign jurisdiction. There is actually a revenue regulation for this. The most important provision there is that if
this specific ground is invoked, there is a need to make a request from the tax authority of a foreign country.
You must be able to establish that there really is an account existing in the Philippines and that is the only
connection they have in relation to the tax of the subject person which is ought to be paid. In other words, they
just have to establish that it is really necessary for purposes of determining the tax liability of such person.
What is so interesting about this law is that if ever there is a request from a foreign tax authority, whatever
information the BIR gathers here can also be used to assess that same person.

Conditions under RA 10021 –

i. the identity of the person under examination or investigation;
ii. A statement of the information being sought;
iii. The tax purpose for which the information is being sought;
iv. Grounds for believing that the information requested is held in the Philippines;
v. The name and address of any person believed to be in possession of the requested information, to the
extent known;
vi. A statement that the request is in conformity with the law and administrative practise of the foreign tax
authority;
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vii. A statement that the requesting foreign authority has exhausted all means available in its own territory to
obtain the information.
7. Power to Prescribe Additional Procedural or Documentary Requirements (Section 6(H), NIRC)

8. Power Not to Allow the Withdrawal of any Return, Statement or Declaration, Although the Same may be Amended
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(Section 6(A)3 par., NIRC)
o Any return, statement or declaration filed in the BIR shall not be withdrawn but may be modified, changed or amended
within 3 years from the date of such filing, provided that no notice for audit or investigation of such return, statement or
declaration has, in the meantime, been actually served upon the taxpayer.
The general rule is that whenever a return is filed, it will stay there, you cannot do anything about it. But you can make
additional filing that’s why you can modify, amend or change any information there. Does that mean that you can
withdraw the return filed earlier and exchanged it with another return? No. The return, once filed, will stay with the BIR.
You just have to file a new return containing the corrected information. Changing, amending or modifying a return can
only be done within 3 years from the time of filing and granting that there has been no notice of investigation was ever
issued to the taxpayer otherwise you cannot amend the return you filed. What’s the reason for that? Because it would
be very convenient for any taxpayer who received a notice of investigation to change his return in order to escape
liability. So it would be useless on the part of the BIR to investigate since the taxpayer would have changed the
information in the return o coincide with whatever was investigated.

A.3. Delegable Powers of the CIR (Section 7, NIRC)

GR: The CIR may delegate the powers vested in him to subordinate officials with rank equivalent to a division chief or higher.

Exceptions:
1. Power to recommend the promulgation of rules and regulations by the SOF;

2. Power to issue rulings of first impression or to reverse, revoke or modify any existing ruling of the BIR;
For example, motor vehicles owned by companies are considered ordinary assets and are vatable whenever sold. So
that’s the current position of the BIR on the matter. What if the new CIR will issue an opinion that it’s no longer
vatable? That ruling can only be issued by the CIR because it is a modification of a ruling previously made.

3. Power to compromise or abate any tax liability except assessments issued by the regional offices involving basic deficiency
taxes of P500,000.00 or less and minor criminal violations;
4. Power to assign or reassign internal revenue officers to establishments where the articles subject to excise tax are
produced or kept.
If ever there are excisable taxes in SM, is it necessary that the CIR would assign a revenue officer to check on these
articles? No because that is an area where these excisable articles are being sold. What is provided in the Tax Code
is establishments where these articles are produced or kept. So if it’s a place for selling, the CIR need not be the one
who will make the assignment of a revenue officer. The CIR can just delegate it to someone else. But if it’s a place
for production or warehousing then the CIR should be the one to make the assignment or reassignment.
What is the reason for this? Because it’s very easy to get away with excise taxes. From one production line to a
plant, supposedly there’s excise tax involved already. The moment it is produced and transferred to the warehouse,
excise tax is supposed to accrue. So if imong papiyungon ang nagtan aw dha nga BIR personnel then you can get
away with excise tax. And if this BIR personnel is already very close to the owner of the entity then it would be very
easy to collude. And so they are required to be reassigned, I think, every two years. But then again, this would be
impractical.

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B. REMEDIES

OVERVIEW

Remedies of the Government
I. As to the Nature of Proceedings

A. Administrative Remedies
1. Tax Lien
2. Distraint or garnishment
3. Levy
4. Forfeiture
5. Compromise and Abatement
6. Penalties and Fines
7. Suspension of Business Operations

B. Judicial
1. Civil
2. Criminal

II. As to Procedure
A. Assessment and Collection
B. Collection without Assessment
Remedies of the Taxpayer

I. Before Payment
1. Protest against Assessment
2. Entering into a Compromise
B. Judicial Remedies

II. After Payment
1. Claim for Tax Refund or Tax Credit
2. Judicial Remedies
The general rule is that before you resort to judicial remedies, you must first resort to administrative remedies.

Remedies Of The Government

ASSESSMENT

Noun – notice to the effect that the amount therein stated is due from the taxpayer as a tax with a demand for payment of the tax
or deficiency stated therein.
Verb – official action of an administrative officer in determining the amount of tax due from a taxpayer.
Computing actually how much is the tax due is already considered an assessment.

Kinds of Assessment:
1. Self-‐assessment – tax is assessed by the taxpayer himself
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Usually, every April 15 for individual taxpayers and in the case of corporations, every 15 day of the 4 month
following the close of their taxable period.

2. Deficiency Assessment – made by the tax assessor himself whereby the correct amount of the tax is determined after an
examination or investigation is conducted.
a. Deficiency Tax – one where the taxpayer has already paid the amount of tax due but the BIR later on found that
such amount was incorrect.
b. Delinquency Tax – one where the taxpayer failed to pay the amount of the tax due after having been assessed.
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The BIR personnel will then retrieve all the records of the taxpayer, make their own computation and compare it to the
return filed. If they notice that there is a discrepancy they will then issue a deficiency assessment. It will embody the
deficiency tax. Let’s say for example, you made your return last April 15. You paid P1million. The when the BIR made
their own computation, it turned out that the amount due is P1.5million. The P500K is considered the deficiency tax. If
you failed to pay after demand made by the BIR, the P500K is now a delinquency tax. Deficiency tax if there is no
assessment yet made by the BIR but once there is an assessment already and you failed to pay, it now becomes a
delinquency tax.

3. Illegal and Void Assessment – tax assessor has no power to assess at all.
This is an assessment made without authority. This could happen, for example, when the BIR made an assessment
after the period to assess has already elapsed or prescribed.

4. Erroneous Assessment – tax assessor but committed a mistake in the exercise thereof.
For example, the BIR made an assessment but it turned out that the computation was wrong. It was without basis
which usually happens since everything under the sun seems to be subject to tax. Whether it’s exempt or not does
not matter already.

5. Jeopardy Assessment – made by an authorized Revenue Officer without the benefit of a complete or partial audit, in light
of the RO’s belief that the assessment and collection of a deficiency tax will be jeopardized by delay caused by the
taxpayer’s failure to:
a. Comply with audit and investigation requirements to present his books of accounts and/or pertinent record, or
b. Substantiate all or any of the deductions, exemptions of credits claimed in his return.

Assessment Process:

I. Issuance of a Letter of Authority (LOA)
o LOA is an official document that empowers a Revenue Officer to examine, investigate and audit a taxpayer’s books of
accounts and other accounting records in order to determine the taxpayer’s correct internal revenue tax liabilities.

Requirements of a valid LOA:
1. The taxpayer has to be properly identified;
2. The LOA must be given to the proper address;
3. Taxes to be audited must be identified (it is enough to say NIRC Taxes);
4. It has to specify the year to be audited (which should not exceed one (1) year); and
5. It is signed by the proper officer.

o Letter Notice (LN) – issued by the CIR or his alter ego to the taxpayer who has been found to have incurred
discrepancies, either under-‐declaration of his sales or over-‐declaration of his expenses under a no-‐contact audit
approach.
II. Actual Audit/Investigation

III. Issuance of a Preliminary Assessment Notice (PAN)

IV. Issuance of Formal Letter of Demand and Assessment Notice (FAN)
Rule: PAN must first be issued by the BIR before issuing a Fan and Letter of Demand.

Exceptions:
1. Mathematical error appears on the face of the return;

2. Discrepancy between tax withheld and tax remitted exists;
The contemplation here is that the amount of tax withheld is more than the amount of tax remitted.
There’s no more need from PAN because the withholding agent clearly committed fraud not only to
the government but also to the taxpayer.

3. Double availment of Tax Credit/Refund and Carry-‐Over;
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You applied for tax credit and you are granted a tax credit certificate. It turned out that you carried
over your excess. Say for example, during the year, the total taxes you paid on the third quarter is
P1million. Come fourth quarter, it turned out that the taxes you ought to pay is only P800K. What are
you supposed to do with the P200K? There are options given you under the Tax Code (Section 76). If
you already availed of one of those three options under Section 76, you cannot avail anymore of the
other options. They’re mutually exclusive. So if ever, it turned out of two options, then there is no
more need of the PAN because there’s mistake on your part.

4. Excise Tax on excisable goods has not been paid;
Again, it’s very easy to get away with excise taxes.

5. Article purchased by exempt person is transferred to non-‐exempt person.
This usually happens in the case of technical importation.
N.B.: The taxpayers shall be informed in writing of the LAW and the FACTS on which the assessment is made;
otherwise, the assessment shall be void (Section 228, NIRC).
o An assessment is deemed made when the FAN is finally released, mailed and sent to the taxpayer.
Dissussion:
There is no more Notice of Informal Conference so the assessment process has become somewhat easier. Now, the PAN is
automatically issued. First, there is the issuance of a LOA which presupposes that the taxpayer is under audit or investigation.
The general rule is that within the region, only the Regional Director can issue a LOA. However, once the national office of the
BIR issues a LOA, the regional officers can no longer issue a LOA. There power has already been superseded by that of the
national office. One taxpayer can only be issued one LOA for a particular tax. But a LOA could contain many taxes for as long as
it involves only one tax period as discussed in the case of Sony. How does it differ from a Letter Notice? Take note, that under a
LOA, the taxpayer is informed that he is subject to an investigation. Under LN, the taxpayer is not informed. He will just be
informed right away that this is the amount of taxes that he’s supposed to pay out of the investigation the BIR conducted out of
third party information. LN can be issued while LOA will have to proceed to an actual investigation. In LN, there is no more need
for information from the taxpayer himself since it already results from an investigation conducted by the BIR from third parties.

If you don’t agree, then the BIR will issue a PAN. With the current administration and based on the current revenue regulation,
PAN is issued as a matter of course. The BIR will automatically issue a PAN probably because they notice that this has become a
problem with the due process requirement in courts. Also, they’ve taken away the Notice of Informal Conference from the
procedure after all it’s never really mentioned in the law. What is mentioned in the law is the LOA and the PAN. The BIR cannot
get away with the issuance of the PAN unless it falls under any of the exceptions where PAN can be dispensed with. If after the
Reply of the taxpayer to the PAN, the BIR thinks that there is no legal basis to reconsider its position, then it will issue a Formal
Letter of Demand and Assessment Notice or Final Assessment Notice (FAN). This is the notice that you will have to question. But
this is the remedy of the government in case you don’t pay taxes. So after a FAN has been issued, the taxpayer will file a Protest
within 30 days. If the BIR still doesn’t agree, then the taxpayer will now have to resort to court. That will be the time that the
judicial process will come in.

When do you say that an assessment has already been made by the government? Is it when the BIR issues a PAN or a FAN? Only
when a FAN has been issued and it is deemed made when the FAN has already been finally released, mailed or sent to the
taxpayer. That’s when the government is said to have made use of the remedy of assessment. Take note that whenever the
government makes an assessment, the taxpayer must be duly informed of the law and the facts on which the assessment is
based otherwise the same is void.

COLLECTION

Administrative Methods for Collection of Taxes:

1. Tax Lien (Section 219, NIRC) – denotes a legal claim or charge on property as security for the payment of some debt or
obligation.
a. Personal Property – at the time the tax becomes due and payable;
b. Real Property – from the time of registration with the Register of Deeds.

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2. Distraint/Garnishment
o Applies to personal property only

a. Constructive Distraint – issued when there is no actual tax delinquency yet as preventive remedy to forestall possible
dissipation of the taxpayer’s assets under the following cases:

1. A taxpayer is retiring from business subject to tax;
2. A taxpayer is intending to:
i. Leave the Philippines or remove his property therefrom; or
ii. Hide or conceal his property;
3. A taxpayer is performing any act tending to:
i. Obstruct the proceedings for the collection of the tax for past or current year; or
ii. Render the same totally or partly ineffective unless such proceedings are begun immediately.
How effected: Section 206, NIRC

a. By requiring the taxpayer or any person having possession or control of such property to sign a receipt
covering the property distrained and obligate himself to preserve the same intact and unaltered and not to
dispose of the same in any manner whatever without the express authority of the Commissioner;

b. In case the person refuses or fails to sign the receipt, the revenue officer effecting the constructive distraint
shall prepare a list of the property and in the presence of two (2) witnesses, leave a copy thereof in the
premises where the property distrained is located.

Constructive Distraint Actual Distraint

No tax delinquency yet There is tax delinquency
No actual or physical seizure of the property; There is actual or physical seizure of property
taxpayer is just obligated to preserve and not to
dispose of the property
Procedure: Sec. 206, NIRC Procedure: Sec. 207-‐212, NIRC

b. Actual Distraint-‐ resorted to when there is actual tax delinquency and the taxpayer fails to pay his obligation which
consists in the actual seizure and taking of personal property of the taxpayer.
How effected (short version):

1. Commencement of distraint proceeding either by CIR or duly authorized representative (more than P1M
delinquency tax) or RDO (P1M and below delinquency tax)
2. Service of warrant of distraint
3. Report on the distraint (by the sheriff serving the warrant)
4. Notice of sale of distrained property
5. Sale at public auction
c. Garnishment-‐ special kind of distraint. the taking of personal properties, usually cash or sums of money, owned by a
delinquent taxpayer which is in the possession of a third party. There could be distraint of intangible properties like
your bank account or shares of stock or dividends or going after the debtors of the taxpayer.
Just like constructive distraint, you write a letter mentioning about the warrant of distraint being issued against the
taxpayer and since you are in a possession of a property to which the taxpayer has an interest, you are hereby
precluded from making any disposition of such property within your possession or control. So if it’s a bank account, the
bank should refuse any withdrawal or set off of such bank account.
3. Levy-‐ applies to real property only. There is no physical seizure of the real property (like constructive distraint). So a
warrant of levy shall be issued to the taxpayer, a copy of which shall be furnished to the RDO stating that this property is
now subject of a levy and that any disposal thereof will be subject to the consent of the CIR. You cannot make any transfer
without authority from the CIR.
When: (NIRC, Sec. 207 (B)) Before, simultaneously, or after the distraint proceedings is effected.

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How effected:
1. Issuance of warrant of Levy
2. Service of the warrant of levy
-‐ Once the warrant of levy has been served the taxpayer can no longer disposed. If sold, all proceeds shall be
used to pay the taxpayer’s liabilities. Whoever holds the property after the service of the warrant is subject to
the lien of the government against such property. The levy attaches to the property once the warrant has been
served.
3. Advertisement of sale
4. Public sale of property

4. Forfeiture-‐ divesture of property without compensation, in consequence of a default or offense.
Resorted to when: there is no bidder or the amount of the bid is not sufficient to cover the tax liabilities

DISTRAINT LEVY
Refers to personal property Refers to real property
Assessment is not required in all There must always be an
instances. If it’s constructive, it’s not assessment. Applicable only when
necessary that there be delinquency there is delinquency
No right of redemption (since it’s One (1) year redemption period
personal
properties)
No forfeiture proceedings Forfeiture in favour of gov’t if no
If not sold in public auction, gov’t will serious bidder. There is no just
have to purchase the properties and compensation. (Not eminent domain)
apply the proceeds to the tax liability

5. Compromise and Abatement
A. Compromise
1. Definition: a contract whereby the parties by making reciprocal concessions, avoid litigation or put an end to one
already commenced (Civil Code, Art. 2028)
2. Requisites:
i. the taxpayer has tax liability
ii. there must be an offer of an amount to be paid by the taxpayer;
iii. there must be acceptance of the offer in settlement of the original claim

3. Authority:
i. Commissioner; or
ii. Regional Evaluation Board, in case the assessment involves basic deficiency tax (BDT) of P500,000 or less
and minor violations discovered by regional and district officials.

4. Grounds:
i. Doubtful Validity-‐ minimum @40% of BDT
ii. Financial Incapacity-‐ 10%, 20% or 40% depending on the condition of taxpayer.
-‐ But under the tax code, the minimum is 10%

5. When required to secure approval of National Evaluation Board:
**in addition to authority of Commissioner or Regional Evaluation Board whenever
a. The basic tax involved exceeds P1M; or
b. The settlement offered is less than the prescribed minimum
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6.
Allowed Cases: (R.R. 30-‐2002)
1. Delinquent accounts
2. Cases under administrative protest after issuance of FAN pending before the BIR
3. Civil tax cases being disputed before the courts
4. Collection cases filed in courts
5. Criminal violations not yet filed in court except criminal tax fraud
*this is always asked

7. Prohibited Cases: (R.R. 7-‐2001)
i. Withholding tax cases
-‐ is not the taxpayer’s tax, you only remit it

ii. Criminal tax fraud cases confirmed by CIR or his representatives
-‐ means the CIR/representative has approved that a criminal tax fraud should be filed. Whether
filed in court or not, so long as criminal tax fraud is involved.

iii. Criminal violations already filed in court (not criminal tax fraud)
iv. Delinquent accounts with duly approved schedule of installment payments
-‐ because already entered into compromise which is why there is schedule of installment payments

v. Cases where final reports of reinvestigation or reconsideration have been issued where the taxpayer is
agreeable
-‐ because already entered into agreement

vi. Cases which are already final and executory after final judgment
-‐ So as not to make a farce out of the proceedings of the court
vii. Estate tax cases on the ground on financial incapacity
-‐ how come there is financial incapacity when there must be an estate that estate tax is paid up

B. Abatement
1. Definition: cancellation of the taxpayer’s entire tax liability

-‐ There can be cancellation of only surcharge or interest penalty or other penalties.
2. Grounds:
i. The tax or any portion thereof appears to be unjustly or excessively assessed
ii. The administration and collection costs involved do not justify the collection of the amount due
3. Authority: CIR only
4. Unjust/Excessive Tax Cases (under Ground #1):

a. Filing of return/payment at the wrong venue
b. Mistake in tax payment due to erroneous written official advice of a Revenue Officer
-‐ if there’s a ruling issued by previous CIR stating that a TP is not taxable, but the new CIR has
ruled he is taxable, there is corresponding surcharges and interest penalties. The TP there can
abate the surcharges and interest penalties and pay only the basic taxes.
c. Failure to file a return due to:
i. Prolonged labor dispute
ii. Force majeure
iii.Legitimate business reverses
-‐ only surcharges and penalties can be abated because it remains that there is tax liability its just
that you were not able to file return on time because of the foregoing
d. Non-‐compliance due to difficult interpretation of the law
e. Failure is due to cause beyond taxpayer’s control
f. Late payment under meritorious circumstances
e. Other similar or analogous cases

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6. Penalties and Fines -‐ so TP will be compelled to pay the taxes due
• Imposition of Addition to Taxes:

1) Surcharges -‐ 25% or 50% depending on whether false/ fraudulent return involved

Surcharge only has two rates:
1. 25% Civil Penalty or Surcharge
(a) Failure to file any return and pay the tax due thereon; or
(b) Filing a return with an internal revenue officer other than those with whom the return is required to
be filed; or
(c) Failure to pay the deficiency tax within the time prescribed for its payment in the notice of
assessment; or
(d) Failure to pay the full or part of the amount of tax shown on any return or the full amount of tax due
for which no return is required to be filed, on or before the date prescribed for its payment. (Sec.
248)
2. 50% Civil Penalty or Surcharge
The 50% surcharge is not a criminal penalty but a civil or administrative sanction provided primarily as a
safeguard for the protection of the State revenue and to reimburse the Government for the heavy
expense of investigation and the loss resulting from the taxpayer’s fraud (Castro vs. CIR, L-‐12174, Apr. 26,
1962)
(a) In case of willful neglect to file the return within the period prescribed by the Code, or
(b) In case a false or fraudulent return is willfully made

2) Interest Penalty -‐ 20%

3) Compromise Penalty -‐ new RR on schedule. Lowest = P1,000, even if late for only one day.

7. Suspension of Business Operations
a. Understatement of taxable sale or receipt by 30% or more based on sales (Ground)
b. Duration: not less than 5 days
VALUE ADDED TAX. The CIR or his authorized representative is empowered to suspend the business operations
and temporarily close the business establishment of any person for any of the following violations:
1. In the case of a VAT-‐registered person –
a) Failure to issue receipts or invoice
b) Failure to file a VAT return
c) Understatement of taxable sales or receipts by 30% or more of his correct taxable sales
or receipts for the taxable quarter.
2. Failure of any person to register who is mandatorily subject to VAT.

The temporary closure of the establishment shall be for duration of not less than 5 days and shall be
lifted only upon compliance with whatever requirements prescribed by the CIR in the closure order.

INTEREST
20% INTEREST (per annum)
The interest shall be computed only on the basic deficiency tax (surcharge is not included in the computation).
1. Deficiency Interest
- Any deficiency in the tax due shall be subject to the interest of 20% per annum which shall be
assessed and collected from the date prescribed for its payment until the full payment thereof (Sec.
249[B], NIRC).
11

2. Delinquency Interest – In case of failure to pay:
- The amount of the tax due on any return required to be filed; or
- The amount of the tax due for which no return is required;

JUDICIAL REMEDIES of the Government:

A. Civil Action
1. By filing a civil case for collection of a sum of money with proper regular court (MTC or RTC)
2. By filing an answer to the petition for review filed by taxpayer with CTA
FANàBIR decisionàCTA (petition for review), where BIR also has the right to file an answer

B. Criminal Action
Common Criminal Cases:

1. Attempt to evade or defeat tax; and
2. Failure to file return, supply correct and accurate information, pay tax, withhold and remit tax and refund
excess taxes withheld on compensation.
The judgment in the criminal case shall not only impose the penalty but shall also order the payment of taxes
subject of the criminal case as finally decided by the Commissioner
- Assessment is NOT a requirement to file a criminal action. (Ungab v. Cusi, Adamson v. CA)

PRESCRIPTIVE PERIODS

I. ASSESSMENT
th
Rule: (NIRC, Sec 203) Internal revenue taxes shall be assessed within three (3) years after (1,095 day) reckoned from
a. The last day prescribed by law for the filing of return; or
b. The day the return was filed, if in default
Prescriptive Period for Filing of Return:

th th
Income tax: 15 day of the 4 month following the close of the taxable year
If individual: April 15, pertaining to taxes of previous year.

Estate tax: 6 mos from the date of death

VAT: 25th day of the month following the close of the quarter

Donors Tax: 30 days from the donation was made; it’s just at the end of the year there is a final return consolidating it.

th
Withholding tax: 10 day of the month following (withholding)

Date of Filing Deadline
Income Tax:
April 15, 2015 (last day to file) April 15, 2018
April 10, 2015 April 15, 2018 (Rule a.)
April 20, 2015 (late/default) April 20, 2018 (Rule b.)

12

rd
VAT: 3 Quarter
Oct. 25, 2015 (last day to file) Oct. 25, 2018
Oct. 15, 2015 Oct. 25, 2018 (Rule a.)
Oct. 30, 2015(late/default) Oct. 30, 2018 (Rule b.)

Estate tax. Date of death: Dec 25
June 25, 2015 (last day to file) June 25, 2018
June 20, 2015 June 25, 2018 (Rule a.)
June 30, 2015(late/default) June 30, 2018 (Rule b.)

Withholding tax: January 2015
Feb 10, 2015 (last day to file) Feb 10, 2015
Feb 9, 2015 Feb 10, 2015 (Rule a.)
Feb 29, 2015 (late/default) Feb 28, 2015 (if not leap yr)

Exceptions: (NIRC, Sec. 222)
a) False or Fraudulent Return—10 years after discovery
b) Failure to file a Return/No Return—10 years after discovery
c) There is a waiver (to toll the running of the prescriptive period)
Requirements for a valid waiver:
1. The waiver must be in the proper form prescribed by RMC 20-‐90
2. The waiver must be signed by the taxpayer himself or his duly authorized representative
3. The waiver should be duly notarized
4. The CIR or the revenue official authorized by him must sign the waiver indicating that the BIR has
accepted and agreed to the waiver;
5. Both the date of execution by the taxpayer and date of acceptance by the BIR should be before the
expiration of the period of prescription or before the lapse of the period agreed upon in case a
subsequent agreement is executed;
6. The waiver must be executed in 3 copies.
Reckoning Point:
1. Date of Actual Assessment (released, mailed or sent)
2. Date of Substantial Amendment (that which changes the tax liability of the taxpayer)
**ground for amendment: mistake in your name—not a substantial amendment

**change of total sales: if negative P1M, but you want to amend it to P2M—substantial bec. can affect NOLCO
(corpo or individual, related to business/trade)

II. COLLECTION
Rule: Three (3) years from date of final assessment notice, if there is a return (NIRC, Sec 203)
Exceptions: Five (5) years from date of final assessment notice
1. False or Fraudulent Return
2. Failure to file a Return/No Return
Exception to the Exceptions: Ten (10) years from date of discovery if the government will collect without assessment.
(NIRC, Sec 222 (a))
Reckoning point:
a. Collection through summary remedies
b. Collection through judicial remedies
13

Grounds for Suspension of Statute of Limitations (NIRC, Sec. 223)
-‐-‐ the same for assessment and collection
1. When the CIR is PROHIBITED from making the assessment or beginning the distraint or levy or a proceeding in
court, AND 60 days thereafter;
2. When the taxpayer requests for a REINVESTIGATION which is GRANTED by the CIR;
3. When the taxpayer cannot be located in the ADDRESS given by him in the return UNLESS he informs the CIR of
any change in his address;
As a matter of fact under the latest amended rules on assessment 18-‐2013(?) it is provided there that the
BIR can already issue or send an assessment on the last known address of the taxpayer and the last known
address need not be the one registered. So long as the BIR has knowledge of the address that would already
suffice.

4. When the warrant of distraint or levy is duly served, AND No property is located
5. When the taxpayer is out of the Philippines
III. CRIMINAL CASES
Rule: (NIRC, Sec 281) All violations of any provision of this Code shall prescribe after five (5) years
Reckoning Point:
1. From the day of the commission of the violation of the law; or
2. If the same be not known at the time, from the discovery thereof AND the institution of judicial proceedings
for its investigation and punishment.
Technically, it is imprescriptible because it requires the institution of judicial proceedings before the five year period
will start to run. If the BIR will not file a case, then it will never prescribe.

REMEDIES OF THE TAXPAYER

N.B.: Protest over an assessment as well as claim for refund or credit can only be initially done administratively.

I. BEFORE Payment

PROTEST or may enter into compromise
LOAàPANàTP files a reply within 15 daysàBIR will issue FANàTP may protest within 30 days from the receipt of FAN

TYPES:
i. Request for Reconsideration-‐ plea for a reevaluation of an assessment on the basis of existing records.
- No requirement for submission of supporting documents. Reconsider decision without looking into
other evidence. 180 days to wait for the decision of BIR reckons from date of submission of
protest.

ii. Request for Reinvestigation-‐plea for the reevaluation of the assessment on the basis of newly-‐discovered
evidence or additional evidence.
- Supporting documents should be submitted. (60 days period to submit+ 180 days to wait for the
decision of the BIR reckons from the date of submission of supporting docs)

REQUISITES:
1. In writing
2. Addressed to the CIR
3. It must be accompanied by a waiver of the Statue of Limitations in favor of the government

PROCEDURES IN PROTESTING AN ASSESSMENT
1. The taxpayer shall file his Protest within 30 days from receipt of the FAN.
2. The taxpayer shall submit all relevant supporting documents within 60 days from date of filing of protest (only
if Request for Reinvestigation)
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Relevant Supporting Documents-‐ those documents necessary to support the legal basis in disputing a tax
assessment as determined by the taxpayer.

3. The CIR has 180 days from receipt of relevant supporting documents/receipt of the Protest within which to
decide. Two scenarios may transpire therefrom:
a. BIR decides within the said 180-‐day period, if adverse to taxpayer, he may file an appeal to CTA (Rule 43)
within 30 days from date of receipt of decision. From CTA, appeal to SC (Rule 45) within 15 days.
b. BIR does not act on the protest within the said 180-‐day period, taxpayer may (mutually exclusive):
1. File an appeal to CTA within 30 days from the lapse of 180 days period; or
2. Wait for the decision and if adverse, file an appeal within 30 days from receipt of such
decision.
*Read New Cases! Causes changes in the remedies.
4. If CTA decides adversely, file an appeal before the Supreme Court (Rule 45) within 15 days receipt of such
decision.

15

II. AFTER Payment

REFUND/CREDIT
GROUNDS:
a. Tax is erroneously or illegally collected
b. Penalty is collected without authority
c. Sum collected is excessive or in any manner wrongfully collected

REQUISITES:
a. Must be in writing
b. Filed within two (2) years from date of payment
c. Show proof of payment

N.B.: Taxpayer should not wait for the decision of the CIR; both the claim for refund and subsequent appeal must be filed to
CTA
within the 2-‐year period. This does not account to supervening event.
- Appeal to CTA should be within 30 days from receipt of decision, but this may change (shorter) on account of the
remaining 2 year period from date of payment, because the 2 year period does not account to supervening event.
- If the TP received the decision of BIR 10 days before the expiration of the 2-‐year period, the TP should appeal to CTA
within the 10 remaining days of the 2-‐year period.
- If the BIR made a decision after the 2-‐year period, TP can no longer question the decision because the remedy to go
to court has already prescribed.
- If you learned that the 2-‐year period is about to lapse on that day, you file both to BIR and CTA.

JUDICIAL REMEDIES:
1. Civil Action-‐ action for damages for any whimsical or capricious act resulting to actual damages to the taxpayer
2. Criminal Action—against erring official

ROHM case
- If the BIR fails to make a decision within 120 days (because it is VAT) it is already considered a denial. It is required now for
the taxpayer to file the Petition for Review with the CTA within 30 days FROM the lapse of the 120 days.

Why is this a new ruling?
-‐ Before, you are given an option to either wait for the decision or to file right away 30 days right after.

Opinion of the colleague of sir: this procedure does NOT apply to Income tax

For Income tax purposes or for any other tax other than VAT, in relation to refund for excess INPUT VAT, the option is still available
tot eh taxpayer. That if ever there is NO decision made within the lapse of 180 day period, you are still given the option to:
1. File right away, 30 days thereafter; or
2. Wait for the decision of the BIR before you make an appeal

Q: is it required that the taxpayer should submit a quarterly income tax return for him to avail of a tax refund?
A: NO, it is not necessary (Case assigned)

Case not assigned:
February 2015 -‐ About the BIR making use of the Best Evidence Rule

There was this typhoon (Ondoy) which affected the records of the taxpayer. One taxpayer was assessed and he was required to
present proof. However, he was not able to present proof because the records were lost during the typhoon.

What the BIR did was make an assessment based on the Best Evidence Rule. But other than that it had no other basis. And it would
seem that the BIR was not able to fully substantiate the assessment, so the SC said:
16

That while you can use the BER, you should be able to present basis still of why an assessment is made, OTHER THAN the BER
because the assessment taxes on the taxpayer could NOT BE BASED ON A PRESUMPTION ALONE.

(Mention again of the Peace Bond case -‐ BDO, there are two (2) doctrines that you should remember)

Q: Can the SC take jurisdiction of a matter decided by the CTA in Division WITHOUT passing through a CTA En Banc proceeding?
(BDO Case)

A: Yes, the SC can still take jurisdiction for as long as these are matters which are incidental. The best remedy should still be Petition
for Certiorari with the SC, granting that it is just a matter of interlocutory orders of the CTA in Division. It need not follow through
the CTA En Banc proceeding.

Q: are Peace Bond considered Deposit Substitute?
A: There is NO categorical answer by the SC. However, in the decision it can be inferred that these are Deposit Substitute because
there is an underwriting agreement which seems to phrase that there are undisclosed investors. So there could be more than one. It
appears that the purchase of the PB is just made by one bank and so you only have one lender. But under the underwriting
agreement it seems that there are undisclosed investors. So, it may be considered Deposit Substitute PROVIDED that the investors
are AT LEAST 19 (because in the case there was 1 disclosed bank-‐investor)

NB: there must be at least 20 investors for it to be a D.S.

PRESCRIPTION

Under Sec. 222, "(c) Any internal revenue tax which has been assessed within the period of limitation as prescribed in paragraph (a)
hereof may be collected by distraint or levy or by a proceeding in court within five (5) years following the assessment of the tax. ,

it seems that 5 years is still applicable. BUT the book of De Leon says that it’s just 3 years.

“Our Contention” -‐ 3 years if there is an assessment but you base it on the period from the date of assessment.
“Sir’s Contention” -‐ when there is an assessment, it should be 5 years under Sec. 222(C).

De Leon says that it should be 3 years from the date of the assessment. But if there is no assessment it also 3 years. 3 years base on
the date of payment or filing, whichever is earlier. Same reckoning point with an assessment. But in all the discussion he does not
mention of 5 years which SIR does NOT agree with.

Sir: Sec 222 says 5 years. So, as it stands, 3 years if NO assessment. 5 years if there is an assessment.

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ESTATE TAX

Q: What is Estate Tax?
A: Tax on the privilege to transfer properties at the time of death through succession.

NB: In both instances (Estate and Donor’s tax), it should be gratuitous, no payment other than love and affection. Both are
just supplemental taxes to Income tax. Other source of revenue. Based on the sumptuary purpose, it ought to contribute in
the equitable distribution of wealth among the people.

Review Purpose on Estate Tax. TN: No inheritance tax anymore.
- This is a tax on the person transferring.

General Principles under Estate Taxation:

Under Income Tax, except Resident Citizen, the rest are taxable only for income WITHIN the Philippines.

Under ET and DT, it is the opposite. Except NRA, everyone is subject to ET and DT on their properties within and without the
Philippines.

Q: As a Rule, what type of properties may be taxable to a RC, NRC and RA?
A: Regardless of what type (Real, Tangible, Intangible) of property it is covered in the Gross Estate of the Taxpayer.

Q: To what type of taxpayer does the reciprocity rule apply?
A: to a NRA in relation to INTANGIBLE property

So with NRA, Real and Personal Tangible properties are covered as long as it has situs in the Philippines. So an Intangible Personal
Property can be exempted if there is reciprocity.

Q: How do we compute the tax of a decedent?
A: Gross Estate less deduction is Net Estate. Your Net Estate will be subject to the tax rate of Exempt to 20% which will be your
Estate Tax Due and Payable.

Q: What should form part of your Gross Estate of the decedent
A: Decedent’s Interest which is all of the decedent’s properties to which he has interest. The reckoning point should be the time of
the death of the decedent. It should be a property of the decedent at the time of the death of the decedent.

NB: even if it is not in the name or possession of the taxable decedent, it could still form part of his Gross Estate. When it falls under
these items:
1. Transfer in contemplation of death -‐ “the thought of death”
i. The transfer, even if it happened during the lifetime of the decedent it may be part of the GE if it can be
inferred in the circumstances that the reason for the transfer is because the TP is already thinking of death.
ii. No hard and fast rule. Question of fact. No time element.
iii. TN: Not everything can be transferred. Some properties/rights may be retained. But the same may still be
considered as TICOD
1. E.g. there is a thought of death; there is transfer but only in the name; there are still some rights
enjoyed by the decedent (like enjoyment and possession)
2. Consequently, it becomes confusing.
3. Q: can a revocable transfer be considered TICOD?
A: yes; it is also given a different kind of category.
Q: what is a revocable transfer?
18

A: it is a transfer where there is actual transfer but the right to designate who is suppose to
enjoy it after the death of the decedent remains with the decedent.
A: the right to amend, alter, or change any of the transfer already made

2. Revocable Transfer

3. Property Passing under General Power of Appointment
a) Q: Who gives the GPA?
A: Another decedent before. E.g Decedent A, who gives Decedent B the right to determine who can get
the property at the time of the latter’s death.
b) It is as if he owns the property because he can determine who can enjoy the property.
c) It cannot be Specific

Q: When can Proceeds of Life Insurance form part of the GE of the decedent?
A: the beneficiary must be REVOCABLE. Contrary, it will not automatically form part of the GE of the decedent.

HOWEVER, even if it is Irrevocable, if the beneficiary is the executor or the administrator of the estate, it will form part of the GE of
the decedent.

NB: the insurance should be taken by the decedent for his own life. If taken for the life of someone else then it will not form part of
his GE under proceed of Life Insurance even if he is the beneficiary.

Scenario for the NB above: Husband took a life insurance for his wife. The estate of the Husband is the beneficiary. They both died.
Will the proceeds of the life insurance form part of the estate of the husband-‐decedent?

A: it WILL NOT form part under PROCEEDS of Life Insurance. BUT it WILL form part under Decedent’s Interest because it is now part
of his property.

Q: Can Transfer for insufficient consideration form part of the GE of the decedent?
A: Yes.

Scenario: There is a motor vehicle worth 500T owned by the TP and sold it for P100. Clearly it is a transfer for insufficient
consideration. The difference will form part of the estate of the decedent.

Q: How about if it is a parcel of land, sold by the decedent to a third person for only 200T and it is 1M. Will it form part of the GE of
the decedent?
A: No, because it is real property and it has been taxed fully. The gov’t is not disadvantaged. It is subject to 6%.

NB: Taxing transfer for insufficient consideration is only available if the government is sort of cheated.

CAPITAL OF THE SURVIVING SPOUSE

Only those conjugal properties will be considered forming part of the estate of the decedent separate of the exclusive. Because of
the conjugal properties, half of that will be owned of he spouse. It is only part of the GE only for purposes of computing the GE. Later
on, that share of the SS will be deducted.

Q: Is it advantageous?
A: Yes, because of funeral expense.Because there are some expenses which are part of the gross estate. The cap is sort of increases.

-‐Done with what form parts of the Gross Estate of the Decedent-‐
19

DEDUCTION FOR RC, NRC, RA

1. ELIT
a) Expenses:
i. Funeral Expenses -‐
1. reckoning point: up to the interment of the decedent;
2. lowest of
a) Actual expenses; or
b) 5% of the Gross Estate; or
c) 200,000

ii. Medical Expenses
1. Cap of 500,000
2. Incurred within 1 year prior the death of the decedent
3. NOT necessarily related to the cause of death of the decedent

iii. Judicial Expenses
1. For the testamentary or the intestate proceeding
2. Administrative expenses necessary to collect the assets, pay the debts, or distribute the property to the person
entitled to it ( case )
3. Allowable judicial expense
a) Notarial fees for extrajudicial expenses
b) Attorney’s fees for the guardian of the decedent’s property during his lifetime
4. Disallowed J.E
a) Trustees compensation ( Posadas ) -‐ management for the benefit of the heirs not for the benefit of the
estate of the decedent
b) Executor or administrator’s bond
c) Attorney’s fees of the individual heirs

b) Claims against the estate such as for taxes due to the decedent or for other indebtedness (payables)
i. Requirement for indebtedness:
1. Embodied in a notarized document
2. Incurred within 3 years from the death of the decedent there must be a certification, issued by the
administrator or executor of the estate showing the distribution of the proceeds or how the proceeds were
applied

c) Taxes -‐ incurred accruing up to the death of the decedent
i. Income tax (Business Jan to July: whatever the tax due can be considered from Jan to July can be deducted because
the liability is incurred while the decedent is still living.) (But from Aug to Dec it can now be deducted from the
income of the estate if there is any or just an expense that is to be absorbed by the heirs)

2. Claims of the deceased from an insolvent person (receivables)
a) Must form part of the decedent’s interest (GE) as his receivable
b) Just deduct it

3. Unpaid mortgages
a) Refers to a property which is part of the GE of the decedent
b) The value of the property at the time of death must form part of the GE
c) Later on, whatever is the outstanding mortgage you can deduct it
20

4. Losses
a) Must be incurred up to the last day of the payment of the estate tax (from the time of the death of the decedent up to 6
months thereafter)
b) Provided, whatever that loss is was not claimed as a deduction for income tax purposes

5. Vanishing Deduction aka Property Previously Taxed
a) The closer it is to the death of the decedent the more effect it has
b) Rate vanishes after 5 years
c) Take note: There is an INITIAL BASIS (value of the property that was previously taxed)
i. Take note that this is a deduction. The reason this is allowed is because it has been previously taxed, it is just
appropriate that the value you consider is the value at the time of the transfer.
ii. However, it says which ever is lower between the value of the property now and the value of the property it
was transferred to you. Because there are properties which deteriorates then you will only get to deduct less.
(benefit of the government)
iii. Additional unpaid mortgages shall be deducted to the initial basis
1. H and L from Father. At the time it was transferred was mortgage that Child will assume. Outstanding
mortgage of 1M at time of transfer. At time of transfer, the remaining mortgage was 600T. How much is
to be considered in computing the initial basis? It is is the 400T which was shouldered by the tax payer.
Why will it be diminish the value of the Initial basis? Because it is possible that the current decedent may
have deducted that amount in some other taxes.
iv. E.G.
Data:
GE including property previously taxed =10M
Property previously taxed FMV at the time of the death = 2M
Property previously taxed FMV at the time of the transfer = 1.5M
Paid Mortgage by current decedent = .5M
ELIT = 2M

How much is the Vanishing Deduction granted that this property was transferred to the decedent 3.5 years
ago?

Let us get the Initial Basis.

The value of the property to be considered for VD will be 1.5M because it is whichever is lower between the
FMV at the time of death or time of transfer. Why transfer? Because the transfer may be a donation or trough
succession.

You the deduct the mortgage that was shouldered by the decedent worth 500T.

So our initial basis now is 1M.

Then, we get to deduct the ELIT. What is the basis in computing the ELIT? It should be the value of the
property in relation to the GE which is 2M. So it is 2M over 10M. In other words 20% multiplied by 2M. Thus,
400T which is the amount on which you have to base the rate. So it is 3.5 years ago. Thus, 40%. Multiply 400T
with 40%. Your Initial Basis is 240T.

Note: sir made a mistake here and there was no discussion as to the changes in answer.

It should be Initial Basis over Gross Estate times the ELIT plus transfer for public use. So the VD is 320T.

21

Requisites for VD:
a) Present decedent must have acquired the property by inheritance or donation;
b) Acquired within 5 years prior to the death of the present decedent;
c) Formed part of the GE os the prior decedent if by inheritance, or the taxable gift of the donor if acquired by
donation;
d) Estate or donor’s tax must have been pain on the previous transfer;
e) Identified as the one received from the prior decedent or donor; and
f) Estate of the prior decedent must not have previously availed of the vanishing deduction on the subject property

6. Transfer for Public Use in favor of the government
- It must be written

7. Conjugal share of the surviving spouse

8. Family home
- Maximum 1M -‐ not all the time, it could be less
- Both Individual (head of the family) and Married

9. Standard Deduction
- 1M
- RC, RA, and NRC
- NRA cannot claim

10. Amounts received by heirs from RA 4917 (private benefit plan) granted those benefits are part of the GE of the decedent

DEDUCTION FOR NRA
- Proportionate to his total estate around the world
- Only the estate attributable to the Philippines

E.G
Philippines = 1M
Around the World = 10M

(1M/10M) X allowable deduction

However, allowable deductions are:
1. ELIT
2. Indebtedness
3. Vanishing Deduction
4. Transfer for Public Use

EXEMPTION TO THE ESTATE TAX

If the property has been previously transferred, it will not form part of the GE of the decedent. Example. The decedent happens to
enjoy the use of a car. But the legal owner happens to be his son. At the time of his death, the usufruct of the car will not form part
of his GE because it has been previously taxed at the time it was transferred to the legal owner.

1. Merger of the usufruct to the legal owner, not anymore subject to ET
22

2. Transmission from the fiduciary heir to the fideicommissary
• Remember 1 degree only
3. All bequest, devises, legacies, or transfer in favor of social welfare, cultural, and charitable institution. Provided that not more
than 30% thereof is used for the administrative purposes.

Who are required to file notice of death?
Those person whose estate are exceeding 20,000 (GE) even if exempt.

How about filing a return?
Only required for estates exceeding 200T. But even if it does not reach 200T, if there are registrable property, you are still required
to file notice of death.

Where the value exceeds 2m, the estate tax return shall be supported with a statement duly certified by a CPA.

Where do you file the return?
The residential place of the decedent. Which is the last RDO where he is registered. (Where your TIN is registered)

Sec. 90 (D) Place of Filing. – Except in cases where the Commissioner otherwise permits, the return required under Subsection (A)
shall be filed with an authorized agent bank, or Revenue District Officer, Collection Officer, or duly authorized Treasurer of the city or
municipality in which the decedent was domiciled at the time of his death or if there be no legal residence in the Philippines, with
the Office of the Commissioner.

But mind you class, this means the last Revenue District Officer where the taxpayer is registered. If your TIN is registered in
Mandaue, even if you are currently a resident of Cebu City, you will still have to file it in Mandaue because that is where you are
registered. That is in actual practice.

SUMMARY:
• Deadline for filing a return – within 6 months from decedent’s death, but the filing can be extended up to 30 days by the
Commissioner in meritorious grounds. [Sec. 90 (B) and (C)]

• Deadline for payment of taxes – within 6 months from decedent’s death since it shall be paid at the time of filing of the
return. It can be extended up to 5 years for judicial settlement or 2 years if extrajudicial settlement if it causes undue
hardship on the part of the taxpayer. [Sec. 91 (A) and (B)]

Question: As for medical expenses that are already paid, can they still be allowed as a deduction? YES, what is deductible is medical
expenses that are incurred one year prior to the death of the decedent, whether paid or not. Only that if it is unpaid, you cannot
claim it as a deduction as claims against the estate.

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DONOR’S TAX

Q: What is Donor’s Tax?
A: Tax on the privilege to transfer properties while you are living. This is imposed on gratuitous transfers while the transferor/donor
is living.

NB: In both instances (Estate and Donor’s tax), it should be gratuitous, no payment other than love and affection. Both are
just supplemental taxes to Income tax. Other source of revenue. Based on the sumptuary purpose, it ought to contribute in
the equitable distribution of wealth among the people.

The DONOR should be liable for such kind of tax, hence the name.

Follow the formula: GROSS GIFTS Php XXX,XXX
Less: Deductions ( XX,XXX)
Net Gifts XXX,XXX
Multiply rate _____%_
DONOR’S TAX PAYABLE XX,XXX

It is imposed on completed donations, therefore the reckoning point is the time when donation is completed and not when it is
perfected. If it is not a completed donation then donor’s tax may not be imposed after all it can be said that there is no donation
which has happened. The following are the requisites for a completed donation:
1. It must be a valid donation – meaning, it has to comply with all formal requisites. It need not be in writing if it involves
personal property with an amount of Php 5,000 or less. It has to be in a private document if it is more than Php 5,000. If it is
a real property, it has to be in a public document, regardless of the amount involved.

2. There must be delivery of the economic benefits – reckoning point when donation is completed. Delivery need not be
actual, it may also be constructive (e.g., traditio longa manu, traditio brevi manu, tradition symbolica and by legal
formalities)

GENERAL PRINCIPLES IN DONOR’S TAX

ü All donors, except a non-‐resident alien, is taxable for donations made within and without the Philippines. In other words, if
you are a non-‐resident alien, you are taxable only for donations made in the Philippines.

Now, if the real property is located abroad, even if the contract was perfected here in the Philippines, the donation shall be
deemed to have been made abroad. Unsaun man tawn na nimu pagbalhin ang property nganhe sa Philippines if the real
property is located abroad. So it can be said that the donation is made wherever the property is located. Look at where the
property is located at the time of the transfer. But if it is personal property, take note that the donor’s tax is reckoned
when the donation is completed. When is donation completed? When it is transferred here in the Philippines, therefore
made within the Philippines still.

ü Generally, donations must have donative intent (DIRECT DONATIONS), otherwise it shall not be subject to donor’s tax. But
there are certain donations which do not have donative intent (INDIRECT DONATIONS) which are donations by operation of
law. These includes,
1. Transfer for insufficient or inadequate consideration – You might wonder why it also falls under estate tax and also
in donor’s tax, but this does not mean that it is taxed twice under both, it should be taxed only once. To determine
what tax should be applied, the basis is made on the point of discovery by the BIR or when the taxpayer discloses it
to the BIR, whether during the lifetime of the donor (Donor’s tax) or at the death of the donor (Estate tax).

What is subjected to Donor’s tax is only the excess. Example the property is worth Php 1 million and what was paid
for is only Php 200,000, only the Php 800,000 is subjected to donor’s tax or estate tax, whichever is applicable.

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2. Condonation of debt – this is the gratuitous cancellation of a debt which is free from any material consideration. It
should not be predicated on past or future service. Example the debtor forgives a debt, it could be considered a
gift which may be subject to Donor’s tax.

If there is condonation of debt, there could be three (3) possible applicable taxes:
INCOME TAX – if it pertains to past services rendered;
DONOR’S TAX – if there is no material consideration;
DIVIDEND TAX – condonation of a stockholder’s debt. It could also be considered as an additional investment if the
stockholder condones the corporation’s debt to him.

GROSS GIFTS

Includes any property, whether real or personal, tangible or intangible, which was transferred gratuitously during the lifetime of the
donor. Just take note that it should be a completed gift for donor’s tax to apply.

EXEMPTIONS OF CERTAIN GIFTS FROM DONOR’S TAX

1. Dowries or gifts made on account of marriage – to the extent of the first Php 10,000 for each parent that should be considered
a deduction. So you have the gross gift less the dowry of Php 10,000, whatever is the excess shall be subjected to donor’s tax.
Take note, that it is applicable only when it is on account of marriage and only to the parent donating. In other words, if you
are the grandparent, you cannot claim such exemption because it is explicit under the law that it should be the parent donating
for the same to be claimed as a deduction on the part of the donor-‐parent. Ang parent nga ni-‐donate ang mudeduct, dili ang
nakadawat.

The Php 10,000 is for each parent because it may be a conjugal gift to the child and only to the child. If it is a donation to the
spouse of your child, the same cannot be deducted with the dowry exemption amounting to Php 10,000. In other words, the
Php 10,000 exemption shall only be applicable to the child and not to the son/daughter-‐in-‐law. It should likewise be made prior
to or one year after the marriage. With regards to the phrase “prior to” it should be made on account of the marriage [Sec. 101
(A) (1)]. This should not be considered as an exemption or exclusion but rather a deduction.

Example: Mr. and Mrs. X gave Php 1 million to their daughter Y and her husband Z.
(There is a need to distinguish between donations made to a stranger and a non-‐stranger. Y, being the daughter of the
spouses, shall be subjected to the graduated rate since she is not a stranger. On the other hand, Z is subject to the rate
of 30% since he shall be considered a stranger with regards to the donors, Spouses X.)

Mr. X’s share – Php 500,000 to Y = 250,000 – 10,000 (dowry) = 240,000
Z = 250,000 (no exemption) = 250,000

Mrs. X’s share – Php 500,000 to Y = 250,000 – 10,000 (dowry) = 240,000
Z = 250,000 (no exemption) = 250,000

Therefore, maypag di nalang tigaan ug donation ang umagad kay ma-‐subject na to donor’s tax. Pasabta nalang, ingna nga tax
planning J Also I suggest you make the donation after the marriage so that it shall form part of his exclusive property thereby
you can better protect your child.

2. Donations made to a political party -‐ provided that it is reported to the Comelec and later on, you will have to liquidate it. The
Angara case is no longer applicable;

3. Gifts made to or for the use of the National Government or any entity created by any of its agencies which is not conducted for
profit, or to any political subdivision of the said Government [Sec. 101 (A) (2)];
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4. Gifts in favor of an educational and/or charitable, religious, cultural or social welfare corporation, institution, accredited
nongovernment organization, trust or philantrophic organization or research institution or organization. Provided, however,
that not more than 30% of said gifts shall be used by such done for administration purposes. [Sec. 101 (A) (3)]

ACCUMULATION OF DONATIONS

If the donation is subjected to the graduated rate of exempt up to 15%, it is subjected to the accumulation rule. Remember that the
deadline of the filing a return for donor’s tax is within 30 days after the date the gift was made [Sec. 103 (B)], this means that every
time there is a donation during one calendar year, you have to compute the taxes due. And if all those persons to whom you’ve
given the donation are non-‐strangers, since they are the ones subjected to the graduated rate, then you would have to keep adding
all the donations made during the year until you will reach the end of the year. This is the last day of such accumulation. The next
year kay lain nasad to siya na accumulation.

It is important to know who are considered as non-‐strangers under the Tax Code [Sec. 99 (B)]. They are:
1. Brother, sister (whether by whole or half-‐blood), spouse, ancestor and lineal descendant; or
2. Relative by consanguinity in the collateral line within the fourth degree of relationship.

How about affinity? There is none. Remember that it specifically states “collateral”, this means that if it is “lateral”, regardless of the
degree, it is still considered non-‐stranger. It falls under the first enumeration pertaining to ancestor and lineal descendants. So if
your great⁷ grandfather donated to you, it is still considered a donation to a non-‐stranger. Mugawas ni’s exam ninyu sunod.
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Remember that if “lateral”, no degree requirement. However, if collateral, up to the 4 degree.

What is collateral man? Kung muanhe naka’s kilid. Example, you made a donation to your aunt, which is the sister of your mother. If
you trace it, from you, go up to your mother. That is a lateral relationship. You go on up to her parents, which is your grandmother or
grandfather, it is still a lateral relationship. If straight lang musaka and muubos kay it is lateral. However, kung munaog na ganeh na
and adto sa kilid to go to your aunt, that becomes collateral. You then count how many degrees from you – your mother – your
grandparents – aunt, which is 3 degrees, so it is still allowed. Always remember that the last person to whom you will give a
donation that will still fall under the enumeration of donations to non-‐strangers would be a donation to your first cousins because
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that is the 4 degree. After that, it shall be considered as donations to a stranger. That is important because they are subjected to
different rates. A donation to a non-‐stranger is subjected to the graduated rate and to accumulation. If it is a donation to a stranger,
subjected to the rate of 30%.

Also take note, a corporation can be a donor and a donee. Donations between corporations are automatically considered donations
to strangers. Bisan naa pa na’y parent company or sister company, it is still donation to strangers.

Example: Donations made are the following -‐
01 Jan – Php 1million to sister
05 May – Php 1miliion to girlfriend
08 Oct – Php 1million to brother
09 Dec – Php 1million to classmate
29 Feb – Php 1million to paramour

Computation: Donation to sister, deadline for filing: 31 Jan (30 days thereafter)
Php 1 million First 500,000 -‐ 14,000
Excess 500,000 -‐ 30,000 (excess x 6%)
Donor’s Tax Due 44,000 (a)

Donation to girlfriend, deadline for filing: 05 Jun
Php 1 million x 30% = 300,000 – don’t accumulate; donation to a stranger

Donation to brother, deadline for filing: 07 Nov
Php 1 million to Sister First 1 million -‐ 44,000
Php 1 million to Brother Excess 1 million -‐ 80,000 (excess x 8%)
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Php 2 million 124,000
Minus Tax already paid (44,000) (a)
80,000

Donation to classmate, deadline for filing: 08 Jan
Php 1 million x 30% = 300,000 – don’t accumulate; donation to stranger

Donation to paramour, deadline for filing: 30 Mar
Don’t accumulate anymore since donation made beyond one calendar year.

Donor’s tax follows the calendar year, it is explicit under the Tax Code. It becomes difficult when the donor is a corporation following
the fiscal year.

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VALUE-‐ADDED TAX

In case of doubt, just follow the general rule that it is vatable. Always remember that there are only 3 types of transactions that are
subject to VAT, they are sale of goods, sale of services and importation of goods.

SALE OF GOODS

Tax rate -‐ 12%
Tax base – Gross Selling Price [Sec. 103 (A) (1) last paragraph]

The term “gross selling price” means the total amount of money or its equivalent which the purchaser pays or is obliged to
pay to the seller in consideration of the sale, barter or exchange of the goods or properties, excluding the value-‐added tax.
The excise tax, if any, on such goods or properties shall form part of the gross selling price.

This means that whether you have pay it or not as long as there is obligation to pay the same, then that is still part of the
gross selling price and therefore subject to value-‐added tax. If it has already accrued, it is part of the gross selling price. So
accounts receivable or the sales that the buyer has not yet paid is included in the computation for the value-‐added tax.

Sale of Goods subject to VAT could be regular, zero-‐rated or transactions deemed sale.

ZERO-‐RATED TRANSACTIONS

What is important to remember here that in the sale of goods, there are those subjected to the regular rate of 12% but there are
also sale of goods which are subject to 0% which are termed as “zero-‐rated transactions.” These are the following:

1. Export Sales – [Sec. 106 (A) (2) (a) (1-‐6)]

a) DIRECT EXPORT –
I. Sale and actual shipment of goods from the Philippines to a foreign country regardless of shipping arrangement;
II. Paid for in acceptable foreign currency or its equivalent in goods and services; and
III. Accounted for in accordance with the rules and regulations of the BSP.
Example: Furniture of company X actually delivered to the United States paid for using a credit card issued in the
United States and the value of such goods is US$1000. This is an export sale under the first enumeration. Take note
that the use of credit card is automatically accounted for under the rules and regulations of the BSP since it is being
regulated by the same. Even if it was issued abroad, it will have to be coursed through the Philippine Banking System
through the BSP.

b) INDIRECT EXPORT –
I. Sale of raw materials or packaging materials;
II. To a non-‐resident buyer;
III. For delivery to a resident local export-‐oriented enterprise;
IV. To be used in manufacturing, processing, packing or repacking in the Philippines of the said buyer’s goods;
V. Paid for in acceptable foreign currency; and
VI. Accounted for in accordance with the rules and regulations of the BSP.
Example: A kind of raw material is rattan. There is A who sells them. A sold some rattan to B who happens to be in the
United States. B, in turn, paid A US$1000. However, the rattan was not delivered to B but to company X which is a
resident local export-‐oriented enterprise (it is considered as such when it is stated in its articles of incorporation that it
is engaged in export of goods. But there is a requisite for registration, for example under the BOI, that it should have
exports at least of 60% [Sir was not certain as to the rate]. The 70% is only the requirement for it to fall under the third
enumeration but it does not mean that it should have 70% exports to be categorized as a local export-‐oriented
enterprise). X converts the rattan to chairs and subsequently delivers the same to B.
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This is why it is considered as export sales because even if the goods (rattan) is not delivered to B at the outset, it will
still end up being delivered to him by the export-‐oriented enterprise. So it has the same outcome. It is very important
for this kind of export sales to have an export-‐oriented enterprise to carry out the intention that the goods be
converted to some products and it will be delivered ultimately to the non-‐resident buyer who bought the raw
materials.

c) CONSTRUCTIVE EXPORT –
I. Sale of raw materials or packaging materials;
II. To an export-‐oriented enterprise, whose export sales exceed 70% of its total annual production.
Even if the process does not go through the same process as that described under (b) and instead the goods are
automatically delivered abroad, it is still considered export sales because it will end up outside the country. It does not
mention that the goods are sold to a non-‐resident buyer, it is however a sale to an export-‐oriented enterprise. It is
considered still an export sale because the intention of that company must be to still convert the raw materials to some
goods and such goods will be exported abroad.
Take note that it is not required to be paid for in foreign currency considering that both the buyer and the seller are
located here in the Philippines.
Example: A wants to sell rattan. He delivered rattan to X, a local export-‐oriented enterprise which has at least 70% of
its annual production as export sales (this is only where the 70% is significant).

d) Sale of gold to the BSP

e) Those considered export sales under the Omnibus Investment Code of 1987 and other special laws – this involves sales
to export zones, e.g. PEZA. Sales to PEZA shall be considered export sales because those under export zones are
considered to be abroad. In all likelihood, these companies in PEZA are export-‐oriented, in fact it is a requirement to be
registered under PEZA.

f) I. Sale of goods, supplies, equipment and fuel;
III. To persons engaged in international shipping or international air transport.
Why is there no mention of land transport? Unsaun man daw nimu pag-‐adto’g abroad by land.

2. Foreign Currency Denominated Sales -‐ [Sec. 106 (A) (2) (b)]
I. Sale to a non-‐resident of goods assembled or manufactured in the Philippines, EXCEPT Sec. 149 – Imported
Automobiles
(a) Automobile shall mean any four (4) or more wheeled motor vehicle regardless of seating capacity, which is
propelled by gasoline, diesel, electricity or any other motor power: Provided, that for purposes of this Act,
buses, trucks, cargo vans, jeeps/jeepneys/jeepney substitutes, single cab chassis and special-‐purpose vehicles
shall not be considered as automobiles.
Sec. 150 – Non-‐essential Goods which includes jewelry, perfumes and toilet waters, yachts and other vessels
intended for pleasure or sport;

II. For delivery to a resident in the Philippines;
III. Paid for in acceptable foreign currency; and
IV. Accounted for in accordance with the rules and regulations of the BSP.
Example: There is a non-‐resident who has a rest house in Amara. He bought rattan chairs from Kenneth Cobonpue which
shall be considered as goods manufactured in the Philippines. The items he bought will be delivered to his rest house where
his Yaya lives. The non-‐resident then paid in US dollars through inward remittance.

How does foreign currency denominated sale (FCDS) differ from the second export sale?

The FCDS does not involve a raw material or packaging material, what was sold was the finished product itself.
Therefore, there is no more need to process (manufactured, packed or repacked it again since it has already been
manufactured or assembled before. Furthermore, it is a requirement under the second export sale that there be sale to
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a local export-‐oriented enterprise. No such requirement under FCDS for as long as it is delivered to a resident here in
the Philippines which in this case is the Yaya.

3. Effectively Zero-‐Rated Transaction -‐ [Sec. 106 (A) (2) (c)]
Sales to persons or entities whose exemption under special laws or international agreements to which the Philippines is a
signatory effectively subjects such sales to zero rate. Therefore, there must be treaty providing for such zero-‐rating.

TRANSACTIONS DEEMED SALE [Sec. 106 (B)].
-‐ Subject to 12% VAT.

It includes:
1. Transfer, use or consumption not in the course of business of goods and properties originally intended for sale or for use in
the course of business;
Example you are engaged in a sari-‐sari store business and you ate all sardines which you originally intended to be sold.
Kung imu pa lang tong gibaligya ang imung mga sardinas, it would have been subject to value-‐added tax but since you
consumed it yourself it would still be subject to value-‐added tax and it will be deemed sold. Another example for not in
the course of business is that goods that were stolen, it will also be deemed sold since nawa man sa imung inventory.
But of course, nothing is stopping you from claiming losses from theft in your income tax return but it will still be
considered deemed sold for VAT purposes.

2. Distribution or transfer to:
a) Shareholders or investors as share in the profits of the VAT-‐registered persons; or
Sari-‐sari store is a corporation, this is possible for there is no prohibition. Since wa man gyud nahalin ang ilang
sardinas, mao nalang ang ilang gidistribute as dividends. It will be deemed sold.

b) Creditors in payment of debt;
Instead of paying money, sardinas ang ilang gibayad sa ilang creditor. It is still considered deemed sold.

3. Consignment of goods if actual sale is not made within sixty (60) days following the date such goods were consigned; and
The sari-‐sari store is engaged in consignment sales. Gi-‐transfer nila ang sardines to another sari-‐sari store which will sell
the sardines in their behalf. If the consigned goods is not delivered back to them within 60 days from the time they
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delivered it to the consignee, it is deemed sold. So ang buhaton kung di mahalin ang sardinas, inigka-‐59 day kay ipauli
na gyud, otherwise it is deemed sold.

4. Retirement from or cessation of business, with respect to inventories of taxable goods existing as of such retirement or
cessation.
The sari-‐sari store decided to close kay wala gyud nahalin ang ilang mga sardinas, ang mga wala nahalin at the time of
the retirement shall be deemed sold.
So for transactions deemed sale, never ever forget the sari-‐sari store and the sardines. J Di gyud mo makalimot ani nigka-‐
padung bar kay mao naman lang inyung makaon sa Manila, sardines gikan sa sari-‐sari store.

How about if there are returns, will it be deducted? Yes! [Sec. 106 (D)]

Sales Returns, Allowances and Sales Discounts. – The value of the goods or properties sold and subsequently returned or for
which allowances were granted by a VAT-‐registered person may be deducted from the gross sales or receipts for the quarter in
which the refund is made or a credit memorandum or refund is issued. X X X

Returns shall be deducted at the time it was granted regardless of the selling date. The time it is granted is when it was accepted
and allowed to return. But it is accounting policy for any company to record allowances for returns so in the ordinary course of their
accounting process, they will already account for returns and allowances, so deemed granted na siya at that time. They can deduct
that for purposes of value-‐added tax. Kung ila nang ideduct, mugamay ang ilang tax basis for VAT.
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Sales Discounts, on the other hand, will only be deducted if at the time of the sale it was already given. The discount must be
provided for in the receipt, otherwise you cannot claim any deduction for that.

IMPORTATION

Tax rate – 12%
Tax base – Generally, based on the total value used by the Bureau of Customs which we know to be the transaction value, which
includes the tariff and custom duties, excise taxes and other taxes as may be due.

This is a sort of tax pyramiding because in the total transaction value you have to include the custom duties and excise tax, which
is another form of tax. Therefore, you tax a tax. That is pyramiding. It is unconstitutional because it is already excessive but
nobody questioned it before the Courts, hence it stayed.
Example: You import sardines from Spain. You can only get it from Customs if you pay, aside from the duties, the value-‐added tax
thereon. To compute how much you need to pay, get the value of the sardines, add the custom duties, also add the excise taxes and
the total amount will be subjected to value-‐added tax. Let’s say that the value of one bottle of sardines is Php 1000, then the custom
duties is Php 100 while the excise taxes is assumed to be Php 100. The total transaction value is at Php 1,200, this will be multiplied
by 12% to get the value-‐added tax.

There are importations that are exempt from value-‐added tax. But take note that there is no such thing as zero-‐rated importations
and transactions deemed sale on importations because in the first place if you are importing does not necessarily mean that you are
selling.

SALE OF SERVICES

Tax rate – 12%
Tax base – Gross Receipts [Sec. 108 (A) last paragraph]

The term “gross receipts” means the total amount of money or its equivalent representing the contract price, compensation,
service fee, rental or royalty, including the amount charged for the materials supplied with the services and deposits and
advance payments actually or constructively received during the taxable quarter for the services performed or to be performed
for another person, excluding value-‐added tax.

Therefore, you will only account for the money you actually or constructively received out of the services you render or yet to
render. Unlike in sale of goods, whether it is paid or not, so long as the goods was already sold, you must account for it. That’s
the difference between sale of goods and sale of services for value-‐added tax purposes. In this case, accounts receivable is not
included for gross receipts. Only when it is paid or no longer a receivable that you account for value-‐added tax.

There are regular, zero-‐rated transactions but there are no transactions deemed sale.

REGULAR SERVICES
It will be subject to the rate of 12%. If you will not pay, there is no VAT because it has to be actually or constructively received and
not only incurred. If di ka mubayad or utangon ang imung services, not subject to VAT since you received no payment for such
rendition of service. Mao bitawng gross RECEIPTS, unsa ma’y receipt kung wa ka’y nadawat.

ZERO-‐RATED SERVICES -‐ [SEC. 108 (B) (1-‐7)]

1. I. Processing, manufacturing, repacking goods – it is the service which is zero-‐rated;
II. For other persons doing business outside the Philippines;
III. Goods are subsequently exported;
IV. Services are paid for in acceptable foreign currency;
V. Accounted for in accordance with the rules and regulations of the BSP.
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Example: A manufactures rattan chairs. Only the services are paid for since the design is dictated by someone else. What will A
do with the chair later on is to export it. The manufacturing service of A will be considered zero-‐rated because the goods which
is being serviced (rattan chairs) will end up abroad. If goods will end up abroad, most likely it is zero-‐rated. Also remember that
the sale of rattan to A is likewise deemed a zero-‐rated sale of goods under export sales provided that it is sold to a non-‐resident
and is paid for in foreign currency and accounted for under the rules of the BSP. Zero-‐rated sale of services provided it is
manufacturing, processing or repacking. It is as if gi-‐outsource ang services lang.

2. I. Services, other than manufacturing, processing or repacking;
II. Rendered to a person engage in business conducted outside the Philippines or to a non-‐resident person not engaged in
business who is outside the Philippines when the services were perfomed;
III. Paid for in acceptable foreign currency;
IV. Accounted for in accordance with the rules and regulations of the BSP.
Example: BPO, not PEZA-‐registered, whose services are rendered for clients’ abroad. Services while rendered here in the
Philippines are intended for abroad. If you are PEZA-‐registered, then you would fall under special laws na, not anymore here.
Also services rendered by medical transcriptionists falls under this enumeration.

3. Services rendered to persons or entities whose exemption under special laws or international agreements to which the
Philippines is a signatory effectively subjects the supply of such services to 0% -‐ services rendered to economic zone enterprises,
e.g. janitorial services, the same is zero-‐rated;

4. Services rendered to persons engaged in international shipping or international air transport operations, including leases of
property for use thereof – example are ikaw tigprovide sa manpower services to cruise ship or ikaw tiglimpyo sa hull sa barko,
zero-‐rated as long as the ship or vessel is engaged in international shipping;

5. Services performed by subcontractors and/or contractors in processing, converting or manufacturing goods for an enterprise
whose export sales exceed 70% of total annual production.

Example: X is a manufacturing company whose export sales of rattan chairs exceeds 70% of its annual production. It decided to
outsource its packaging services of chairs to D, another entity in the Philippines. The sale of rattan to such entity is considered
as zero-‐rated sales of goods. Likewise, the packaging services rendered by D to X are also zero-‐rated sales of services.

6. Transport of passengers and cargo by air or sea vessels from the Philippines to a foreign country;

7. Sale of power or fuel generated through renewable sources of energy – the list is not exhaustive. Mao nang cases sa VAT kay
about anang regarding companies engaged in such services because they can claim input vat.

VAT IN TERMS OF TRANSACTIONS

1. Sale of goods or properties
o It could be a regular type of transaction subject to 12% VAT, zero rated type of transaction or transaction deemed sale

2. Sale of services
o Could be regular type of transaction subject to 12% or zero rated but there is no such thing as transaction deemed sale

3. Importation of goods
o Technical importation – when certain goods is supposed to be exempted because it is imported by entities exempted from
VAT but transferred to a vatable person or entity, in which case it will be subjected to 12% VAT to be paid by the transferee.

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EXEMPT TRANSACTION VS ZERO RATED SALES

(a) A zero-‐rated sale is a taxable transaction but does not result in an output tax while an exempted transaction is not subject to
the output tax;
(b) The input VAT on the purchases of a VAT-‐registered person with zero-‐rated sales may be allowed as tax credits or refunded
while the seller in an exempt transaction is not entitled to any input tax on his purchases despite the issuance of a VAT
invoice or receipt.
(c) Persons engaged in transactions which are zero-‐rated, being subject to VAT, are required to register while registration is
optional for VAT-‐exempt persons.
TN: Zero rated sales are transactions subject to VAT but the rate is 0% but exempt transaction is not subject to VAT at all.

CHANGES IN THE VALUE OF THE REAL PROPERTY EXEMPTED FROM VAT:

o if sale of residential lot – 1, 919, 500

o if sale of residential house and lot (includes condominium units) – 3, 199, 200
- However, parking lot in a subdivision or condominium unit is not covered by exemption as it is not considered as residential
anymore and thus subject to regular threshold of 1,199,500.

o for rent – 12, 800
- TN this only applies to lessees of residential units. If it is commercial it is subject to the regular threshold of 1,919,500.
- What happens to the excess of the 12, 800? It will be considered as if not exempt, so regular, you don’t just consider the
excess but the whole amount. So if it is 13k, the entire 13k will be subject to VAT and not considered as an exempt
transaction anymore.

o You have to aggregate everything during the entire calendar year. If in excess of 1,919,500, then it will be subject to VAT.

CLAIM FOR REFUND FOR EXCESS OF INPUT VAT

- only applies to zero rated sales.

Read: CIR vs Toledo Power Company G.R. No. 199645, August 10, 2015 as it summarizes the rules on VAT

Requisites to claim excess input VAT:

1. Must be VAT registered;
2. The taxpayer claimant is engaged in zero rated or effectively zero rated sales;
3. creditable input taxes due or paid attributable to zero rated of effectively zero rated sale;
4. input tax not previously applied to output tax;
5. Claim for refund and application has been filed within the prescriptive period.

o Prescriptive period means you can only claim within two (2) years reckoned from the last day of the quarter in which
the sale transaction transpired.

o Only the administrative action must fall within two years. Unlike in other refund where both the judicial and
administrative action must fall within two years.

o An administrative claim must be filed with the CIR within two years from the close of the taxable quarter when the zero
rated or effectively zero rated sale transaction transpired. The CIR has 120 days from the date of complete submission
of documents in support of the administrative claim within which to decide whether to grant the refund or issue a tax
credit certificate. The 120 day period may extend beyond the two year period from the filing of the administrative
claim if the claim is filed in the later part of the two year period. If the 120 day period expires without any decision
33

from the CIR, then the administrative claim may be considered as denied by inaction. The judicial claim must be filed
within 30 days from receipt of the CIR decision denying the administrative claim or the expiration of the 120 day period
without any action from the CIR.

o All taxpayer however can rely on BIR Ruling No. DA 489-‐03 (San Roque Case) which gives exemption from the 120 + 30
day period. (December 10, 2003 to October 6, 2010) Thus, periods outside such dates, the 120 + 30 day period is
mandatory.

TRANSACTIONS WHERE YOU CAN APPLY THE EXCESS CREDITABLE INPUT VAT:
1. Alienation to government transaction; and
2. To non-‐resident

MOCKBAR Q&A DISCUSSION / ACTIVITIES

MOCKBAR 2015 ANSWERS
(please refer to your questionnaires)

I. PEZA is exempt for being an instrumentality of the government.

II. The taxpayer is not anymore entitled to claim for refund or credit because the 120 days plus 30 days period to
file for judicial claim has already lapsed.

III. The issue actually is whether the presence of a Court of Tax Appeals case renders the taxpayer unqualified to
avail of the Tax Amnesty Law. There is no more question on whether the corporation has complied with the
requirements of the Tax Amnesty Law. It had in fact availed itself of the program of the Tax Amnesty Law and
because the Tax Amnesty law is a decree granted by the law in lieu of all taxes and whether there is an existing
case in the CTA is of no moment. The Tax Amnesty Law prevails so it is not anymore liable of the deficiency.

IV. Beach Resorts are not among the enumeration under the LGC that the local government could levy for
amusement tax. It also does not belong to the definition of an amusement place. An amusement place is
where there is exhibition or staging of shows. Peliz Loy case.

V. Under the irrevocability rule, the taxpayer is now barred to claim for tax refund or credit once the taxpayer
chooses to carry over excess taxes, forever. Net loss in the next year will not matter for once the choice is made
it is already irrevocable. You can only claim for refund once the taxpayer closes its business to clear its other tax
liability.

VI. A. At least 18 years old, regularly employed for at least 30 working days, has real property with aggregate value
of Php1,000.00 or more, required to file an ITR and engaged in business or in a corporation.

B. Importation begins upon entry of the goods in the territorial jurisdiction of the Philippines with the intention
to unload therein. It ends when all the customs duties and taxes were paid and was already released with the
proper permit of withdrawal.

VII. The value of the property must be included in the gross estate and the unpaid mortgage must be reflected as
part of the deductions therein.

VIII. The renunciation is subject to donor’s tax since it is a specific renunciation. Abbie and Cedie are the ones liable
for the said tax excluding the wife.

34

IX. A. Estate Tax is applicable in this case under transfers in contemplation of death.

B. The depositor could not withdraw the amount unless he presents a clearance from the BIR or he has gotten
an approval from the commissioner to withdraw the amount of Php20,000.00.

X. Because the company here failed to commence operations then the PEZA incentives here does not apply.
Whatever it has sold will be subject to the usual tax.
Alternative answer: If the selling of the buildings and machineries are not among those enumerated as its
registered activities then PEZA incentives does not apply.

XI. Yes, the sale is subject to VAT but at the rate of 0% because it is a sale to a PEZA registered entity.

XII. A. Interest income on savings deposit is not subject to VAT because it is not a sale, exchange or transfer of
goods or services.

B. Subject to VAT because it is considered a transaction deemed sale.

C. VAT does not apply because the services were performed outside the Philippines.

XIII. 30% final tax on dividends assuming Sassa Gray International is a non-‐resident foreign corporation. 30% final tax
on royalties because it is exercised in the Philippines. 30% final tax on the Monetary Award because the rule on
exemption only applies to individuals.

XIV. This is an importation so this is subject to VAT. It does not fall under the exemptions provided under the law.

XV. The petition should not be granted. The issue on the PAN does not apply because this is a case for withholding
taxes.

XVI. C. In the case of corporations, it doesn’t include machineries.

ACTIVITY DISCUSSION

Capital gains tax from the sale of real properties of individuals and capital gains tax from the sale of real properties of
corporations.
• If it’s corporation, it doesn’t include machineries. Machineries do not form part of the real properties of corporations
subject to CGT.

Surcharge and interest under NIRC and surcharge and interest for local taxes under LGC.
• Interests for local taxes limited to 36 months while interests for national taxes no limit.
• Surcharge need not be imposed under LGC if granted by the Sanggunian while surcharge under NIRC will always be
imposed.
• There is no rate of 50% under LGC, there’s only 25% (Surcharge).
• The charging of interest for LGC, the 2% per month includes surcharge. Whereas under NIRC, the 20% is clear on deficiency
tax. Under LGC, if there’s 2% interest per month based on unpaid taxes including surcharge.

What are the requirements for taxpayer’s suit? Does Revilla have locus standi?(#17)
• Legal standing. Yes, he has legal standing because it involves the use of public funds.

Basic personal and additional exemptions (#18).
• 50, 000 personal exemption plus
• 100,000 additional exemption for the 4 children. The child conceived during marriage is presumed to be that of the father.
35

• If there is no waiver made by the husband, it is him who should claim the additional exemption.

Is the assessment proper? (#19)
• There is local business tax only for tin cans because it’s on the manufacturing and tin cans are considered incidental to the
business of Oh My Gas corporation but there could not be any local business tax on the sale of petroleum products. It
should be on the gross receipts. You can just write the distinction, you can say that there could be imposition of local
business tax on the corporation not on the sales but on the gross receipts. Local business tax is not on the sale.
• The reason why it is not allowed is because it’s already imposed by the NIRC (ang sale), so there could be double taxation. It
is already provided under the Local tax Code that the local governments cannot impose taxes imposed under the NIRC.

Did the RTC gravely abuse its discretion in issuing the Writ of Preliminary Injunction? (#20)
• “No injunction rule” is not specifically provided under the LGC. The prohibition on the issuance of the Writ of Preliminary
Injunction does not apply to local taxes.

Was the trial court correct in issuing the writ of replevin? (#21)
• The doctrine on primary jurisdiction applies. Writ of Replevin cannot be granted by the trial court. When it comes to seizure
proceedings, it is the BOC who has exclusive jurisdiction with regards to the questions on dutiable goods.

What is the remedy available to Strong Foundation? Detail the whole remedial procedure up to the SC, assuming all the
government offices/tribunals will find Strong Foundation’s position unmeritorious? (#22)
• If the issue is not on the payment of taxes but on the application of the law to him, there is no need for payment under
protest. The procedure will be as follows:
a) Appeal to the LBAA within 60 days from the receipt of the assessment. The LBAA has 120 days to decide the appeal
from the receipt of such appeal
b) Appeal to the CBAA within 30days from the receipt of the decision of the LBAA (if denied)
c) If CBAA rejects protest, appeal to CTA en banc within 30days from receipt of the decision
d) Appeal to the SC within 15 days from receipt of CTA decision

• If payment under protest is required:
a) Pay the tax and file written protest with the local treasurer within 30days from payment. Local treasurer must
decide within 60 days from receipt of the protest.
b) Appeal to the LBAA within 60 days from the receipt of the decision (denial) of the local treasurer. The LBAA has
120 days to decide the appeal from the receipt of such appeal
c) Appeal to the CBAA within 30days from the receipt of the decision of the LBAA (if denied)
d) If CBAA rejects protest, appeal to CTA en banc within 30days from receipt of the decision
e) Appeal to the SC within 15 days from receipt of CTA decision

Is the real property tax assessment on the land surrendered by VDC in 1986 valid? (#23)
• Yes it is valid because this refers to the properties owned by the local government where the beneficial ownership is
transferred to a taxable entity. But take note that the facts stated here “portions of the property were still leased by
businesses engaged in commercial dealings” which means there are still portions used by the government. You should be
able to distinguish.

Did the CA commit serious error of law when it ruled that it has no jurisdiction over the appeal? (#24)
• CA has jurisdiction because it is a civil case. The issue on bonds is civil in nature rather than tax lang.

Is the decision of the CTA en banc correct? (#25)
• Deutsche Bank case

What is the doctrine of wilful blindness?
• Mere reliance on another person in preparing, filing, and paying income taxes is not a justification for failure to file the right
information on income taxes.

36

X, a former OFW, now a resident citizen, receives pensions from Hungarian Industries, a subsidiary from the German government,
which is transferred directly to his Metrobank account. Are the pensions subject to income tax? Would your answer be the same if
X was a non-‐resident citizen? Resident alien?
• Pension is excluded from gross income. Section 32c of the NIRC provides that pensions and other similar benefits received
by resident or non-‐resident citizens of the Philippines or aliens who come to reside permanently in the Philippines from
foreign government agencies and other institutions, private or public are excluded from the gross income of the taxpayer.

For tax amnesty purposes, is a withholding agent considered a taxpayer who can avail of the tax amnesty (in relation to the tax
withheld)?
• The tax amnesty should not be applied to withholding agents in relation to withholding taxes because that would
encourage fraud in relation to withholding tax. In the same that withholding taxes cannot be subject of a compromise. Only
the taxpayer is covered by the tax amnesty.

How are enterprises registered in accordance with PEZA taxed? IOW, how are PEZA-‐registered entities taxed?
• They are taxed 5% of their gross income in lieu of local and national taxes specifically income tax, local tax, and VAT except
for lands owned by developers real property tax but they may avail of income tax holiday for the first 4 years if pioneer and
6years if non-‐pioneer.

A received a car from his father. At the time of donation, the car was worth 1million pesos, the father had previously purchased
the car for 700,000. A sold the car for 2million. What is the cost basis for computing the capital gains tax for the car? How much
gain has been realized?
• The cost basis is the carry-‐over basis which is the value of the car in the hands of the previous owner who has received it
from an onerous transaction. In this case, you don’t use the FMV at the time of donation, you use the carry-‐over basis from
the last owner who has acquired it by onerous title, the 700,000.
• If there is a donated property, which is subsequently transferred onerously, the cost basis should always be the cost of the
property in the hands of the last person who received it onerously. You have to trace it back to as far as whoever received it
under onerous title. So for the last 2 transfers of the property, it has been donated, then you have to go further until you
reach a person who has received it onerously.
• But take note of the exception also that while that is the rule, if the FMV at the time of the last donation, it was lower
compared to the cost of the property using the carry-‐over cost, then you will apply the FMV at the time of the donation.
• Duha imo tan-‐awon: last transfer using onerous title & last donation whichever is LOWER, that becomes the cost basis.

The municipality of Pateros passed an ordinance imposing real property tax on businesses located therein. X Corporation, a
domestic corporation having its business therein questioned the said ordinance alleging that municipalities cannot impose RPT.
Decide.
• X Corporation cannot assail the ordinance because Pateros being the only municipality in Metro Manila can validly impose
real property taxes on businesses located therein.

What is the prescriptive period for the government to collect improperly accumulated earnings tax?
• IAET is a tax which does not require a return, so the prescriptive period is 10years from discovery of the improperly
accumulated earnings, BOTH the assessment and collection.

Taxpayer is liable for customs duties when he imported canned goods. However, the BOC discovered that TP is already insolvent
and his properties are not enough to pay the duties. Where in the order of preference of payment does the government belong?
IOW, order of preference of payment in case there is insolvency.
• The government has a superior lien on the canned goods as the liability of the TP in relation to such customs taxes is
deemed fulfilled/complied with, with the forfeiture of the canned goods.
• Preferred lien on the canned goods subject of importation.
• As to the other assets, ordinary lien because they are not subject of importation.

-‐ end -‐

Albaño|Bonghanoy|Cardorna|Dionen|Dionaldo|Enriquez|Escabarte|Fernandez|Morales|Quibod
37

Taxation Review - Prefinals 2015

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TAXATION

REVIEW – PRE-‐FINALS (A.Y. 2015 – 2016)

Officials of the BIR:

4. Power to Make Assessment (Section 6, NIRC)

b. Assess the proper tax on the Best Evidence Obtainable

d. Issue Jeopardy Assessments and Terminate Taxable Period

6. Power to Inquire into Bank Deposits (Section 6(F), NIRC)

Remedies of the Taxpayer

II. Actual Audit/Investigation

How effected: Section 206, NIRC

Constructive Distraint Actual Distraint

How effected (short version):

1. Definition: cancellation of the taxpayer’s entire tax liability

4. Unjust/Excessive Tax Cases (under Ground #1):

• Imposition of Addition to Taxes:

b. Duration: not less than 5 days

Common Criminal Cases:

Prescriptive Period for Filing of Return:

**ground for amendment: mistake in your name—not a substantial amendment

III. CRIMINAL CASES

*Read New Cases! Causes changes in the remedies.

ACCUMULATION OF DONATIONS

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Taxation Review - Prefinals 2015

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Taxation Review - Prefinals 2015

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TAXATION

REVIEW – PRE-­‐FINALS (A.Y. 2015 – 2016)

Officials of the BIR:

4. Power to Make Assessment (Section 6, NIRC)

b. Assess the proper tax on the Best Evidence Obtainable

d. Issue Jeopardy Assessments and Terminate Taxable Period

6. Power to Inquire into Bank Deposits (Section 6(F), NIRC)

Remedies of the Taxpayer

II. Actual Audit/Investigation

How effected: Section 206, NIRC

Constructive Distraint Actual Distraint

How effected (short version):

1. Definition: cancellation of the taxpayer’s entire tax liability

4. Unjust/Excessive Tax Cases (under Ground #1):

• Imposition of Addition to Taxes:

b. Duration: not less than 5 days

Common Criminal Cases:

Prescriptive Period for Filing of Return:

**ground for amendment: mistake in your name—not a substantial amendment

III. CRIMINAL CASES

*Read New Cases! Causes changes in the remedies.

ACCUMULATION OF DONATIONS

You might also like

REVIEW – PRE-‐FINALS (A.Y. 2015 – 2016)