van oe ve RSITY D So 2018 CENTRALIZED BAR OPERATIONS MEMORY AID TAXATION LAW 2 i 8 iy Fs ae At)2018 CENTRALIZED BAR OPERATIONS EXECUTIVE COMMITTEE ‘Over-all Chaifperson Chairperson for Academics Chairperson for Hotel Operations Vice Chair for Operations Vice Chair for Secretariat Vice Chair for Finance Vice Chair for Audit Vice Chair for Electronic Data Processing Vice Chair for Logistics Vice Chair for Membership Kates Jastin E. Aguilar Christine P, Monderin Cheska Arla C. Agrupis Mara Clara M. Estrella Mary Cyriell C. Sumanqui Artlyn Gem G. Setoran Zaire Xandra M. Reyes Asmenah M. Barambangan Martin Alec N. Bautista Marvie L. Pagcaliwangan LAYOUT AND CONTENT EDITORS Jordan N. Chavez Roger P. Cuaresma Joelle Mae J. Garcia Marie Anna Karla M. Regencia Jecko G. Bello Christopher Lawrence C. Ferriols Jean Claudette L. Galvez ‘Agatha Josephine V. Matabuena Jeremy M. Mercader Dentzen S. Villegas SAN BEDA COLLEGE OF LAW ADMINISTRATION Dean Vice Dean Prefect of Student Affairs Administrative Officer Legal Aid Bureau Director Atty. Virgilio B. Jara Atty. Marciano G. Delson Atty. Risel G. Castillo-Taleon Atty. Francesca Lourdes M. Sefiga Atty. Peter-Joey B. Usita 2018 CENTRALIZED BAR OPERATIONS CORE GROUP OVERALL Carmelo R. Aguilar Jr. Ma. Angelica B. de Leon, Joseph Nicholas R. Serrano ACADEMICS Jecko G. Bello, Christopher Lawrence C. Ferriols, Jean Claudette L. Galvez, Agatha Josephine V. Matabuena, Jeremy M. Mercader, Dentzen S, Villegas HOTEL OPERATIONS Doh Albert E. Arquilizan, Ronalyn A. Gacuia, Ruth P. Balladares, John Paul P. Bertolome, Hannah A. Caceres, Vincent Paul C. David, Lorenzo Thaddeus Ruel D. Galandines, Tagma Esther V, Garabiles, Carlo C. Saplan OPERATIONS Roi Christopher T: Dizon, Ursulaine Grace Feliciano, Ferdinand Elbert D. Jomilla Jr, Lydia Marie | Mizabel, Ma. Lourdes M. Santos SECRETARIAT Elaine Anne L. Bernardino, Jessiea Sharla G, Bustamante, Jhelsea Louise B. Dimaano, Doane Kevin P. Jacinto, Graham Faison G. Ragsac FINANCE [enica A. Aquino, Colleen F, Dilla, Lex Angelo A. Rosario, Kathrina Grace C. Sanchez, Meriwila R Tulayan AUDIT Ma Consolada V. Ben, Arta Olmaya J. Badangan, Guenavere J. Hao, Lorelie M Santos, Apollo Julius S: Sta, Maria ELECTRONIC DATA PROCESSING Jordan N. Chavez, Roger P. Cuaresma, Joelle Mae J. Garcia, Marie Anna Karla M, Regencia LOGISTICS Daniel Philip V. Barmachea, Jose Emmanuel L Cabel, Sophia Victoria E, Mina, Patina Miana J. Rodriguez, Hanz Darryl D. Tin MEMBERSHIP Eric Winson F. Cea, Agatha Loren S. Edillor, Mark Benedict S, Francisco, Antonio C. Manaligod 1V, Justine Renee C. SisonTAXATION LAW Subject Chair Assistant Subject Chair Electronic Data Processing General Principles Income Tax Transfer Tax Value Added Tax Tax Admin. and Enforcement Remedies Real Property and Local Tax Tariffs and Customs Court of Tax Appeals JAMES PHILIPPE MAC SITTIE NAJLIAH A. AZIS DIVINA G. VELASCO SUBJECT HEADS JOHN CALEB C. ANDAL IVAN PAULO B. SALANGUIT. JENICA A. AQUINO ORLAND JERICO M. CORDERO ALEXANDER ABRAHAM P. COLINA, JIRAH L. JARETA SALVADOR S. FULGENCIO IIT JOHN RALEIGH D. LEE CHRIST DENN A. MAGNO’ MEMBERS ABDULJALIL A. ABDULHALIM CHARMAINE G. AGUILAR JAMES LEE N. AVENDANO GERARD CEASAR S. BAGUIO BRANDON L. BERAD JOHNROM HOMER M. BUENO GRACE ANNE B. DE VEYRA ADRIAN JARED M. GAFFUD ANDREW M. LEONARDO FAISAH A. MACABUAT JEFFERSON B. MADRID SHIELA MARIE M. MARASIGAN ‘MICHELLE B. PADAYAO FEDERICO C. SORIANO ADVISERS JUSTICE JAPAR B. DIMAAMPAO. ‘ATTY. ANTHONY A. DY ATTY. DANTE O. DELA CRUZ ATTY. NICASIO 0. CABANEIRO ATTY. DANTE R. BRAVO ATTY. EFREN VINCENT M. DIZONTABLE OF CONTENTS ole GENERAL PRINCIPLES POWER OF TAXATION eed Taxation ‘Thtee Elements of Taxation ‘Two Concepts of Taxation rincples of a Sound Tax System Effects of Violation of tre Principles NATURE OF TAXING POWER. Extent of the Taxing Power ‘Taxation Distinguished ftom Other inherent Powers Power of Taxaton as an implement ofthe Polce Power (Regulatory Measure) lice Power as an implement of Power of Taxation Power of Taxation a an Implement ofthe Power of Eminent Domain TAXES .. : ‘Atibutes or Essential Gharactarsice Reequistes ofa Valid Tex (Gaseifeations or Kinde of Taxes Distinct of Tax rom Other Foms of Exactions ‘Test in Determining Whether the impoation ea Tax ora Fee Importance of distinction DOCTRINES IN TAXATION . 1 Inpreseripsbily of Taxes Ti, Prospectty of Tax Law uy See ean Seeeaiecacee i Seer eee iets rr a sectarter oe Sea tog totes deste acest Seger en ome Seecteremneratne erate og, ede Sere % Sete ern i Eeeeee te smi : ok Senereaate ; EEL En seats eee aa ee =a ieee Hage See eae Sees See er feces ekeaer see, Eee eae tn Ppa Em fecal a od lt See Amy moe 2018 SAN BEDA CENTRALIZED BAR OPERATIONS |TABLE OF CONTENTS SAN BED MOéRy Alp 2d Tax Exctusions ‘Wl Blindness Doctrine X Double Taxation. ‘Kinde of Double Taxation Modes of Reet frm Double Taxation Methods Rosorted to by a Tax Trealy in Ordor to Eliminate Double Taxation ‘Two Waye under the Second Method Most Favored Nation Clause in Tax Treaties LIMITATIONS OF TAXATION . ie Inert an Conationa sens Conatisna! iatone Garett vet & Spesre Ores Linteret Leiatone ELE ue ‘ens o Deine Pubic Pupone sees eu rrpoee Ircmasonal Sony Noreelegaton ot Yaning Power Except Cito of he Excpone Exampion ofthe Govern. overen Ene (Coren of fe Repub ofthe Pirin) Govererent Agen inerrant te Goverment Eampen Foam fo te Rue on xaron Severmer Oued Contales Caeratons(GOCCs) «. Fenton or Stas of Texaton Factor het Geterne Ste Stisot Subecs ax 1, Conmtna one 1 “Ceara net Cotsen nko ue Paces Suse Tao Aapects of Boe Process Dis pteca tears Bue proces In nation covert requce usiatons of Vlasone ibe ue Peers Cavee 2. Egil Ptecion Cae ‘ie equal protection cau may be lated nwo ways FRegaes for aVald Gasteaion Suan! Seton Vora Equity and xtzontlEauty a. Frcs dite Pree 2 Raigous Featom tnetne of Gen Oceizatons Cin fee 5, NS Tango Prat Property without ust Compensation 8: Nanimpamene Suse tunpatmert las a a Lintaton othe Power to Tax Erceptore 1. LmeMaing Process Bitlet Power Grant Repoves, Cmitatons and Paons and Rent Fines and Forties ser Coniston by Fn Siren 8: Specie Bret Coun intion ‘sate shal fe Union 2nd eqtble oxen poe Srginof Reverue o Tan fia Velo Povar ofthe Presgenk Delegated Authorty of Present o Impose Tait Rates, Import and Export Quotas, Tonnage and Wharfage Oues PlosBle Tort Cause ‘Tax Exemption of Properties for Religious, Chartable, and Educational Purposes Teatot Exempion Nature of Use 8, Vote Resurement or Tax Exemption 8. Nan-Use of Pune Money ox Property for Religous Purposes “0 Prohbiten on Use of Tax Levies for Special Purpose o Special Assessments 1. Supreme Cours Power to Review suerte or orders of Lower Court Pine of useal Nominertorence 1S SAN BEDA CENTRALIZED BAR OPERATIONSTABLE OF CONTENTS BEDA MEMORY AID 20 12 Geant of Taxing Authosty to LGUs 13, Tax Exemption Granted to Nen Stock, Non-Profit Educational inttutons [AY Non-stock, Non-profit Educational Insituion NNon-proft Educational Institution TTarabilty of Incame Derived fom the Operation of Dormitories, Canteens and Bookstores Taxabiityof Interest Income on Currency Bank Deposits and Yields fem Deposk Substitutes Taxabiity of Donation Acie XV waite Vt 8. Propnetary Edueationa Instistion Taxabity of income Taxabity of Interest Income on Currency Bark Deposits and Yields from Deposit Substitutes Taxabily of Donation CC. Government Edueatonal institutions ‘Summary of Taxaily of Ecucatonal Institutions TAX LAWS Nature of Tax Lawe Constucton of Tax Laws Hombook Doctine Kinds of Provisions of Tax Laws Importance of distinction ‘Sources of Tax Laws ‘TAX CREDIT VS. TAX DEDUCTION Iastation INCOME TAX DEFINITION AND GENERAL PRINCIPLES Income [Basie ofthe Right ofthe Government to Tax income: Partnership Theory Requisite for Taxabilty of income Realized income vis-a-vis Recognized Income Test of Reaizaton Examples of Income Constructvely Received Recognition of Income Cash Method Vie vs Accrual Method “Tests in Determining Whether Income is Eamed for Tax Purposes: Income Tax Systems inthe Philppines Features of Phiippne Income Tax Citra in imposing Philippine Income Tax ‘Types of Tanabie Income’ Goneral Prnciples of Income Taxation ‘Situs of Taxaton income from Sources within the Philppines Income from Souross without the Prippines Income ftom sources party within ad party without the Philipines Personal Property Produced Purchased and Sold CLASSIFICATION OF TAXPAYERS. Taxpayer Signfieance of Knowing the Ciassifcation of Taxpayers 1" Ingividual Taxpayer |. Resident Citizen 1 2. Non-Resident Caizen ‘Overseas Contract Worker (OCW) Seaman 3. Resident Alen 4. Non-Resident Aon Engaged in Trade or Business 5. Non-Resident Alen Not Engaged in Trade or Business I. Corporations Corporation includes Corporation excludes I, Estates and Trusts IV. Pacterships Co-Oumership 34 32 2018 SAN BEDA CENTRALIZED BAR OPERATIONS | iTABLE OF CONTENTS SAN BEDA MEMORY AID 2018 TAX ON INDIVIDUALS eee 42 Applicable Taxes LL Graduated Rates of 86:52% 1. Final Tax Paseive income Passive income Subject o Final Tax Dividend Kinds of Dividend income (Cash and Property Ovidends Final Tax Rates ‘Stock Dividends, Lguideting Dividend Royalties Interest Income I, Capt Gains Tax ‘Tarabity of Special Classes of Individual Employees TAX ON CORPORATIONS tale of Taxes on Corporations Normal Corporate Income Tax IL Minimum Corporate Income Tax Corporations lable When does MCIT commence ‘When MTT applicable Untatone FRloquterents forthe Suspension ofthe Imposition of MCIT Entes to which MII fe Not Appcabie UL Gross income Tax When GIT is appbcable ‘Conaitions tobe sisted before the grant of President's authority IV. Capital Gains Tax . V._ Final Tax on Passive income ‘Corporations lable ‘Conations forthe 15% final taxiemposed on didends received by @ NRFC rom a domestic corporation (Tax Sparing Rule) Effet tax ered isnot alowed Tax Sparing Rule VL. Improperty Accumulated Earrings Tax Corporation table Retonale of IAET Peried for Payment of Dividend or Payment of AET Reasonable Accumulation of Icom lunmediacy Test ‘Tho Following constitute proper accumulation of earrings forthe reasonable needs of the business ‘The folowing instances constitute improper aecumulabon of earings Corporations Exempted from the JAE VI. Branch Proft Remittance Tax [BPR of a foreign corporation deriving income from the Philippines VIIl. Tax On Non-Resident Foreign Corporation ‘Special Domestic Corporations 4.” Proprietary Non Proft Edveational Instone and Hospitals 2. Depositary Banks (Foreign Currency Deposit Units) 5. Government owned and controlled corporations, intrumentaities or agencies ‘Special Resident Foreign Corporations ‘Intemational Carrere doing business Inthe Philippines (Ar Cartier and Sea Carrer) Gross Phiippine Biings ‘Continuous and Uninterrupted Fight o Voyage 2. Offshore Banking Units (OBUs) authorized bythe BSP. 3. Resident Depository Bank i 4 Regional or Area Headquarters of Multinational Companies ‘5. Regional Operating Headquarters of Multnatenal Companies ‘Special Non-Resident Foreign Corporations “Non-Resident Cinematographic Fm Owners, Lessors of Distributors 2. Now Resident Oumner or Lessor of Vessels Chartered by Phiipine Nationals 3. NomResident Ovmer or Lessor of Aireraft and Mactineries and Other Equipment Taxcexempt Corporations Documentary Requirements Requistes for Tox Exemption Effect fa chartabie metiuton engages in actives conducted for proft Common Limitation 51 GROSS INCOME a ones 66 Gross income ‘Meaning of the Phrase "Gross Income frem whatever Source Derived" Iv | 2018 SAN BEDA CENTRALIZED BAR OPERATIONS,TABLE OF CONTENTS SAN BEDA MEMORY AID 2018 Passive Income Not Included in the Computation of Gross income Subject tothe Reguar Income Tax Rates 1" Compensation ‘Testo Determine whether Income is Compensation or Not Valuation of Amount of Compensation (Compensation Income Inetuces 2. Armuties 3. Rents Financing Lease Income ftom Leasehold Improvements i Income from Leasehold Improvements 4 5. Gains from Dealings in Property 6. Royalties 7. Interest {Gross Income from Profession, Trade or Business 8. Prizes and Winnings 410, Pensions 11, Partnere Distrbutive Share in the Net Income of a General Prfessionel Parinership (GPP) EXCLUSIONS FROM GROSS INCOME 7 ee n Exclusions Items of Exclusions A Proceeds of Life Insurance Instances Where Life Ineurance Proceeds Are Incuded In The Gross Income RRetum of Insurance Premium Git Bequest, Devise oF Descent Git Tax Test ‘Compensation fr Injuros or Sickness ‘Compensation for Lost Profts FRetrement Senefte, Pensions and Grates Retirement Benefits under RA. No. 4917 Retirement Benefs uncer RA. No. 7641 ‘Terminal Leave ‘Cause Beyond the Controt SIS Benefits under RA No, 8291 F. Income Exempt under Treaty Intemational Convention or Tax Teaty G. Macetaneous items m9 of FRINGE BENEFITS oe : 76 Fringe Benefits Valuation of Fringe Banat ‘Tax Treatment of Fringe Benefits 1. If given to managerial or supervisory employees 2 tt gven to rank-and-file employers 3. Exempt fromm income tax, regards ifthe benefits were giver to managerial or supervisory or rank-and-file employees Convenience ofthe Employer Fulo ‘Grossed-up monetary value of nge benefits represents Determination of Gressec-up Monetary Value Pringe Benefits Subject to FBT 1. Housing Nomtaxable Housing Fringe Benefit Expense account Vehicle of any kine Household expenses Interest on loan at less than market rate othe extent ofthe cifference between the market rte and actual rate granted Membership fees, dues, and other expenses borne by the employer for the employee in social ad athletic cubs and similar organizations Holiday and vacation expenses. Expenses for foreign travel | Educational assistance tothe employes or his dependents 10. Ineurance Premium Benefits not subject to the FST Fringe Benefits Given to Rank-and-Fle Employees ‘De Minimis Bonets Exerps tom Income Ta Deductions for the Employer OoNOMAON DEDUCTIONS FROM GROSS INCOME 89 Deductions ‘General Rules Kinds of Deductions Summary Rules an Allowable Deductions 2018 SAN BEDA CENTRALIZED BAR OPERATIONS | vTABLE OF CONTENTS SAN BEDA MEMORY AID 2018 2etun of Capital itemized Deductions ‘AC Ordinary and Necessary Trade, Business, and Professional Expenses 8 Interest ©. Taxce © Losses Reuistes for Decusbilty Substantiaton Requivements 1 Classifeation of Loseoe Wash Sales Substantial Identical Stock or Securities Elements of Wach Satee Losces are personal and nol ransferable to another Closed and Competed Transacton Lostes can be claimed as femized deduction within sic (6) months after the death ofthe decedent provided thal the same are ‘at claimed as deduction fr estate tax purposes Loss is decuctble inthe year the loss was sustained Casualty Losses et Operating Loss Carry-over (NOLCO) Feequstes for Desuetbilty Substantial Change inthe Ownership ofthe Business or Enterprise ‘Taxpayers Entiled to Deduct NOLCO ‘Taxpayers Not Enited to NOLCO ‘Summary Rules en NOLCO E. Bad Debts equistes for Deductilty Examples of reasonable steps which may be undertaken by the taxpayer to prove undertaking of dligent offers to callect the debt Factors affecting worthlessness Tax Benefit Rue Depreciation Requiites for Desuctbilty Properties Subject to Depreciation Properties Not Subject to Depreciation ‘Commencament of Depreciation Determination ofthe Useful Life on which Depreciation Rate le Based Methods of Computing Depreciation Special Cases Basis of Depreciation Wo can claim depreciation expense Spacial Rules Rules on Deduetbity of Depreciation of Vehicles G. Depletion of Ot and Gas Walls and Mines ‘Theory and Purpose of Depletion Alowance Depletion Method ‘Tax Treatment of Intangible Exteration and Development Dring Costs Intangible costs in Petteleum Operations ‘Tax Treatment H. Chartable and Other Contsbutions FRequlstes for Deducbity Kinds of Contras: Valuation Substantiaton Requirement |. Research and Development (R&D) 4. Pension Trust Conttbution FRequlstes for Deductbity Deductible Payments to Pension Trust Requletes of a Reasonable Retirement Beneft Plan |. Optional Standard Deduction (OSD) TaxRate Seme important rules (OSD of GPP and Inavdul Partners Surenary of Alowance of OSD I, Segal Desucions Estates and Trusts Insurance Companies Mutual Marine Ineurance Companies (MMIC) Mutual Insurance Companis (MICs) [Assesement Insurance Companies Establishments granting sales discounts to or employing senor citizens 1V. Premium Payments on Heath and Hospitalization Insurance (PPHH!) ‘Who may avall of PPHHI as deduction Reequites for Deductilty amoo@>. O18 SAN BEDA CENTRALIZED BAR OPERATIONS.TABLE OF CONTENTS : SAN BEDA MEMORY PERSONAL EXEMPTIONS, 113 Pereonal Exemptions ‘Taxpayers who are Alowes Personal and Additional Exemptions : Whether or not NRA-ETB is allowed both personal and additonal exemptions Basic Personal Exemption ‘Adina! Exemptions ‘Whe claims the scdtional exemptions Stalueatthe-ong-otthe-yoar Rule ‘Summary a allowance of personal exemptions NON-DEDUCTIBLE ITEMS Personal Living of Faily Expenses + Captal Expenatures ‘Amount expended in restoring property Premiums paid on any ie insurance policy Losses from Sales or Exchanges of Property batwoon Related Taxpayers Poltical Campeign Expenses A. Ordinary Assets 8. Copital Assets RULES ON CAPITAL GAINS AND LOSSES ... Treated 2s Ordinary Asset ‘Treated as Capital Asset Change of Purpore The following are considered as sale or exchange of capital assets Not Capital Gain v. Net Capal Lose Treatment of Capital Gaine and Loses Determination ofthe Amount of Tax ‘A. Salo of Shares of Stock Subject o CGT 1B. Sale or Other Disposition of Real Property Subject to CGT by a Non-Dealer Excluded fom the Coverage ‘Sale made by a desler in real etate orf the real property is an orcnary asset ‘Sale of Principal Residence Requates for exertion ©. Other Capital Asses Net Subject to COT Special ules on Capital Gains or Losses Subject to Regular Income Tax Rates 1)” Holding perios 2) Non-Deductlty of Net Capita Loss (Loss Linitation Rule) 3, Net Capital Loss Carry-Over (NELCO) 116 RULES ON EXCHANGES OF PROPERTY Determination ofthe Amount of Gains and Loss| Subetuted Basis Reguistes for recognition of gsi or loss in an exchange of property ‘Tax-Free Exchangee Taxctiee exchanges of property Defntione Reason forthe exceptions ule on Upstream Merger Exchanges Not Sole in King (Other Instances when Gain is Recognized but Loss is Not Recognized 122 ESTATES AND TRUSTS. Estate Trusts ‘Taxabity of Estates and Trusts When Income of Estate and Trust Taxable {Reme compasing th taxable income of Estates and Trust Income tax Exemption of Employees" Trust Revoenble rust Irevocable Trosts Income inekided in computing the taxable income of the grantor Fling of mcome tax return ‘Conscldation of Income of Two of More Trusts 125 ACCOUNTING PERIODS AND METHODS 130 ‘Accounting Period I Galendar year 2) Fiscal year 3. Short pond Change of Accounting Period Matnads of Accounting NMathods Recognized by Law and Regulations 2OG SAN GEDA CENTRALIZED BAR OPERATIONS | vilTABLE OF CONTENTS SAN GEDA MEMORY AID 2018 Cash Basie Method ‘Resnual Method ‘Atvevents Test Instatment Method leital Payments Percentage of Completion Method (Crop Year Methoa ‘TAX RETURN AND PAYMENT : : 131 ‘Tax Retum Who are required to fe income tax return Special Rules What retume to fle 4 When returns ae fled Where retums be fled How retums are to be filed ‘Substtted Fling Requistes Manner of Payment Coverage Ropertorial Requirements ‘Statement of Management Responsiity RRetume of Corporations Contemplating Dissolution er Reorganization WITHHOLDING TAXES Withholding Tax System Earmerking NOT the same as withholding When to watts How witheld and remitted Reason ‘Withholding Agents (Character of wrtnholing agent Duties of the Wrthholding Agent abies ofthe Withholding Agent ‘Withholding of tax shal not apply to income payment othe folowing ‘Consequences for Failure to Wehold Kinds of Withholding Tax A. Final Withholding Tax Effects of Final Withholding Tax B. Credible (Expanded) Witinoiing Tax Return on Credtable Expanded) Withholding Tax Requistes ‘When to Fle Annual Information Retum fr Income Tax Withheld Surenary of Expanded Wahholding Tax Fates, Compensation Subject to Withholding Tax (Compensation Exempted from Witiolding Tax TRANSFER TAX BASIC PRINCIPLES ‘Transter Tax Kinds of Transfer Tax Distinatons between Estate and Donors Tax ‘Theories regarding the Purpose of Transfer Taxes . 139 ESTATE TAX Estate Tax Nature of Estate Tax Purpose of Object of Estate Tax ‘Accrual of Estate Tax {Caw that Governs the Imposition of Estate Tex ‘Time and Transfer of Propetion, The State as an Extraordinary Compussory Heir of Decedent Cassifestion of Oecedent for Estate Tax Purposes GROSS ESTATE ere 141 Gross Estate ‘Composition of the Gross Estate Intangible Properties Coneldered Situated in the Philippines Rute of Reciprocly Valuation of Gross Estate vil 2018 SAN BEDA CENTRALIZED BAR OPERATIONSTABLE OF CONTENTS SAN BEOA MEMORY AID 2018 Inclusions in The Gross Estate A. Decedent's interest B. Transfers in Contemplation of Death Creumatances taken into account ©. Revocable Transters ‘The Power to Alter, Amend, or Revoke i Considered to Exist onthe Death ofthe Decadent Examples of revocable Transfers D. Property Passing under General Power of Appointment (GPA) Requistes for Taxabilty E. Proveeds of Life insurance Determination ofthe Character of the Proceeds F.Tranefer for Ineuificiont Consideration NET ESTATE Net Estate Determination ofthe Net Estate ‘Schedule of Tax Rate DEDUCTIONS FROM GROSS ESTATE ‘Alowable Deductions from Gross Estate Ordinary Deductions ‘A. Expenses, Losses, Indebtedness and Taxes 1. Funeral Expenses Deductible Funeral Expenses Iietratione on How to Determine the Amount of Alowable Funeral Expenses 2. Judicial Expenses Nature of Expenses that may be Deducted Deductible Judicial Expenses Extrajudical Expenses 3. Claims Against the Estate Requistes for Decuctty ‘Substantaon Requirements 4. Claims Agsine! insolent Persone Requisttes for Deductisty Unpaid Mortgages FReguises for Deducibity 6. Unpaid Taxes Requlsites for Deduct “Th deduction wll at include Losses Roquistes for Dedutibity Property Previously Taxed (Vanishing Deductions) lequittes for Dedlctibity Ferma for Computing Vanishing Deduction Cc. Transfers For Pubic Use Requisttes for Deductty . Net'Share ofthe Surviving Spouse inthe ConjugaliCommurity Property EXCLUSIONS FROM GROSS ESTATE 151 Exclusions from Gross Estate EXEMPTIONS FROM GROSS ESTATE 152 Exempfons fom Gress Estate ESTATE TAX CREDIT ee nnn sons 152, Estate Tax Credit Umtatione Estate Tax Formule ESTATE TAX SETTLEMENT 154 ‘A. Filing of Notice of Death B. Fling of Estate Tax Rectum CC. Paymant of Estate Tax Requistes for Exension of Time Effects when the Extension f2 Granted Payment of Estate Taxby instalment eraone Liable to Pay Resttfion of Tax Pate Duties f Certain Officers or Debtors Rustatve Examples te Property Present Funeral Expenses, Family Home, Standard Deduction, and Medical Expenses as Deductions from the Groes Estate O18 SAN BEDA CENTRALIZED BAR OPERATIONS | ixTABLE OF CONTENTS MEMORY AID 2018 DONOR'S TAX . Donors Tax ‘Nature of Donors Tax Purposes or Objects of Donor's Tax eoquistes ofa Taxable (Vali) Donation Badges of Donation Inter Vivos Law that Governs the Imposition of Donors Tax ‘Coverage of Danor’s Tax CCaeffeation of Donors Importance of Knowing the Classification of Donors : GROSS GIFT Gross Git Properties Considered Situated inthe Phippines ‘Situs of Donors Taxation Valuation of Gite ‘Speatie Cases of Transfers Inter Vivos ‘Donations Betieen Spouses ‘Donations by One ofthe Spouses ‘Donations ta Conesivad and Unbom Chi ‘Contibuton for Election Campaign ‘Renunciabon of Share of Surviving Spours ‘Renunciation of Iertance ta Co-Hee Renunciation of Inhertanee to Another Person Nota Co-Heir Life insurance with Third Person a Beneficiary FReemuneratory Donations ites Req 40. Gratustous Donations to Associations ‘Onerous Donations ‘Oneraus Donation, or Donation in Exchange for Goods o Services, or Use or Lease of Properties, isnot subject to Donors Tax “Transfers Which Nay le Considered as Denations 161 NET GIFTS Net cits Schedule of Donor's Tax Rate 4 Graduated rates 2 Fixed Rate 164 EXEMPT DONATIONS .. 7 sone 164 Gis Made by a Resident ‘Dowries Gite Made to oF forthe Use ofthe National Goverment or any Entity Created by any of ts Agencies which le Not Conducted for Prof or to ary Poltcal Subdivision ofthe sad Govertanent Git fy Favor of an Educational andior Chartable, Reigous, Cultural or Social Wetfare Corporation, Institution, Accredited Non ‘Govemment Organization or Philanthropic Organization ox Research Institution ‘Ablet's Pizes and Aware Encumbrances on the Property Donated if Assumed by the Donee Donations made tothe folowing ntti exempted under special laws BB. Gins Mage by Non-Residents Aine COMPUTATION OF DONOR'S TAX CREDIT.......... . eons 165 ‘Computation of Donors Tax. A "Cumulative Method B Splitng Method DONORS TAX CREDIT Donors Tax Credit Unmtatone to the Tax Credit ne 168 DONOR'S TAX SETTLEMENT ‘A. Filing of Donors Tax Return 8) Time of Fling ©. Place of Fang D._ Payment of Donor’ Tax Notice of Sanation 167 | 2018 SAN BEDA CENTRALIZED BAR OPERATIONSTABLE OF CONTENTS SA MEMORY AID 2018 VALUE ADDED TAX VALUE ADDED TAX . 168 Value-Added Tax (VAT) CChatectrstics of Pilpine VAT ‘Advantages of VAT PERSONS LIABLE FOR VAT a 170 41. Any person who i the course of trade or business 2._ imports goods (importer) In the Course of Trade or Business (Rule of Rogulaty) Exceptions tothe Rule of Regular VAT Registered Person VAT Registrable Pereon VAT-Exempt Person 1. Persons not engaged in undertaking VAT taxable transactions 2 Subsistence Livelinood Income 3, Persons exempt fom VAT under Special Laws 4. VAT-Exempt under Treaty 5. Cinematheater Operators “Transactions of Special VAT Persons VAT ON SALE OF GOODS OR PROPERTIES ‘Goods or Properties Requisite for Taxabilty of Sale of Goods and Personal Properios Tax Base ond Tax Rate ‘Gross Selling Price for Goods or Properties Other than Real Property ‘Alowable Deductons from Gross Saling Pre 173, \VAT ON SALE OF REAL PROPERTIES nnn 174 Fequistes for Taxabillyof Sale or Exchange or Real Proparty : ‘Tax Base and Tax Rate Gross Selling Price in Case of Real Property ‘Sale of Real Property Covered by VAT. ‘Modes of Sale of Real Property by a Real Estate Dealer VAT ON IMPORTATION OF GOODS: VAT on Importation of Goods ‘ax Base and Tax Rate : Sale, transferor exchange of imported goods by tax exemppersons (Techical Importation) Importer VAT ON THE SALE OF SERVICE AND USE OR LEASE OF PROPERTIES vmnnmnnnee 7B ‘Sale or Exchange of Services Lease of Propartes Reequstes for Taxabity ‘Tax Bave ond Tax Rate Grose Receipts Payment to Uneelated Third Party ‘Advance Payment Unrelated Party ‘Retaal Receipt Constructive Receipt Sale or exchange of services includes services performed or rendered by ‘The pivaze "sale or exchange of services shall kewise cide Condominium Corporations Subjectto VAT and income Tax Homeouners’ Association of Subdivisions and Vilages VAT en Professionals When lawyer practicing his profession is subject to VAT 176 TRANSACTIONS DEEMED SALE ........ enneteesnnees 180 ‘ransedions deemed sale 11 Transfer, use, consumption of goods or properties nc inthe course of business of goods or properties eniginaly Intended forsale or for Use in the course of business Distibution or transfor to Consignments of goods If actual eae isnot made within 60 days flowing the date such goods were consigned Retirement ftom or cessation of business with respect to all goods on hand, whether capital goods, stockimtrade, supplies or materials ‘as ofthe date of such retrement or cessation BEN 2018 SAN BEDA CENTRALIZED BAR OPERATIONS |x!TABLE OF CONTENTS SAN BEDA MEMORY AID 2016 Tax Base and Tax Rate CHANGE OR CESSATION OF STATUS AS VAT-REGISTERED PERSON : 181 Subject to 12% Output VAT Not Subject 0 12% Output VAT Exceptions ZERO-RATED SALES OF VAT REGISTERED PERSONS ..... : snes 182 input tx atibutable to zero-rated sales, atthe option of the taxpayer, may be IKhds of Zero-Rated Sales LAs to object of the sale A. ZerofRated Sales of Goods or Properties 4." Expon Sales 2. Foreign Currency Denominated Sales 13. Sales to persons or entites deemed tax-exempt under Special Law or Intemational Agreement B. Zero-Rated Sales of Services II, As tohow the trnsacton shall be subject to zero-ating A. Automaticaly Zero Rated Sales BL Effectively Zero-Rated Sale ‘Appleation for Effective Zero Rating Destine on Eocvely Zero-Ratod Sales Sales Made to Foregn Embossies Sale, Barter or Exchange of Goods, Properties or Sences in Ecozones Guistome Teron Ecazane of Special Economic Zone Proof of VAT Zero Rated Sales VAT-EXEMPT TRANSACTIONS «concen ee 185 Features of VAT-Exempt Traneactons Exempt Transactone v.Exemet Party ‘Transactions Exempt rom VAT I. Sale or importation li, Sate Il, tmportation IV, Services V. others Summary of Rules INPUT TAX AND OUTPUT TAX ccs ee sanhnnnnss 190 Input Tax ‘Sources of Input Tax Output Tax Sourees of Output Tax Determination of Output Tax and VAT Payable and the Computation of VAT Payable or Excess Tax Determination of Crectable Input Tax Input Tax on Mixed Transactions INPUT TAX ON DEPRECIABLE GOODS 192 ‘Aggregate Effect tthe aggregate soguistion cost (exclusive of VAT) does not excoed PIM Effect of ste or transfer of depreciable good witin a perad of 5 years or prior tothe exhaustion ofthe amortzable input tax ‘Asset acauired in instalment ‘Amortization of Input Vat on Imported Capital Goods Applicable to both zero-ated and 12% VAT Transactions Input Tax on Construction in Progress. (Contract forthe sale of service where only labor will be supplied by the contactor and the materiss willbe purchased by the contractee ffom other suppliers ‘TRANSITIONAL AND PRESUMPTIVE INPUT TAX 193 ‘Transitonal Input Tax ‘lowed Transtonal Inpxt Tax Credt Prior Payment of Taxes NOT Necessary for Avaiment of Transitional Input Tx Presumptive Input Tax Determination F Input Tax WITHHOLDING VAT ne Types of Withnolding VAT Final Withholding VAT on Payments by Government CCredtable Withholding of VAT on Payments to Non Residents Stand input Tax xi | 2018 SAN BEDA CENTRALIZED BAR OPERATIONS,TABLE OF CONTENTS DA MEMORY AID 2018 SUBSTANTIATION OF INPUT VAT 195 ‘Who can claim input VAT; Time for claiming Required Supporting Documents (R.R. No. 16-05) REFUND OF TAX CREDIT OF EXCESS INPUT VAT sn 195 Instances where claims for VAT refundtax erect may be availed of Zoro-Rated and Etfectvoly Zero Rated Sales of Goots, Properties or Services ues on Prescription of VAT Refund! Tax Cred . 1. Administrative Claim (withthe BIR) i. Just Claim ‘Cancellation of VAT Registration Cancellation of Registration may be due to: ‘Where to fie the caim for refundtax eed cericate Manner of ving refund REGISTRATION Persons who are Reguived to Register Registration as a VAT Person 4. Mandatory 2. Optional 197 INVOICING REQUIREMENTS AVAT Registered Person shall issue {efomaton contained in VAT invoice or receipt Consequences of fssung Erroneous VAT livoice or Receipt Invoicing and Recording Deemed Sale Transactions 198 FILING OF RETURN AND PAYMENT OF VAT 7 seentnennnnnnnnnnnnns 199 Who are required to fle @ VAT Return Time for Fling a Return CANCELLATION OF VAT REGISTRATION 199 AVAT Registered Person may Canca his Registration fo VAT if BIR FORMS-VAT Monthly VAT Declarations ‘Quarterly VAT Returns OTHER PERCENTAGE TAX .. 7 200 ‘Transactions covered by OPT Nature of OPT. Tax rata for transactions subject to OPT EXCISE TAX Nature of Excise Tax Kinds of Excise Tax 200 DOCUMENTARY STAMP TAX 201 Nature of OST. Documents subject to OST ‘Time for Payment Person Liable TAX ADMINISTRATION AND ENFORCEMENT OVERVIEW seers 7 202 Tax Asministration ‘Stages or Processes of Taxation BUREAU OF INTERNAL REVENUE 202 BIR Composition Powers and Dues of the BIR ‘Agents in Tax Collection {BIR Organizational Swuctre A” Rogenal Offices Powers and Outies of Revenue Regional Directors 2018 SAN BEDA CENTRALIZED BAR OPERATIONS | xiTABLE OF CONTENTS MEMORY Art B. Revenue District Offices Compostton of ROS. Duties of Revenue District Offcers and Other Inemal Revenue Offcers and Employees ‘Adstional Duties of Revenue Dien! Oicers ‘Authoray of Revenue Offers POWERS OF THE COMMISSIONER OF INTERNAL REVENUE ...... 204 Powers of the Commissioner |. Power to nterpret Tax Laws Il, Power to Decide Tax Cases Ill, Power to Obtain information anc to Summon, Examine and Take Testimony of Persons Purposes ofthe Power Exton ofthe Power 1V. Powor to Make Assessments and Prescribe Additional Requirements for Tax Administation and Enforcement Extent of the Power Effet of Termination of Tax Period V. Authority to Make Arests and Seizures Vi. Authority to Delegate Powers VIl. Authonty to Assign internal Revenue Officers Those involved in Exlse Tax Functions ‘Assignment to Other Speciat Duties Cimtatons of the Assignment No Vested Right Post Vill. Authority te Impose Duties on Certain Offcors ‘other buts 1X. Power to Suspend the Business Operations of a Taxoayer 2X. Reporiorial Duties ofthe Commissioner COMPLIANCE REQUIREMENTS . sn 208 ‘Keeping of Books of Accounts ond Records Purpose in Requiring Books of Accounts Required Form of Books of Accounts Detnition of Terme ‘Adational Requirement for Set-employed Professionals Language in wtich Books are to be Kept FRegetraton of Books ef Accounts Preservation of Books and Other Accounting Records Exceptions Examinstion and Pisces of inepection ‘cministratve Provisions Registration Requiroments Who may reaister Where to reqster Contents atthe Registration Internal Revenue Taxes which may be registered Mandstoy Registration for VAT (Optional Regisvaton of VAT-exempt Persons, ‘Taxpayers Meniiteaton Number (TIN) Some General Rules the lssuanoe of TIN ‘Annual Registration Fee Exceptions Registration of Each Type of Tax ‘Transfer of Registration ther Updates Cancellation of Registration Ieeuance of Recaipts or Sales of Commetial Invoices Printng of Receipts or Sales oF Commercial Invoices Exhibtion of Certfeate of Payment at Place of Business Rules ana Reguiatons Specie Provisions to be Contained inthe Rules and Regulations tye Taxpayer Large Taxpayer Candidates L. Revenue Regulations Mh BIR Rutngs Review of Rulings by the Secretary of Finance kind of BIR interpretative Rulings Non-Retroact uty f Rusngs Dectine of Operative Fact ‘General interpretative Fle xiv | 2018 SAN BEDA CENTRALIZED BAR OPERATIONSTABLE OF CONTENTS STATUTORY OFFENSES AND PENALTIES : 216 Additions tothe Tax ‘Tax Detlesency vs. Tax Delinquency Cw Penaibee Surcharge Rates of Surcharge Interest DBeticieney Interest Delinquency interest Falke to File Certain Infomation Retums Crimes, Other Offenses and Forfeturee General Provisions, Some Acts Punishabe under NIRC ‘When isthe Crime Deemed Compete Will indness Dectane reseiption in Cminal Cases Penal Liabilty of Corporations Compromise Penalty Effect of he Taxpayer's Fatue to Comply wth the Compromise Agreement Infommers Reward Ae Fer Violations ofthe NIRC Requistes B._ Fer Discovery and Selaure of Smuggled Goods SOURCES OF INTERNAL REVENUE oe 220 Sources of intemal Revenue REMEDIES OUTLINE OF REMEDIES... : . 222 Tax Remecies Government Remedies A "Adminitrative Remedies 8. Josictal Remedies Taxpayers Remedios ASSESSMENT Power ofthe Commissioner to Make Assessments Examination of Retume ard Determination af Tax Due Delinquency Taxv. Defisency Tax Withdrawal of Ret, Statement or Declaration ‘Assessment Based onthe Ges! Evidence Obtainable Best Evidence Obtainabie Inventory taking, Survellance, and Presumptive Gross Sales and Receipts Presumptive Grose Seles or Receipts Constructive Matned of Income Determination 1. Pecod of Limitaton on Assessment (Computing for the Preceriptve Period Requistes in oder that a return may be considered fled for puposas ef staring the runing ofthe preseripive period ‘Amendment of Tax Return False Return | Fraudulent Return Instances Negating Fraud Faire lo Fue a Return ‘Waiver of Staite of Limitations ‘Grounds for Suspension of the Running ofthe Staite of Lintations to Assess and Collect Ii, Assessment and Proto Floquistes for Valid Assessment Principles Governing Tax Assessments Kinde of Assesment ‘Aasesement Process fesuance ofa Letter of Auhooty ‘Tax Aud or Investgation ‘Three Possible Seanarios after Issuance of PAN Issuance of a Forma Lettr of Demand and Final Assessment Notice ‘Requistes ofa Vala FLDIFAN Period to lesve FLDIPAN When FAN can be Issued Vion FAN deemed mode “Three Possible Seenaros ater Issuance of FLDIFAN 222 Dole SAN BEDA CENTRALIZED BAR OPERATIONS | xvTABLE OF CONTENTS SAN BEDA MEMORY AID 2018 Adranistratve Actonsinacion onthe Disputed Assessment Taxpayers Remedies ‘What Constitutes Final Decision Denying the Protest (Tener of Finaliy Rule) Effect of Void FODA on Assessment IV. Compromise and Abatement Compromise ‘Approving Authorties in Compromise of Taxes ‘Cates that May be Compromised (Cates that are NOT Subject to Compromise ‘Some Important Application Requirements Instances when the penalties andlor interest imposed on the Taxpayer may be abated onthe ground thatthe imposition thereot is unjust Instances of abatement on ground that coflecton costs are more than tax sought V. Tax Refund or Tax Credit ‘Tax Refund and Tax Credit, Defiriton ‘Tax Credit Certicate ‘Aathorty of the CIR and Ombucaman ‘Suspicion in the Grant of Tax Refund Grounds for Fling a Caim for Tax Refund or Tax Credit Foqulstes of Tax Refund or Tax Creat, Pasties Entitled to Tax Refund or Tax Croct ‘Taxpayer's Remedies When Not Acted Upon or Denied Government's Uabiity for Interest Forfeiture of Tax Refund of Tex Credit ‘Cary-Over Excess income COLLECTION Power to Collect Collection Requistes 1, Period of Limitation en Collection When does assessed tax becomes collectible ‘When taxie deemed colected i. Aaminisvative Remecies ‘A. Enforcement of Tax Lien 8. Distant of Personal Property Kinde of Dieraint Procedure for Actual Distant Right of Pre-Emption Purchase by the Government at Sale upon Distraint ©. Levy of Real Property Procedure for Levy 1D. Compromise and Abatement E. Penattes and Fines (Other Remedies IV. Judicial Remedios AU Ciel Action Form and Mode of Proceeding ‘junedieton 8. Caiminal Acton \Wmhen does the period of prescription begin to un Necessity of Judicial Proceeding Interuption of Prescriptive Period ‘Two Common Crimes Punishable Elements for Nomfiing of Tax Retum Elements fr Faure to Supply Correct Information ‘Wf Blindness Doctrine Irnportant Principles on Criminal Actions, \V. Injunction TABLE OF COMPARISON OF REMEDIES TORE ce compara cs ic beetereaey HES et amen et apron TEE Ce mere Gann nd Toop Revd SEL Aan miter 254° nvi 12018 SAN BEDA CENTRALIZED BAR OPERATIONS,FC wemé TABLE O ONTENTS TRAIN LAW ‘TAX REFORM FOR ACCELERATION AND INCLUSION (R.A. NO. 10963) INCOME TAX : I. For Purely Sel Empioyed indvidusis andor Proiessionals Ui, Rate of Tax for Mined Inoame Eamere I. Optonal Standard Deductions TRANSFER TAX .... VALUE-ADDED TAX, EXCISE TAX, OPT & DST ‘TAX ADMINISTRATION & ENFORCEMENT .. REAL PROPERTY TAX GENERAL PRINCIPLES .. Real Property Taxes ‘Theory of Real Property Tax [Nature or Characteristes of Real Property Tax Fundamental Principles Govering Resi Property Taxation For taxation purposes, rel property consists of Machinery Realy by Destination Requiltes tobe classified as real property Reaty by incorporation Summary of Rules on Machinory UGUs that may Levy RPT (Imposing Authorty) IMPOSITION OF REAL PROPERTY TAX Extent of Taxing Powers Procedure inthe Admanstration of Real Property Tax STEP 1: Declaration of Real Property Declaration by Owner or Administrator Purpose of declaration Properties dectared forthe frst time "Notes of Transfer of Real Property Ownership Declaration by ProvinclalCityhtunicpal Assessor STEP 2: Listing of Real Property n the Assessment Rots 'STEP 3: Appraisal and Valuation af Real Property Appraisal (eterminaion of Fair Market Vale (FMV) ‘STEP # Determining the Assessed Value and the Tax Dus ‘Assessment ‘Basie of Assessment of Real Property ‘Assavement Level ‘A. Assessment Levels for Land ‘Classes of Real Property for Assessment Purposes B, Assessment Levels for Buldings and other Stuctures 1G. Assessment Levels for Machinerice D._ Assessment Levels for Special Ciasses of Real Property Revision of Real Property Assessments General Revision of Real Property Assessments Purposes of the General Revieon Valtation of Real Property Date of Efecvty of Assocement or Reassessment STEP 5: Payment and Colecton of Tax Procedure for Determination of Real Property Tax Due Porson liable to pay eal property tax Presenption of Collection of Taxes ‘Grounds fr the Suspension ofthe Running of the Prescriptive Periods ‘TYPES OF REAL PROPERTY TAX Basic Real Property Tax ‘Assessed Value/Tacble Value Fair Markel Value Special Levies 1 Special Education Fund (SEF) ‘Aésiional Ad Valorem on ile Lands 262 270 272 . 278 280 281 287 2018 SAN BEDA CENTRALIZED BAR OPERATIONS | xTABLE OF CONTENTS SAN GEDA MEMORY Al Lands Considered tale Not Considered as Idle Lands LGU may Exempt lle Lands fom Adeltional Levy Reason for imposing Ad Valorem Taxes on lle Lands 2. Special Assessmente (or Speaal Levy) 3. Imposed by oer laws, Summary of Rates ‘TAX EXEMPTIONS, CONDONATIONS, REDUCTIONS Properties Exempted from Real Property Tax [Lands Exempt from the Adetional Ad Valorem Tax on Ie Lands Condonaton or Reduction of Real Property Tax and Interest Authoty of LGUs to Grant Tax Exemptions DISTRIBUTION OF PROCEEDS Basic RPT Special Education Fund Taxon Idle Lands Special Levy REMEDIES IN REAL PROPERTY TAXATION (LGU) Notice of Delinquency Remedies of the LGUs forthe collection of real property tax ten Ti, Admieistrative action ‘A. Levy on the Ral Property subject to Tax When levy is made How ievy is made ‘Advertisement and Sale of Levied Real Property 1 Aaverioernent 2 Sale Effect # thre is no bidder (Foretue of Real Property) Resale of Forteted Real Property 3. Report at Sale 4, Issuance of Certificate of Sale Redempton of Property Penod af redemption How effected Effect of redemption Effet of failure to redeem property Only 2 person having legal iteret’in the property may effect redemption 289 291 292 Mere use or posseesion of property alone dose not vest legal terest therein sufficient fo clothe legal personality to redeam it Effect of Absence of Notice to Delaguent Owner, Posting and Publication of Sale B. Distraint of Personal Property I, ula REMEDIES IN REAL PROPERTY TAXATION (TAXPAYER) Protest Against a Newiy Enacted Ordinance or Reverue Measure Ii, Administrative A" Romedy Against Assessment When remedy avaliable Who may eppeal "No motion for reconsideration ofthe adverse decision ofthe local assessorAveasurer; the remedy is to appeal tothe LBAA ‘Where referral tothe LBAA not requred When © appeal Pro to decide on the Period 10 appeal decision f the LBAA, Effect of Appeal on the Payment of RET 8. Protest ‘When remedy availabe Reausites to fle protest When tote protest Posed fo decide onthe protest Effet he protest fs decid In favor ofthe taxpayer Effects the protest denied or expration ofthe GO-day pesiod ©. Claim for Refund ar Cot ‘Beiod to decico on te ein Etec clam for refund or cre is denied or expiration ofthe 60-day pesiod 1, sudiea! out Aton Sit Aesaling the Vabdty of the Tax Sale seit | 2018 SAN BEDA CENTRAL -D BAR OPERATION: 295TABLE OF CONTENT DA MEMORY AID 2018 BOARD OF ASSESSMENT APPEALS : 297 Local Board of Assessment Appeals (LBAA) Composition Term of Ofice Meetings eriral Board of Assessment Appeals (CBAA) Composition Term of ofc Requirements for Chairman and Members Heating officers Term of oftce Cusiieation LOCAL TAXATION VS. REAL PROPERTY TAXATION, . ees 298 PROTEST AGAINST REAL PROPERTY TAX es 209 LEVY ON REAL PROPERTY 300 LOCAL TAXATION GENERAL PRINCIPLES . 301 Local Government Taxation Geant of Local Taxing Power Cimtatons imposed upon Congress, Natur ofthe Taxing Power of GUS ‘Acctual of Tax ‘Scope of Leeal Government Taxation LOCAL TAXATION ae 302 Local Taxes! Fundamental Principles Governing Local Taxation Local Taxing Power and Authority Loca Tax Ordinance Procedure for Approval and Effoctivty of Tax Ordinance and Revenue Measure equates for Impositon of Fee ot Tax Authorized bythe LGC. FRequsltes for Imposiion of Fee or "Not Speciealy Enumerated under the LGC (Residual Taxing Power) Residual Taxing Power UGUs may exercise its residual axing power to impose taxes Consitions in he Exercise of Residual Tang Powers LGnitatene ofthe Residual Power Principle of Pre-Empton or Exeusionary Doctrine COMMON LIMITATIONS ON LOCAL TAXING POWERS 304 LGUs Cannot Levy on Reinsurance Retrocession Common Limitations Claceied Whartage TAXING POWERS OF LGUS 307 ‘Taxing Powers of LGUs Classified Common Revenue-Ratsing Powers Tol Charges Fee Specie Powers of LGUs to Impose Tax R Provinces 1. Taxon Transfer of Real Property Ownership 2. Taxon Business of Printing ana Publeation 3. Franchise Tax Simultaneous imposition of Franchise and Local Business Tax 14, Tax on Sand, Gravel and other Quary Resources Extracted trom Public Land 5. Professional Tax &. Amusement Tax ‘Amusement ‘Amusement places Businesses not subject to Amusement Tax Places upon which ProwcentGties cannat impose Amusement Tax (because the NIRC already imposes Amusement Tax) 7. Rewual fixed tar for every delivery tuck oe van of manufacturers or producers, wholesalers of, dealers, cc retallers in, certain products 2018 SAN BEDA CENTRALIZED BAR. PERATIONS | xixTABLE OF CONTENTS SAN EECA MEMORY AID 2018 5. Municpalitos Tar on Various Types of Business 1.” Onmanufacturrs, azsembers, te packers, processors, brevers, stiles, rectors, and compounders of Fquors, stile spits, and wines or manufacturers of any ale of commerce of whatever kind or nature ‘Onvwholesalers lstibutors, or dealers in any atte of commerce of whatever kind or nature ‘On exporters, and on manufacturers, miles, producers, wholesalers, lsbuors, dealers of retalers of essential commodities On retaiers (On contractors and other independent contractors ‘On banks and othe nancial nsutons (On peddlers engaged inthe sale of any merchandise or artic of commerce On any business. not olherwize spectioa inthe precesing paragraph, which the Sanggunlan concerned may deem proper to tax Business Tax Distnguished ftom Income Tax ‘Tax Base of Local Business Tax Gross Receipts Gross Revenue Rates of Tax in Municipalities within Metro Manila Area ‘Condominium Corporations Payment of Business Taxes ‘Sits of Business Tax When there is 8 branch or sales ofce or warehouse in the cy or municipaity where the sale was made 2 Where thare is ne branch, gales office, or warehouse 13. tfthere fe no branch bul there sa factory, project fice, plan, or plantation in pursuit of business ‘4 Where Sales are moda by Route Trucks, Vane or Vehicles ‘Summary on Situs Retement of Business ‘Municipal Fees and Charges Cos Barangays Taxes 2. Senvice Fees or Charges 3. Barangay Clearance 4. Other Fees and Charges Summary Rules on Disirbuton of Tax Proceeds Between LGUs Communty Tax ‘Communty Tax Cerificate {Gerain occasions when Commurity Tax Cevtficate is Required tobe Presented Gotection of Taxes Gther Povers ofthe LOC ‘Tax Exemption Ceriicata ‘Tax Exemptions visting befoe the Effecivity ofthe LGC has been Abolished ‘Sma v Cy of Davao! vs. NCP v. Ova’ Guidelines for Granting Tax Exemptions, Relies and incentives se PRESCRIPTIVE PERIODS FOR THE ASSESSMENT AND COLLECTION OF LOCAL TAXES oat Prescitve Pris to Assecsnent Precaipine Peto of Clecton Grete one Supers ehe Ring ofthe Presrpive Peds PRO) OUTLINE OF REMEDIES 7 7 321 Remadies ofthe LGU Remedies ofthe Taxpayer TAX REMEDIES OF THE LOCAL GOVERNMENT UNITS {Local Government's Lien How local government ion extinguished 8. Administative Action Datraint \When personal property considered sold to LGU Lewy ‘When LGU may purchase real property advertised forsale Further Detain and Levy Properties Exempt rom Distant and Levy ©. Judea Action Surleicton Remedies Not Exclusive ‘TAX REMEDIES OF THE TAXPAYER 323 I. Before Assessmant Iter Assessment UL Compromise 8 Judieal Remedies ‘Court Acton, hen available Wx | 2018 SAN BEDA CENTRALIZED BAR OPERATIONSTABLE: OF CONTENTS nen 5. Action for Declaratory Relief Is Injunction TABLE OF TAXING POWERS OF LOCAL GOVERNMENT UNITS 325 Provinces (Sections 134 141 ofthe LGC) Municiplies (Sections 142 ~ 150 a he LGC) Giias (Section 151 of he LGC) Barangays (Section 152 of the LGC) Procedure fr Distant of Personal Property Procedure for Levy of Real Property TAXPAYER'S REMEDIES FROM ASSESSMENT OF LOCAL TAXES OTHER THAN REAL PROPERTY TAXES oo 330 PROCEDURE FOR DISTRAINT AND LEVY FOR THE PURPOSE OF SATISFYING LOCAL TAXES ..... 331 TARIFF AND CUSTOMS GENERAL PRINCIPLES 332 Policy Reforms Under RA. No. 10863 ‘Tacit kinds of Tart Customs Duties Free Zones. Purpose of imposition ADMINISTRATION OF TARIFF AND CUSTOMS LAWS 333 Bureau of Customs Chief officials Funetions ofthe BOC Powers and Functions ofthe Commissioner Duties of Dstiet Collector Persons Exeresing Police Authority Pace where authority may be exercised ‘Allthoily to Enter Properties, ‘Authonty to Search Visitrat power Who Way Exercise the Vistorial Power ofthe BOC Piaces Where Vietriat Power May be Exereised Manne: of Exercice of Vistonal Power Proceedings when goods seized inte exerese of power to inspect and vst ‘luresiton ofthe Bureau of Customs Doctrine of tot Bursutn Customs Administraton ‘Tart Commission Omtcals Fuinetione ofthe Tan Commission ‘The Compostion of Congressional Customs and Tari Oversight Committee Funetions ofthe Congressional Oversight Commits, In Ald of Legilaton GooDs ...... 7 336 Concept of Goad for Customs Duly Kinas of Goods ‘Table 1 Kinds of Goods or Articles ‘Table 2 Specie Ailes under Conditionally Free Importations (RA. No. 10863, See. 800) ‘CUSTOMS DUTIES : oe 344 Glassifeation of Customs Dulles Le Regular Dutes Ae valorem Duty itera for the Determination of the Dutiable Value B. Specie Duty Weights may ether be: 2. Legal 3 Net MW. Special Duties Phirpose A Antidumping Duty ‘Ant Dumaing duty Dumping Regulstes forthe imposition of Ant-dumping DutyTABLE OF CONTENTS Xmen Or 1 Amount of Duty Imposing Autherty 8. Countervating Duty Countering Duty Subsidy CounteWaleble/actonable Subsidies Non-aetonable Subsidies Prohibited subsides Kinds of Specific Subsidy ‘Amount of Duty Requistes for the imposition of the Countervaiing Duty Imposing Authority Duration and Review of Countering Duty ©. Mancng Duty Definition Purpose ‘Amount of Duty Imposing Authonty Enveptions to Marking of Arie D. Dieerminatory Duty Detntion Impositon ‘mount of Duty Imposing Authority E. Safeguard Duty Safeguard measures General safeguard measures ‘Special safeguard measures Purpose of impostion ‘Two ypes of safeguard dutios General Safeguare Measure ‘Amount of Duty Irnposing Authority Special Safeguard Measure for Agileutwal Products Amount of Oaty FLEXIBLE CLAUSE 348, Base Reauistes forthe Exercise of the Power Excoption Ettetviy of Order Issued by the Present Preferentst Tart ‘Ton barter ‘Table 3 ~ Comparison of Customs Duties METHODS OF DETERMINING DUTIABLE VALUE ........ : 351 Dutable Valve Methods of Determining Dutable Value Sequental Rule Excoption [METHOD ONE: Transaction Value System Method 1 shall not be used in determining the dutabe valu of imported goods if Person Ovomed to be Relates Reason for the Use of Transaction Vale |, METHOD TWO: Trensaation Value of Identical Goods "dentieal Goods Ill, METHOD THREE: Transaction Value of Simlar Goods Sinan Goods IY. METHOD FOUR: Deductive Value V. METHOD FIVE: Computed Value Vi, METHOO SIX Fallback Value Prohisted Methods of Valuation under Method Si IMPORTATION IN GENERAL, Innportton ‘When importation Begins When importation tg Deemed Terminated Persone Who May Act ae Declarant (Owner of imported artiles Requirement o Ieeue Proof of Payment ‘Applicable Rate of Duty ‘Applicable Rate of Duly for Goods Withdrawn from Free Zone for Inrodiction to Customs Territory Rates of Duty for Goods Sold at Customs Public Auction Entry at Customhouse 363 i | 2018 SAN BEDA CENTRALIZED BAR OPERATIONS,TABLE OF CONTENTS Port of Entry IMPORT CLEARANCE AND FORMALITIES : 354 ‘Obligations ofthe Importer A. Cargo Manifest 5. impor entry Goods Declaration Immpotaions Subject to Goods Declaration Provisional Geods Deciaration Contents of Goods Declaration Kinds of impor Entry Formal Enty| loformal Eney Preparation of the Import Entry \Where impor Entry Fled by Person Other Than the Importer LLodgernent of Goods Declaration, Relef Consignment Declaration ot Correct Weight or Value Laity for Payment of Dubos Failure to Pay Correct Duties and Taxes on imported Goods 2Dagrees of Culpabity ‘Assessment and Payment of Duties and Taxes ‘When Assessment Deemed Tentative ‘When Aesessment of Duty Less Than the Enterad (Declared) Value of the Goods When Assessment Deemed Final [Legal interest on Unpaid Duties and Taxes ‘Surcharge fo Faure to Pay, ‘Summary ofthe Assessment and Clearance Procedure E. Keeping of Records 29 CRIMES AND OTHER OFFENSES .. 7 358 ‘Smugatng Element of Smuggling ‘Outright Smuggling Purpose of Outright Smuggting ‘Technical Smuigging ‘Types of Technical Smuggling Irmpostion of Surcharge Effect of tentonalfFraudulent Medecaration, Miscassfication, or Undervaluation Contraband Evidence for Conviction in Smuggling Cases Things Subject to Confiscation in Smuggling Cases Table 4~ Crimes and Other Offenses (RA No, 10853) TAX REMEDIES ... 361 1. Tax Remedies of the Government A" Administrative Remedies 41° "Compulsory acquistion 2 Reduction af eustom dutesleomeromise 3. Alert Orders Effect of tesuance of Alert Orders ‘Acton afte Examination Basic Considerations on Alert Orders ‘What may be considered 2s Derogatory Information 4. Seizure and Forfeiture Seizure Forfetire Property Subject to Seizure and Foreture “ureceton Reasons for Exclusive Jurisdiction upen the Collector of Customs Nature of Forfetuce Proceesinas. When Forfeture Can Be fected Roguistes for Customs Forfeture Forfeiture of Common Canter ‘Bama Facie Presumpton ef Krowodge by the Owner ofthe Common Carrer Burden of Proofin Seizure and Forfature Proceedings ‘Summary of Sezure and Fortature Proceedings 5. Distain of Personal Property Procaduire for Detain Gonatnicive Distant of Personal Propety ow Can Constrdtive Distant of Personal Property be effected 6. Lewot Real Property Process for Lewy 8 Judicial Remedies 2018 SAN BEDA CENTRALIZED BAR OPERATIONS | osTABLE OF CONTENTS N BEDA MEMORY Al WL. Tax Remedies ofthe Taxpayer A Rimniatve Remesies, Protest ‘When Protest May Avge When Protest May Be Made Protest Exclusive Remedy in Protestable Case ‘Arpount Prctsted May of May Not Be Paid atthe Time of Protest Form and Scope of Pretest Decision in Protest Decision Adverse tothe Government 2. Refund (abatement or sswback) Abatement ‘Claim or Abatement Drawback 3, Payment of fine o redemption 4. Abandonment kines of Abandonment Express abandooment Implied abanderrmont Due Notice Requirement in Abendonment Effects of Abandonment 5, Appeal tothe Commissioner Forfeiture cases Protest 8. Judicial Remedies 4° Appeal 2) Fling of criminal action against ering customs oficial DISPOSITION OF PROPERTY ‘Goods subject to dspostion Place of Dicpostion of Goods Mode of Disposition Disqualification to Participate in Auction Sale Disposition of Proceeds Dispostion of Perishable Goods Disposition af Goods Injunous to Public Health Floor Pice of Goods Sold at Pubic Aucion Disposition of Unsold Goode for Want of Biers Dicpostion of Smugaled Goode Procedure in Customs Pratets COURT OF TAX APPEALS COURT OF TAX APPEALS ..... Salient Features of the Court of Tax Appeals Powers ofthe CTA CCompositon and Organization of Members ‘Quorn Power to Receive Evidence Evidence ean be taken by GTA shal NOT be Governed by the Technical Rules of Evidence ‘GTA's bound by the Rules on Documentary Evidence JURISDICTION OF THE COURT OF TAX APPEALS Court of Tax Appeals ‘Timasicton of CTA Over Cr Cases 1 Gxcusive Ongie!suredetion f CTA Division Ti, Exelusive Appetiate usedicion of CTA Division A Decsions of or inaction bythe CIR B._ Decisions of the Commissioner of Customs ©. Decisons ofthe Seoretary of Finance Reason and Purpave of Aulomalic Review Instances where decisions ofthe Secretary of Finance may be the subject o an appeal tothe CTA in Division D. Decisions ofthe Secretary ef Trade and industry Rs, RMOs, and RMCs are Appesiable to CTA xiv | 2018 SAN BEDA CENTRALIZED BAR OPERATE 369 372 373TABLE OF CONTENTS EDA MEMORY AID 2018 E. Decisions, Resolutions or Orders of the RTC in Local Tax Cases decided or resolved by them in the Exercise oftheir Original irisdetion F, Judgments, Resolutions or Orders ofthe RTCs in Tax Collection Cases eriginaly decided by them I Exclusive Apple Judcon of CTA an banc 2 Daciions or Reolvtons on Mons for Reconsideration ot New Tal ofthe Coutin Ovson inthe Eerie ofits Excise Appia lunecton 1B. Decisions, Resolutions or Orders on Motions for Reconeideration or New Tia ofthe Court in Division inthe Exercise of its Exclusive Original dursdetion . Deeisions, Resclutons or Orders ofthe RCs decided or resolved by them inthe Exercise of thei Appelate Jurisdiction 1D. Decisions ofthe CBAA inthe Exerize of ts Appatate Jurisdiction Jurisition of CTA Over Criminal Cases. i, "Exclusive Original Jurisdiction of CTA Division Ii, Exclusive Appellate Jursdiction of CTA Division ‘A Appeate from the Judgments, Resolutons oc Orders of the RTCs in thelr Original Jurisdiction in Criminal Offenses. 8. Criminal Ontenses over Petions for Review ofthe Judgments, Resolutions or Orders ofthe RTGs inthe exercise of their Appalate Surtedition I, Exclusive Appellate Jursdition of CTAEn Bane ‘A Decisions, Resolutions or Orders on Motions for Reconsideration ex New Tia of the Court n Divison inthe Exercise of ts Exclusive Original Jrtection over cases invalving Criminal Offenses 1B, Decisions, Resolutions or Orders on Motions for Reconsideration or New Tia of the Coust in OWvison inthe Exercise of ts Exclusive | Appeliate Jurisdiction over Cominal Offenses 6." Deeisions, Resolutions or Orders ofthe RTs inthe Exercise of thei Appellate Jucscicton over Criminal Offenses APPEAL IN GENERAL 00 ne ee 376 Subject of Appeal Intances when Decisions are Final Instances where CTA woud have section even there leno decision New leaves Cannot be Raised fr the Fest Tene on Appeal “The Government eannct rai the ius of incapacty forthe fret time on appeal Burden of Taxpayers on Appeal to CTA \Witndrawal of an appeal renders the assailed decison final and executory Interlocutery Order of CTA Not Appealable Findings of feet of CTA not reviewable Principle of Non nature and character of the night destroyed 1 5o~ {Feat the abuse is manifested a to destroy natural dnd fundamental rights, itis the duty 4 theyjuGilary {ohold such an act unconstitutional (, at 31). Extent ofthe Taxing Power: The reaches to every trade or occupation, (ever of industry, use, enjoyment, or to ev possession, and f imposes a borden i Of allure 1o discharge the same may be flowed Seizure, confiscation, offorfeture of property (id 27). Taxation is said to be: (CUPS) 1. Comprehensive ~ it covers persons, businesses, activities, professions, rights and privileges (Id. at 28). 2. Unlimited — a tax does not cease to be valid merely because it regulates, discourages, or even definitely deters the activities taxed. The power to impose taxes is one so unlimited in force ‘and so searching in extent that the courts, scarcely venture to declare that itis subject to any restriction whatever, except such as rest in the discretion of the authority which exercises it (Tio v. Videogram Regulatory Board, G.R. No. 75697, June 18, 1987). 3. Plenary — itis complete. Under the NIRC, the BIR may avail of certain remedies to ensure the collection of taxes (DIMAAMPAO, supra at 28). 4, Supreme ~ although referred to as the strongest Of all the powers of the government, it cannot be. Interpreted to mean that it is superior to other inherent powers of the government, only that itis 4) 2018 SAN BEDA CENTRALIZED BAR OPERATIONS, Po eo es To raise] To promote | To. facitate revenue. public "weltere | the taking of through private regulations. | property for | pubic use CET FNolimt, but as | Limted to the! No. amount much as | cost imposed just | possible, must | regulation, | compensation ee ee : en ules onan f { | | not supreme insofar as the selection of the subject of taxation is concerned (Tio v._ Videogam Regulatory Board, G.R. No. 75697, June 18, 1987). Taxation \guiished from Other Inherent Powers be equai to the needs of the issuance of the | is given to the license or { owner of the survellance | expropriated foc, xcept for | property Phon-usefut Sao, ‘occupations | nie! “Finer the | fexaction may be very rae | (hysicar Therapy | Organization of | the Phiippines, Inc. v. | Municipality Board” ofthe City of Manila, | GR No L-| 10848, "August 30, 1957) I No direct) No direct | A ‘direct benefit is | benefit is | beneftt results teceived by the | received, yet a| in the form of taxpayer, healthy just merely general | economic compensation | benefit of | standard of | to the property | protection and | society is | owner. promotion of | maintained. public welfare. PMT ‘Contracts may | Contracts may | Contracts may be | beimpaired. | be impaired. paired, PIO ‘paid | No transfer but | Transfer is, of | only restraint | effected ia | on the exercise | favor of the of property | State. “Taxes form part public funds.GENERAL PRINCIPLES aay v. Commission on Audit, G.R. No. 92585, May 8, 1992). Covers all| Covers. all | Covers only a Police Power as an Implement of Power of Taxation Fees may also be regarded as taxes even though they also serve as an instrument of regulation. If the persons, persons, particular property’ and | property, rights | property. Si emanate May be | May be | May be. | purpose is primarily revenue, or if revenue is, at exercised only | exercised only | 1.Exercised by | least, one of the real and substantial purposes, then | by the | by the | the | _ the exaction is property called tax (Philippine Airlines government or | government or | government | Inc. v. Edu, G.R. No. L- 41383, August 15, 1988) | its political | its politcal | or its political | subdivisions. | subdivisions. subdivisions; | _‘Mlustration: R.A. No. 4136, requiring the payment or of motor vehicle registration fees levied to raise 2Granted to| funds for the construction and maintenance of public highways and to pay for the operating expenses of Service the administering agency (Id). companies | or public| Power of Taxation as an implement of the Power uitlties | of Eminent Domain Tax measures are but enforced contributions Generally, the pain of penal sanctions and imposed for power to make | expressly “:< | expre pose, The power to tax has indeed laws cannot be | delegated 19, delegated « , ecomé Bost effSctve tool to realize social justice, dolegeted. | theo local |.the Weal] Buble, welfare! andthe equitable distrbution of Government | yovdinént | edi Weorinsioner of “intemal Revenue, v, Units by the law ¥ a ‘Drug Corp., G.R. No. 159647, April making bod) 4 ee PRXEUC TC ss 20% senior citizen discount was an ice power and not of eminent domain. scountis intended to improve the welfare ‘Operates on a | Operates on a| Operates on ‘community ora | community ora | the particule.” | class of | class of | private #25 %eil hb individuat individuat property of an Gitizens wiho, at thetr age, are less likely to | propery AIL: Be oghtung employed, more prove to lnesses and cothgt disabilities, and, thus, in need of subsidy in eS 7 = purchasing basic commodities. The 20% discount inseparable for | Protection, | Common the existence | safety and | necessties ‘Thay be/ereperly viewed as belonging tothe eatoucry the “existence | safety and | nocessties | | of prize regulatory meas, which affect. the profitability of establishments subjected thereto. On supports alee | society the community Te race, therfore the subject regulation ls police coer transcend power moasure (Mana Memorial Park Ie. v. sminot | indwisval | Botta of DSWD, GI. No 175086, Docembor 3 2013). Pomme Constraints by | Limted by tne | Bounded Constitutional | demand for | public purpose AX nd tnherent | publ Interest | and just fiatatines "| Bnd” "due | eormpensation. | raves process. __ Enforced proportional contributions from persons: (VALENCIA & ROXAS, supra at 4-5). and property levied by the law-making body of the State by virtue of its sovereignty for the support of Power of Taxation as an Implement of the Police tha govsenment and for public needs (7 Cooley 62) Power (Regulatory Measure) Taxation is no longer envisioned as a measure merely to raise revenue to support the existence of the government; taxes may be levied with a regulatory purpose to provide means for the rehabilitation and stabilization of a threatened industry which is affected with public interest as to be within the police power of the state (Caltex PHL They are not arbitrary exactions but contributions levied by authority of law, and by some rule of proportion which is intended to insure uniformity of ‘contribution and a just apportionment of the burdens ‘of government (1 Cooley 64; Question No. 1(A), 2004 Bar Examination), SAN BEDA CENTRALIZED BAR OPERATIONS 1SGENERAL PRINCIPLES bey Attributes or Essential Characteristics: (SLE- PayPro-PerPub-PeriPors) It is imposed by the State which has jurisdiction ‘over the person, property, or services; 2. Itis levied by the Law-making body of the state; 3. Its an Enforced contribution — not dependent on the will of the person taxed, not a contract but a positive act of the government; 4. It is generally Payable in money — it is a pecuniary burden payable in money, but backpay certificates may be used in payment of tax (De Borja v. Golla, G.R. No. L-18330, July 31, 1963); Reason: The taxpayer is not allowed to setle his, tax liability by conveying property in view of the problem of assigning value to such property: (MAMALATEO, Reviewer on Taxation (2008), .8) [hereinafter MAMALATEO, Reviewer}. 5. Itis Proportionate in character ~ taxes must be based on ability to pay in accordance with the, constitutional mandate to Congress to progressive system of taxation, 6. Itis levied on Bersons, property, and extis—, 7. Its levied for Public purpose’s; An 8. It is paid at regular Pe Examples: a. Income Taxes are paid “quarterly, “and, annually, \ b. Value-Added Taxes are paid ‘ont quarterly, ¥ \ 9. It is Personal to the taxpayer. \ Examples: 2, Restitution by the heirs in case of state rs deficiency (NIRC. Sec. 91(c)): and Ss. b. Exemption from liability of stockholders “if™"" case of the corporation's tax delinquency, Exceptions: i. Stockholders may be held liable for the unpaid taxes of a dissolved corporation iit appears that the corporate assets have passed Into their hands (Tan Tiong Bio v. CIR, G.R. No. L-15778, April 23, 1962). li, When ‘stockholders have’ unpaid subscriptions to the capital of the corporation, they can be made liable to the extent of their unpaid subscriptions (ABAN, supra at 4) Requisites of a Valid Tax: (JAPUL) 1. That either the person or property taxed be within the Jurisdiction of the taxing authority 2. That the Assessment and collection of certain kinds of taxes guarantee against injustice to individuals, especially by providing notice and opportunity for hearing 3. That it should be for a Public purpose; 6 | 2018 SAN BEDA CENTRALIZED BAR OPERATIONS: inci lkdsE OF LAIRP 4. The rule of taxation shall be Uniform; and 5. The tax must not impinge on the inherent and constitutional Limitations on. the power of taxation. Classifications or Kinds of Taxes 1. As to subject matter . Personal, poll, or capitation — taxes of a fixed amount upon all persons of a certain class within the jurisdiction of the taxing power without regard to the amount of their property, or the occupations or businesses they may be engaged (ABAN, supra at 23). (og, ‘community tax). b. Property — taxes assessed on all property or all property of a certain class within the jurisdiction of the taxing power (0.g., real property tax) (ABAN, supra at 23) c. Excise or privilege — those taxes that are laid upon the manufacture, sale, or consumption of commodities within ‘the country and upon licenses to pursue certain occupations upon corporate privileges (2.9. donor's estaté'tax, VAT, income tax) (ABAN, ‘iting 1 Cooley 127). $8 wtio bears the burden and incidence ct taxes wherein both the incidence of for the payment of the tax as well as t oF burden of the tax falls on the smelperson (id, At 23.) (2g. income tax, ‘@stalg tax, donor's tax) 'pe|ndirget —taxwherein the incidence or liability ‘or the payment falls on one person but the burdon!"may be shifted or passed on to anéther not as a tax but as part of the {iirchase price (Id. At 24), (e.9., VAT, excise “tax, percentage tax), 3) As to purpose ‘General, fiscal, or revenue — tax imposed for the general or ordinary purposes of the Government, to raise revenue for governmental _needs (eg... income tax, donor's tax, estate fax, or Value-added tax) (id. At 26, citing 1 Cooley 142) b. Special, regulatory or sumptuary — tax levied for special purposes (e.g, additonal 1% real estate tax levied under the LGC for the benefit ofthe public school system) (Id. At 27) ‘All money collected on any tax levied for a special purpose shall be treated as a special fund and paid out for such purpose only. If the purpose for Which a special fund was created has been fuliled or abandoned, the balance, if any, shall be transferred to the general funds of the Government (CONST. ART. VI, Sec. 29(3)).GENERAL PRINCIPLES 4. As to how amount is determined a. Specific ~ tax of a fixed amount imposed by the head or number or by some standard of weight or measurement; it requires no valuation other than a listing or classification Of the objects to be taxed (og, fax on fermented liquors, cigars, distled spirits) {ABAN, supra at 27 citing 1 Cooley 143). b. Ad valorem (Value) ~ tax based upon the value of the articles subject to tax (VITUG & ACOSTA, supra at 28). it requires the intervention of assessors or appraisers. to estimate the value of such property before the amount due from each taxpayer can be determined (¢.¢., real property tax) . Mixed — tax having both the characteristics of specific tax and ad valorem tax 5. As to taxing authority a National — levied by the National Government, through Congress, and administered by the BIR or the BOG: (¥iITUG' ACOSTA sepa ot 29) (e9., WOME customs duties). X : b, Local or municipal — levied by the LGU) through their respective Sahgguinians, ‘and > administered by the local executive government through the local ireasurer (¢.9., real property tax, business taxes imposed under the LGC) (ld. At 29). 6. Asto rate a a. Progressive or graduated ~ the rate ‘or amount incredses as the amount of income or eaming to be taxed increases (Id. At 29). (Ge. income tax on individuals, estate tox and donor's tax). b. Regressive ~ the tax rate decreases as the amount of income or earning to be taxéd increases. (Id. At 29) ©. Proportionate — tax rates are fixed (in ‘amounts or in percentage) on a flat tax base (id at 30) (e.g,, real property tax, VAT and 3% percentage tax) Distinctions of Tax from Other Forms of Exactions ee Failure to pay tax (other | No imprisonment for than poll tax) may result | non-payment of debt. | in imprisonment DETER | Generally payable in| Payable in money, mone) roperty, or service. Assignability er General, not subject | May bo subject 10 tocompensation or set- | compensation or set-off ot, (Please refer. to discussions, on Compensation or set-off Tax does not draw Interest except in case of delinquen Debt draws interest if stipulated or i the debtor incurs legal del Imposed, public [Imposed by private authority individuals, Een mined by NIRC. | Determined by the Civil Code. Toll Fees Eran) ‘A consideration which is. Paid for the use of a property which is of a Public nature. (e.g., road Tolls are. compensation support’ ofthe | for the cost and ‘government maintenance of the property used, EOI "The amount of tax is | The amount of the toll is determined by the | determined by the cost legislature. of the property or of the improvement Sc May only be imposed | Imposed — by the: by the State, government or private s individual, Fees paid by the public to toll way operators for the use of toll ways are not taxes. These are exactions Which end up as earnings of toll way operators, and ‘not the government. Taxes may be imposed only by the government under its sovereign authority. Toll foes may be demanded by either the government or private individuals or entities, as an attribute of ‘ownership. (Diaz v. Secretary of Finance, G.R. No. 193007, July 19, 2011) Doon 1A CENTRALIZED BAR OPERATIONS | 7GENERAL PRINCIPLES Il, As against Special Assessments eco Definition Enforced proportional | Enforced proportional contribution from | contributions from persons or property. | owners of_—_tands especially or peculiarly benefited by public improvements. [Taxes are levied on | persons, property | (which includes tand), | income, business, etc. Levied only on land, Personal liability of the taxpayer. ‘Cannot be made a | personal libity of tho | ‘Based on necessity and partially on benefits. Based benefits. solely ‘General application. fe plac Wha agsnat icnse rece tae Levied in the exercise of the taxing power. Primarily for Revenue. For Regulati EAI Limited to the cost of | 4. Issuance of licens and) 2. Inspection and ‘surveillance, except for on-useful occupation (Physical Therapy Organization of the PHL, Inc. v. Municipality Board of the City of ‘No limit Manila, GR. No. L- 10448, August 30, 1987) COT ‘Normally paid after the | Normally paid before the start of business | commencement of operations, | business operations. | 8 1 2018 SAN EDA CENTRALIZED BAR OPERATIONS —/ person ts Taxes, being lifeblood of the State, cannot be surrendered except for lawful consideration, Ticense foo may bo wih or without consideration, cee TO ‘Non-payment does not | Non-payment makes. make the the business illegal legal but ground — for prosecution, business may be criminal ‘Test in Determining Whether the Imposition is a Tax or a Fee If the generation of revenue is the primary purpose and regulation is merely incidental, the imposition is a tax; but ifregulation is the primary purpose, the fact position a tax (Progressive Devt. Corp. City, G.R.No, L-36081, April 24, 1989). Pry Pein a s x 4 3 a 8 | of law or acts deemed } injurious; violation of tax { laws may give rise to imposition of penalty criminally | commission of a crime. liabie: in taxation only ‘when he fails to satisfy his civil obligation to pay taxes (Republic v. | Patanao, GR. No. L- 22356, July 21, 1967) Purpose, Intended to raise | Designed to regulate revenue. conduct, | ET ‘May be imposed only | May be imposed by the: by the government. | 1. Government; or 2.Private individuals or entities. VI. As against Tariff ‘Al embracing term to, include various kinds of enforced contributions from persons for the ‘Akind of tax imposed on. articles which are traded | internationallyGENERAL PRINCIPLES [ attainment of public ee purposes. _ — Penalties Basic imposition on Persons, property, and eee ees nee fmroking wolsions fon ore, nea oF oe Levied by the law- making. body of the A legislative grant of money in aid of a private | State for the support of | enterprise deemed to | the government and for | promote the public public needs. welfare, ‘A source of revenue of the government. Importance of distinction It is important to differentiate tax ‘exactions, especially when it comes to prc issues on double taxation and tax exemptions a the jurisdiction of the Court of Tax Appeals: \2 a. If an exaction is not a tax, then the Yefenk taxpayer of double taxation will necegsari b. In the same manner, a tax-exempt corporation is generally only exempt fro taxes; hence, ifthe exaction is not a tax. nthe cases of fraud, at any time within ten (10) years, after the discovery of the fraud (IRC, Sec. 222). 2. For LGUs, five (5) year prescriptive period for assessment and collection (LGC, Secs, 194 and 270). N. Prospectivity of Tax Laws General Rule: Tax laws are prospective in application (CIVIL CODE, Art. 4; Commissioner of Internal Revenue v. PNB, G.R. No. 195147, July 11, 2016). Exception: When the language of the statute clearly demands or expresses that it shall have a retroactive effect (Lorenzo v. Posadas, G.R. No. L-43082, June 18, 1937) Retroactive application of revenue laws may also be allowed if it will not deny due process. There is Violation of due process when the tax law imposes harsh and oppressive tax (DIMAAMPAO, supra at ‘of Rulings iy fevocation, modification or (the rules and regulations, rulings wigated by the Commissioner ‘én retroactive application if it will be dnergte facts subsequently gathered by the IRple materially diferent from the facts on hic tho ruling fs based: or Teniea er copergn” tt Sl Bo, tea SUM, tmpayer ated In bad fat (MRC exaction (INGLES, Tax Made Less Taxing: A Reviewer with Codals and Cases (2018), p-“4) [hereinafter INGLES] Doctrines IN TAXATION 1. Imprescriptibility of Taxes General Rule: The right to assess and to collect are imprescriptible (Commissioner of Internal Revenue v. Ayala Securities Corp. G.R. No. L-29485, November 21, 1980), Excoptior limitations. ‘When the laws provide for statute of Examples: 1. Assessment of internal revenue taxes within three (3) years after the last day prescribed by law for filing of the return (NIRC, Sec. 203); in “Sec. 246). Uli, Doctrine of Equitable Recoupment This doctrine of law states that a tax claim for refund, which is prevented by prescription, may be allowed to be used as payment for unsettled tax liabilities if both taxes arise from the same transaction in which ‘overpayment is"made and underpayment is due (VALENCIA & ROXAS, supra at 38) Note: This doctrine is not applicable in our jurisdiction. The reason is that “if allowed, both the collecting agency and the taxpayer might be tempted to delay and neglect the pursuit of their respective claims within the period prescribed by law" (VITUG. & ACOSTA, supra at 46, citing Collector of Internal Revenue v. University of Sto, Tomas). IV. Compensation and Set-off ‘Compensation shall take place when two persons, in their own right, are creditors and deblors of each other (CIVIL CODE, Art. 1278) 2018 SAN BEDA CENTRALIZEGENERAL PRINCIPLES This presupposes mutual obligations between the parties, and that they are mutual creditors and debtors of each other (CIVIL CODE, Art. 1270(1)) General Rule: There can be no off-setting of taxes against the claims that the taxpayer may have against the government (INGLES, supra at 28) Reason: Taxes are not in the nature of contracts between the parties but grow out of duty to and are the positive acts of the government to the making and enforcing of which, the personal consent of individual taxpayers is not required (Republic v. ‘Mambulao, G.R. No. L-17725, February 28, 1962) Exception: if the obligation to pay taxes and the taxpayer's claim against the government are both overdue, demandable and fully liquidated, ‘compensation takes place by operation of law and both obligations are extinguished to their concurrent V. Compromise Acontract whereby the parties, by making reciprocal ‘concessions, avoid litigation or put an end to one already commenced (CIVIL CODE, Art. 2028). 1. Compromises are allowed and enforceable when the subject matter thereof is not prohibited from being compromised; and, 2. The person entering such compromise is duly authorized to do so. (VALENCIA & ROXAS, ‘supra at 39). Please refer to Tax Administration and NIRC Remedies for further discussion, Vi. Taxpayer's Suit A taxpayer is allowed to sue where: 4. There is a claim that public funds are illegally disbursed; or 2. That the public money is being deflected to any improper purpose: or amount (Clr, Toledo Power Ine. C.F. No 163060, That here wastage of publ funds through the January 20,2018) ment ofan inva or unconsttutona aw Sq, min, Jr -v. Cuts, GR. No. 10606, Thre can bo ool compensa puna 13,2605) ‘as long as all the requisites under Civil Code are present (RECALDE In order that compensation may ba Probert is necessary < 41. That each one of the obligerhbe botnd principally, and that he be at the gaméiline a principal creditor ofthe other, 2. That both debts consist in a sum the things due are consumable, 1 same kind, and also of the same'g latter has been stated; ‘That the two debts be due, ‘That over neither of them there be any retention ‘or controversy, commenced by third persons. ‘and communicated in due time to the debtor (CIVIL CODE, Art. 1279) The Government may be allowed to set-off taxpayer's claim for refund that has been finally adjudged by the courts in favor of the taxpayer as against a tax assessment that the Government issued to such taxpayer even if such assessment is, ‘not yet final and executory (Commissioner of Internal Revenue v. Cebu Portland Cement, G.R. No. L- 29059, December 15, 1987). (On the other hand, the taxpayer cannot claim the defense of compensation since the claim for refund was not yet liquidated and demandable. Such claim cannot be raised as a defense against a deficiency assessment. (RECALDE, supra at 19) 10 | 2016 SAN BEDA CENTRALIZED BAR OPERATION: varia Hiralea)e¥s ayf may be property brought only when ise by Congress of hs taxing oF wer — (Telecommunications and st Alforneys of the PHL, inc. v. Commission UR No. 132022, Apri 21, 1996). “one who will sustain a direct injury. in conseguente of its enforcement may contest the _ validity of a'statute (RECALDE, supra at 20) “Bidts:(Fho ght is based on the fact that “@xpeniiture of public funds by an officer for the pOSe of administering cr implementing an invalid ps That they be liquidated and demandable + ga ewer inconethalonal law a mapploaton of och funds (Gascon v. Arroyo, G.R. No. 78389, October 16, 1989) Requisites of a Taxpayer's Suit: (OVA) Public funds derived from taxation are Disbursed by a. political subdivision or instrumentality and, 2. Indoing 60, a law is Violated or some irreguiarity is committed 3. Petitioner is directly Affected by the alleged act (Bogetsing v. San Juan, G.R. No. 97787, August 1, 1996; Mamba v. Lara, GR No.” 165109, December 14, 2009) Mlustration: in Mamba v. Lara, the Court held that although the construction of the town center would be primarily sourced from the proceeds of the bonds, which respondents insist are not taxpayer's money, ‘a government suppor in the amount of P187 milion would still be spent for paying the interest of the bonds. Records also show that the governorGENERAL PRINCIPLES requested the Sanggunian to appropriate an amount ‘of P25 milion for the interest of the bond. Clearly, the first requisite has been met. ‘As to the second requisite, the Court, in recent ‘cases, has relaxed the stringent “direct injury test” bearing in mind that locus standi is a procedural technicality. In cases where serious legal issues were raised or where public expenditures of millions of pesos were involved, the Court did not hesitate to give standing to taxpayers, The Court finds no reason to deviate from the jurisprudential trend. The ‘amount involved in this case is substantial. Under the various agreements ratified by the Sanggunian, the province would incur costs totaling 231,908,232.39, Note: The decision to entertain a taxpayer's suit is discretionary upon the Court (I). Concept of Locus Standi as Applied to Taxation it may refer to ripeness for judicial determination: 1 cases involving expenditure of public taxpayer can have a standing to\sue, if ican be ‘shown that: : 1. He has sufficient interest in ipreventitg thé illegal expenditure of money raised in taxation: ‘and yy 2. He will sustain direct injury as @:resiit'of thé enforcement of the questioned statute (Bugaay Construction and Devt. Corp! v.' Judge Laron, G.R. No, 79983, August 10, 1989) = Direct Injury Test ‘ ‘The person who impugns the validity of a state! > must have a personal and substantial interest in the ‘case such that he has sustained or will sustain direct injury as a result (People v. Vera, G.R. L-No. 45685, November 16, 1937). However, being a mere procedural technically, the requirement of locus stand? may be waived by the Court in the exercise of its discretion (David v. Macapagal-Arroyo, G.R. No. 171396, May 3, 2006) Citizen's Suit Accitizen’s suit is a rule whereby any Filipino citizen in representation of others, including minors or generations yet unborn, may fle an action to enforce rights or obligations ‘under environmental. laws. Citizen's suits are filed under R.A. No. 8749 (An Act Providing for a Comprehensive Air Pollution Control Policy and for Other Purposes) and R.A. No. 9003 (An Act Providing for an Ecological Solid Waste Management Program, Creating the Necessary Institutional Mechanisms and Incentives, Declaring Certain Acts Prohibited and Providing Penalties, Appropriating Funds therefor, and. for Other Purposes) (A.M. No, 09-6-8-SC, Sec. 5). Bey aio Taxpayer's Suit distinguished from Citizen’s Si ET Plaintiff is affected by the expenditure of public funds, = ‘One is allowed to sue where there is an assertion that public funds are illegally disbursed or deflected to an illegal purpose or that | hasbeen lawfully there is wastage of | entitled or that he is Public funds through the | about to be subjected enforcement of an | to some burdens or invalid (or | penalties by reason of CET Plaintiff is a mere instrument of public concern. Person complaining must allege that he has been or is about to be denied some right or privilege to which he unconstitutional law. the statute or act __| complained ot. Ret complained — of | Petitioner, standing as involves iilegal | citizen, is’ able to craft disbursement of public| an" issue of, ferived from | transcendental | = importance or when D ne Paramount public 8 interest is involved. BR. NoH183591, October 14, 2008; Lozano v. a” 187883, June 16, 2009). frie of Transcendental Importance SMES Principle that the Court, in the exercise of its “sound /disefetion, brushes aside the procedural ‘barier and fakes cognizance of a petition (Chamber OF RealEstate and Builders’ Associations, Inc. “(CREBA)V. Energy Regulatory Commission (ERC) Arid Maffia Electric Company (Meralco), G.R. No. “474697. duly 8, 2010). ““f-cases of paramount importance where serious Constitutional questions are involved, the standing requirements may be relaxed and a suit may be allowed to prosper even where there is no direct injury to the party claiming the right of judicial review (Coconut Oil Refiners Ass'n., Inc. v. Torres, G.R. No. 182527, July 29, 2005). What determines the Principle of Transcendental Importance 1. The character of the funds or other assets involved in the case; 2. The presence of a clear case of disregard of a constitutional or statutory prohibition by the public respondent agency oF instrumentality of the government; or 3. The lack of any other party with a more direct land specific interest in raising the questions boing raised (Francisco, Jr v. House of Representatives, G.R. No. 160261, November 10, 2003). AN REDA CENTRALIZED BAR OPERATIONS | IL 2018GENERAL PRINCIPLES While the court has taken an increasingly liberal approach to the rule of focus standi, evolving from the stringent requirements of "personal injury” to the broader “transcendental importance” doctrine, such liberality should not be abused. It is not an open invitation for the ignorant and. the ignoble to file petitions that prove nothing but their cerebral deficit (Lozano v. Nograles, G.R. No. 187883, June 16, 2009). Principle Taxation General Rule: The Supreme Court can review judgments or orders of lower courts in all cases involving the legality of any tax, impost, assessment, ‘of toll, or any penalty imposed in relation thereto (CONST. Art. ti, Sec. 5(b)) of Judicial Non iterference in Exception: The courts cannot inquire into the wisdom of a taxing act, unless there is a violation of constitutional limitations or restrictions (ABAKADA Guro Partylist_v. Ermita, G.R- No, i September 1, 2005) 7 Vit inapplicabiity of Estoppel, Against othe’ Government EG General Rule: The Government is net boul ror errors committed by its agents. In the p of its governmental functions, the State cf estopped by the neglect of its agents ant (Commissioner of intemal Revenue. Go ‘Appeals, G.R. No, 106611, July 21, 1984) Reason: Life-blood theory Exception: The CIR is precluded from adopting &, Position inconsistent with the one previously taker Where injustice would result therefrom or swtiore there has been a misrepresentation to the ta . (Commissioner of Internal Revenue v. Benguet Corp., G.R. No. 145559, July 14, 2006) Vill, Power to Tax involves the Power to Destroy ‘The power to tax includes the power to destroy if it is used validly as an implement of the police power in discouraging and in effect, ultimately prohibiting certain things or enterprises inimical to the public welfare. But where the power to tax is used solely for the purpose of raising revenues, the modem view is that it cannot be allowed to confiscate or destroy. If this is sought to be done, the tax may be successfully attacked as an unconstitutional exercise of the discretion usually vested in the legislature in ascertaining the amount of the tax (CRUZ, Constitutional Law (2007), p. 88 {hereinafter CRUZ}. ‘The power to tax is sometimes called the power to destroy. Therefore, it should be exercised with Caution to minimize injury to the proprietary rights of 12 | 2018 SAN BEDA CENTRALIZED BAR OPERATIONS fa taxpayer. It must be exercised fairly, equally and Uniformly, lest the tax collector kill the “hen that lays the golden egg" (Roxas v. Court of Tax Appeals, G.R_No. L-25043, April 26, 1968) Note: But the “power to tax is not the power to destroy while this court sits” (Sison v. Ancheta, G.R. No. L-59431, July 25 1984). IX. Escape from Taxation (AVE:- SCTEx) The "doctrine of escape from taxation" permits the taxpayer to minimize (if not to escape) payment of tax by lawful means (VALENCIA & ROXAS, supra at 32), the same is effected through the following: Tax Avoidance; Tax Evasion; Shifting, Cepitalization, ‘Transformation; and Exemption. (5 dance — also called tax minimization. It e ing or totally excaping payment of taxes through legally pormissibie means (VALENCIA & 2 ROXAS. subg at 39) dice i the tax saving device within the ssetioned by law. This method should be iby tho taxpayer in good faith and at arm's (Commissioner of Internal Revenue v. AJtaxpllyer has legal right to decrease the ‘tse mount of what would otherwise be his taxes or _Zaltogather avoid them by means which the law permits (Delpher Trades Co. v. Intermediate Appellate Court, G.R. No. -69259, January 26, 1988), Example: Availing of all deductions allowed by law of refraining from engaging in activities subject to tax. 2. Tax Evasion ~ an illegal means of escaping taxation. It connotes fraud through the use of pretenses and forbidden devices to lessen or defeat taxes (Yutivo Sons Hardware v. Court of Tax Appeals, G.R. No. L-13203, January 28, 1961). Hence, it subjects the taxpayer to further of additional’ civil or criminal liabilities. Tax ‘evasion is sometimes referred to as tax dodging. ‘A scheme used outside of those lawful means ‘and when availed of, usually subjects the taxpayer to (further or additional) civil or criminal liabilities (Commissioner of Internal Revenue v. Estate of Benigno Toda Jr, G.R. No. 147188, September 14, 2004),GENERAL PRINCIPLES Elements of Tax Evasion: (ESC) 1. The End to be achieved, /.6., payment of less than that known by the taxpayer to be legally due, or paying no tax when itis shown that the taxis due, 2. An accompanying State of mind which is described as being evil in bad faith, wilful, oF deliberate and not coincidental; and 3. ACourse of action or failure of action which is unlawful (Commissioner of internal Revenue v. Estate of Benigno Toda Jr, G.R. No. 147188, September 14, 2004. Indi¢ia of Fraud in Tax Evasio 1. Failure to declare for taxation purposes true and actual income derived from business for two (2) consecutive years (Republic _v. Gonzales, G.R. No. L-17962, April 30, 1965): 2. Substantial under-declaration of income in the tax relums of the taxpayer for four (4) consecutive years. coupled with intent overstatement of deductions (Comra Of Internal Revenue v. Reyes, G.R. Nos. + 11534 and L-11558, November 25, 1958) ‘Tax Avoidance vs. Tax Evasion! Severe ey Logality, Accomplished by legal | Accomplshad procedures or means | breaking tnolter fH wanich may be contrary | lav oe to ihe intent of the law | te: yet do not volte the | letter of tho lav ‘Minimization of taxes. the absence of tax ee ments. 3. Shifting — The transfer of the burden of tax by the original payer or the one on whom the tax was assessed or imposed (impact of taxation) to another (incidence of taxation). Note: Only indirect taxes, as opposed to direct, taxes, may be shifted (CIR v. PLOT, G.R No. 140230, December 15, 2005). Indirect Taxes - the liability for the payment of the tax remains with the taxpayer, but the burden thereof is shifted or passed on to the purchaser (eg. VAT, excise tax, other percentage tax, documentary stamp ax). ‘The imposition of indirect taxes is not a violation of the principle that taxes are personal liabilities, =P Gagne at seaton pot nw ea "Almost always results in | the payment of which cannot be transferred to another person. When the seller passes on the tax to his buyer, he is only shifting the tax burden (not the liability to pay it) to the purchaser as part of the costs of the goods sold or services rendered (ABAN, supra at 24). ‘The Constitution does not prohibit the imposition of indirect taxes like the VAT. The Constitution hhas been interpreted to mean simply that direct, taxes are to be preferred and as much as Possible, indirect taxes should be minimized (Tolentino v. Secretary of Finance, G.R. No. 115455, October 30, 1996). Direct Taxes - those that cannot be shifted and are exacted from the very person who, it is intended or desired, should pay them’ (eg. income tax) (DIMAAMPAO, supra at 142). Impact of Taxation — point on which tax is ly imposed; falls on one on whom the tax lly assessed. finally rests or settles down, Fation: In VAT wherein the seller is required to! pay tax, but the burden is actualiy d oF passed on to the buyer. £ _ impact vs. Incidence aoa eS : ‘As to what it refers to cee the initial | Refers to the ultimate of | burden of the tax. a Borden!” texauchnabity 1 As towhen itoccurs ‘Occurs at the point of ] Occurs at the point of imposition. settlement. I CR Rests upon the person ] Rests on the person who. Pays it eventually. from whom the tax is Sn] | collected, 1 {May be shifted. It Is essential to know where the Impact of taxation lies because it generally determines: 1. The proper party to claim a refund of erroneously Imposed indirect taxes; and 2, Whether the indirect taxes can be passed on to an exempt buyer (INGLES, supra at 7). Kinds of Shifting: a. Forward shifting — when the burden of tax is, transferred from a factor of production through RALIZED BAR OPERATIONS (13GENERAL PRINCIPLES MEMORY Alp 2018 the factors of distribution unti it finally settles, ‘on the ultimate purchaser or consumer. b. Backward shifting ~ when the burden is transferred from the consumer through the factors of distribution to the factors of production. ¢. Onward shifting — when the taxis shifted two ‘or more times either forward or backward (VALENCIA & ROXAS, supra at 34-35) 4. Capitalization ‘The reduction in the price of the taxed object is ‘equal to the capitalized value of future taxes, which the purchaser expects to be called upon to pay. (VALENCIA & ROXAS, supra at 35). ‘Tax capitalization is made when the price of the property is lowered to accommodate the exclusion of the tax which is expected to be paid by the seller as a result of sale transaction (Id. at 38) ae Example: Capital expensés.jncurred educational institutions. for the: expahsian of Scheel actos (MIRC, Sec. AHN2),. SAN & 5. Transformation e co The manufacturer or producer ui tax has been imposed, fearing: 4 mmarkat fhe should aadthe tx tothe pe tain aden fer Pe by improving his process of wean producing his units at a lower cost % at e 6. Tax Exemption The grant of immunity, express or cored ie contractual), to particular persons or corporations ‘his 2, pays: ‘oF to persons or corporations of a particular-class. from a tax which porsons or corporations generally within the same state or taxing district ‘are obliged to pay (Greenfield v. Meer, G.R. No. 156, September 27, 1946). Reason: The inherent power of the state to impose taxes naturally carries with it the power to ‘grant tax exemptions, The power to exempt from taxation, as well as the power to tax, is an essential attribute of sovereignty, and may be exercised by virtue of the Constitution, expressly ‘oF by implication (DIMAAMPAO, supra at 124- 125) Principles Governing Tax Exemptions Tax exemptions, including its equivalent provisions such as deductions, tax amnesty and tax condonations shall be governed by the following principles: 4. They are not presumed (Floro Cement Corp. v. Gorospe, G.R. No, L-46787, August 12, 1991) 14/2018 SAN Bs NTRALIZED BAR OPERATIONS. 2. When granted, they are striclly construed against the taxpayer (Luzon Stevedoring Corp. v. Court of Tax Appeals, G.R. No. L- 30232, July 29, 1988). 3. They are highly disfavored and may almost be said to be directly contrary to the intention of the tax laws (Manila Electric Co. v. Vera, G.R. No. L-29987, October 22, 1975) 4. He who claims tax exemptions must be able to justify his claim or right (Commissioner of Internal Revenue v. P.J. Kiener Co., LTD., GR. No, L-24754, July 18, 1975) Principle of | Strictissimi Exemption Laws granting tax exemption are construed in Strictissimi juris against the taxpayer and liberally in favor of the taxing power. Taxation is the rule and exemption is the exception. The law does not look with favor on tax exemptions and that he who would seek to be privileged must justify it by too plain to. be mistaken and too ical to, be misinterpreted (Sea-Land , Ines 9Court of Appeals, G.R. No. 14, 1993; Philippine Amusement “Cop. v. Bureau ‘of internal ue, G.R. No. 172087, March 15, 2011) Juris in Tax forsffor the Application of Strictissim! fe blood theory (DIMAAMPAO, supra at 2): ‘0 mbimize differential treatment and foster ~ jmpatialty, faiess and equality of treaiment Jamofg taxpayers (Maceda v. Macaraig J / GRINo, 88291, June 8, 1993); and As, Taxélion is a high prerogative of sovereignty “whose “relinguishment is never presumed Aliuzon Stevedoring Co. v. Court Tax of ‘Appeals, G.R. No, L-30232, July 29, 1988). Exceptions to the Application of Strictissimi Juris: (DIMAAMPAO, supra at 127). 1. When the statute granting exemption provides for liberal construction thereof; 2. In case of special taxes relating to special cases and affecting only special classes of persons: 3. If exemptions refer to the public property: 4. In cases of exemptions granted to religious, charitable and educational institutions or theit property; 5. In cases of exemptions in favor of the government, its political subdivisions or instrumentaiities; and 6. Ifthere is an express mention or i the taxpayer falls within the purview of the exemption by Clear legislative intent (Commissioner of Internal “Revenue v. Ammoldus Carpentry Shop, Inc., GR. No, 71122, March 26, 1988).GENERAL PRINCIPLES MOBY Ait Kinds of Tax Exemption: 1. Express ~ exemptions are expressly granted by the Constitution, statutes, treaties, franchises or similar legislative acts; The following are examples of statutory tax exemptions are! a. Inter-corporate dividends by a domestic corporation from another domestic corporation (IIRC, Sec. 27(D)); b. Conditionally-Free Importations (Tariff and Customs Code, Sec. 105); cc. Exemptions from Real Property Tax. (R. A. 7160, Sec. 234) d. Other special laws such as Omnibus Investment Code of 1987 (Executive Order 226); Philippine Overseas Shipping Act (R.A. No.1407) (VITUG & ACOSTA, supra at 34). 2. Implied — whenever particular persons, properties, or excises are deemed exempt as. they fall outside the scope of the taxing provision itself; and 3. Contractual — tax exemption in consid B contractual agreement with ihe goverdment,, ., ¢5 The, burton of NB Eexettintion | His bidiny | Contractual tax exemptions ‘ymust tt. a confuse wit he tax exompons gran franchises, wich are net conras mfinl tne purview of tho, non-impaiment mee eethe Constitution. "Contractual tax exemptions are those lawfully entered into by the goverment in contracts under existing laws (Cagayan Powor & Light Co, Inc. v. Commissi Intornal Revenue, GR. No. L-60126, Se} 25, 1985) ‘A tranchise 's a special priviege conetied BYU governmental authority, acting as suchen! an Undertaking that governmental functions. Contractual tax exemptions covering matters that are not essentially governmental in nature, such as those contained in government bonds or debentures, unlike in franchises, may not be revoked without impairing the obligations of contracts (VITUG & ACOSTA, supra at 35). Revocation of Tax Exemptions Since taxation is the rule and exemption is the ‘exception, the exemption may thus be withdrawn at the pleasure of the taxing authority (MCIAA v. Marcos, G.R. No. 120082, September 11, 1996). However, if the tax exemption constitutes a binding contract "and for valuable consideration, the government cannot unilaterally revoke the tax ‘exemption (DIMAAMPAO, supra at 99). Note: Police power provails over non-impairment ‘clause (Oposa vs. Factoran, G.R. No. 101083, July 30, 1993) is within the scope “Gf Restrictions on Revocati 1. Non-Impairment Clause ~ where the exemption was granted to private parties based on material consideration of a mutual nature, it then becomes contractual and is covered by the non-impairment clause of the Constitution 2. Adherence to form ~ if the tax exemption is granted by the Constitution, its revocation may be effected through constitutional amendment only. 3. Where the tax exemption grant isin the form of @ special law and not by a general law, even if the terms of the general act are broad enough to include the codes in the general law unless there is manifest intent to repeal or alter the special law (Province of Misamis Oriental v. Cagayan Electric Power & Light Co. Inc., G.R. No. L- 45388, January 12, 1990). Tax Refunds Tax refunds are in the nature of tax exemptions Thoy are regarded as a derogation of sovereign and to be construed strictissimi juris person or entity claiming the exemption. is upon him who claims the in hi& favor and he must be abie to justify li By the cloarest grant of organic statute ‘Lumber Corp. v. Commissioner of Roe ue, GR. No. 117359, July 23, 1998). ffnesty is a general pardon othe intentional f60King by the State of its authority to impose orallies off persons otherwise guity of violating a -taxtaw. t¥partakes an absolute waiver by the goverhment of its right to collect what is due it and to sgivetax evaders who wish to relent a chance to start with @ clean slate (Asia International Auctioneers, Ine. v. Commissioner of intemal Revenue, G.R. No S79148, Soptombor 26, 2012) Rules on Tax Amnesty: 1. Like tax exemption, it is never favored nor presumed and construed strictly against the taxpayer (the taxpayer must show complete ‘compliance with the law) (Luzon Stevedoring Co. v. Court of Tax Appeals, G.R. No. L-30232, July 29, 1988); 2, The government is not estopped _ from questioning the tax liability even if amnesty tax payments were already received; and Reason: Erroneous application and enforcement of the law by public officers donot block subsequent correct application of the statute. The government is never estopped by mistakes or errors of its agents, ‘There could be NO tax amnesty granted by the President of the Philippines because the same is in the nature of tax exemption, which could be granted only by a concurrence of Congress NTRALIZED BAR OPERATIONS | 15,GENERAL PRINCIPLES SAN BEDA ME AORY AID 2018 (People v. Castaneda, GR. No. 1-46881, ‘September 15, 1988) 3. Defense of tax amnesty is a personal defense, Reason: Relates to the circumstances of a articular accused and not the character of the acts charged in the information. To avail of a tax amnesty granted by the Government, and to be immune from suit on its delinquencies, the taxpayer must have voluntarily disclosed his previously untaxed income and ‘must have pald the corresponding tax on such previously untaxed income (Baflas, Jr. v. Court of, Appeals, G.R. No. 102967, February 10, 2000) Tax Exemption vs. Tax Amnesty Tax exemption i teecom, munity, or privilege from the burden of taxation to which thors are Hee eee tele eg ni oh abooute frgvenocs, waiver oxerlee of epee dinate Collect’ past due and unpaidtax cofectbies, Including. posable penal on persons sl tvasion of Volto of 8 revenue eesti! tax eveders who wish to relont ot are TO Teform a chance todo so (ABAN, sue aft ¥8N)- Tax Exclusions \ Both in their nature and in their effect, there is! no citerence between tax exertion and Exompton an timunty o vig froma charge.‘ bursen to wich ater Nitjectod” Exctuston on tho” alter had Temovel of aihrwi taxable tems rom Me rea teraion (eg onctsione om prose stowsbe éetuctons) Exons ts Bao Ni BEF SPB), his exemption therefor (Commissioner of Internal Revenue v. Court of Appeals, G.R. No, 115349, April 18,1997), Willful Blindness Doctrine A taxpayer can no longer raise the defense that errors on their tax returns are not their responsibility or that it is the fault of the accountants they hired (INGLES, supra at 18). X. Double Taxation ‘An act of the sovereign by taxing twice for the same Purpose in the same year upon the same property or activity of the same person, when it should be taxed ‘once, for the same purpose and with the same kind, of character of tax (VALENCIA & ROXAS, supra at 31). In the broad sense, double taxation means indirect duplicate taxation. it extends to all cases in which here are two or more pecuniary impositions, The 0 does. not prohibit the imposition of ton in, the broad sense (Villanueva v. ilo, GiR~No. L-26521, December 28, lug poithing nol avoredbuis novertholess jermissibie (VALENCIA & ROXAS, supra at 31). Double Taxation: (DFL) licate Taxation / Obnoxious / tlopable / Prohibited (Strict sense) — itis onable kind of double taxation in its, Sense, since it violates the equal clause of the Constitution (City of ° fect Baguio’. De Leon, G.R. No. L-24756, October Gor 31, 1968) 1@ Same property or subject mattor is taxed it Sian aie imonitor poy which tessa taxpayer Ramegesene=— Se Te sama property oy subject malt charge to which others are subjected. Consequently, the rule that tax exemption should be applied in strictissimi juris against the taxpayer and liberally in favor of the government applies equally to tax ‘exclusions (Philippine Long Distance Telephone Co,, Inc. v. City of Bacolod, G.R. No. 149179, July 15, 2005), Rule that Tax Statutes Construed Strictly Against Government Prevails Over Rule on Exemption Construed Strictly Against TaxpayerThe CIR erred in applying the principles of tax exemption without first applying the well-settled doctrine of strict interpretation in the imposition of taxes. It is both illogical and impractical to determine who are exempted without first determining who are covered by the aforesaid provisions, As such, it must bbe determined first if the person is covered by the tax law, applying the rule of strict interpretation of Jaws imposing taxes and other burdens on the populace, before asking the same person to prove 16 | 2018 SAN BEDA CENTRALIZE !AR OPERATIONS b. Both taxes are levied for the same purpose; and c. Imposed by the same taxing authority i. Within the same jurisdiction; During the same taxing period: and li, Covering the same kind or character of tax (Vilanueva v. City of tole, G.R No, L- 26521, December 28, 1968). Mlustration: The City of Manila imposed local business tax on manufacturers of liquors, distilled spirits, and wines and local business tax on businesses subject to excise, VAT, or percentage tax under the NIRC. The Court held that there is direct duplicate taxation if respondent is subjected to the two local business taxes, since these are being imposed: (1) on the same subject matter — the privilege of doing business in the City of Manila; (2) for the same purpose — to make persons.GENERAL PRINCIPLES conducting business within the City of Manila contribute to city revenues; (3) by the same taxing authority ~ petitioner City of Manila; (4) within the same taxing jurisdiction — within the territorial jurisdiction of the City of Manila; (5) for the same taxing periods — per calendar year, and (6) of the same kind or character — a local business tax imposed on gross sales or receipts, of the business (Nursery Care Corp. v. Acevedo and the City of Manila, G.R. No. 180651, July 30, 2014). Indirect Duplicate Taxation / Broad Sense ~ It extends to all cases in which there is a burden of two or more pecuniary impositions. It is usually allowed as long as there is no violation of the equal protection and uniformity clauses of the Constitution (VALENCIA & ROXAS, supra at 31). Examples: 6. A tax upon a corporation forts property ang upon its shareholders for their shar Atax pon te same Dopey imposed different states; and ftax on a morigage as porsbpal pronertfigh Upon the mortgaged property es real‘estate. “ International Juridical Double Taxation — the imposition of comparable taxes int two\or more states on the same taxpayer in respect of the ‘same subject matter and for identical peice (Commissioner of intemal Revenue Wi Johnson & Son, Ine., G.R. No.127105, June 25 1999). b ae B ‘This double taxation usually takes plage when & orson is a resident of the fist contracting Stale fand derives income from, or owns capital in the ‘other contracting State and both States impose” taxes on such income or capital. In order 16 eliminate double taxation, the two contracting States enter into a tax treaty (Id.)., International juridical double taxation only ocours when the State of residence of the taxpayer imposes tax on the income of said taxpayer from sources within and without their State (Id). Reason for Avoiding International Juridical Double Taxation: To encourage the free flow of, goods and services and the movement of capital, technology and persons between countries, conditions deemed vital in creating robust and dynamic economies (Id). Local Double Taxation — happens when an LGU will impose a tax that is already imposed by the National Government or by another LGU that has territorial jurisdiction over such LGU (RECALDE, supra at 66). To avoid “local double taxation,” Congress Prevents LGUs from imposing taxes which are already imposed by the National Government ‘unless otherwise provided in the Local Government Code.” This limitation, known as the pre-emption rule, is common to all LGUs (Id. at 66) ‘The Philippine tax system provides for certain schomes in order to avoid'or minimize the harsh or burdensome effects of double taxation. The means, however, depend on whether there is international double taxation or local double taxation (1d. at 65: Modes of Relief from Double Taxation: (CREDT) ‘Tax Credits — an amount is subtracted from an individual or entity's tax liability to arrive at the total tax liability. Reduction of the Philippine Income Tax Rate = an example is the Tax Sparing Rule wherein idend earned by a non-resident foreign tion (NREC) within the Philippines is jUECH by imposing a lower rate of 15% (in lieu he 30%).10h. the condition that the country to ich’the NREC is domiciled shall allow a credit 3 thejtax due from the NRFC, which taxes. emit to have been paid in the Philippines Sec. 28(8)(5)(b); Commissioner of 1al Revenue v. Procter & Gamble, G.R. No. 8, December 2, 1991) Exemptions — a grant of immunity to Pipadiculat persons or corporations from. the “Spbligation to pay taxes, juctions — the amount of tax is written off fox tf@ted. 28 deduction from an individual or entity's “gross income on which the resulting _aitrount the tax liability is calculated. Please refer to illustration of Tax Credit v. Tax Deduetion. 5. Tax Treaties — an agreement between two countries specifying what items of income will be taxed by the authorities of the country where the income is earned Methods Resorted to by a Tax Treaty in Order to Eliminate Double Taxation First Method: An exclusive right to tax is conferred in one of the contracting states; however, for other items of income or capital, both states are given the fight to tax although the amount of tax that may be imposed by the state of source is limited. Second Method: The state of source is given a full ‘or limited right to tax together with the state of residence. In this case, the treaty makes it incumbent upon the state of residence to allow relief 20I6 SAN BEDA CENTRALIZED BAR OPERATIONS 117GENERAL PRINCIPLES in order to avoid double taxation (DIMAAMPAQ, ‘supra at 147-148) ‘Two Ways under the Second Method: Exemption Method — the income or capital, which is taxable in the stale of source or situs, is exempt in the state of residence, although’ in ‘some instances it may be taken into account in determining the rate of tax applicable to the taxpayer's remaining income or capital (Id). (This may be done by using the tax deduction method, Which allows foreign income taxes to be deducted from gross income, in effect, exempting the payment from being further taxed). The focus here is on the income or capital itself, 2, The Credit Method — although the income or capital, which is taxed in the state of source, is, stil taxable in the state of residence, the tax paid in the former is credited against the tax levied in the latter (Commissioner of Internal Revenue v. S.C Johnson & Son Inc., G.R. No.127% 25, 1999). The focus is on the'tax. go SAN Bi Jos Most Favored Nation Clause tnt. Treal tet MSC ioisse OF WAHotad ‘The purpose of the most favored ation éla grant to the contracting party tre favorable than that which has granted to the "most favored” among, or subjects of the contracting nations flay ef privileges accorded by either party to $hose.p most favored nation (Commissioner’ of Ih Revenue v. S.C Johnson & Son Ync., WG No.127108, June 25, 1999). While the State has an interest in swift collection of the tax, its power to tax is by no means absolute. The power of taxation, no matter how vigorous it may be, has its limitations. Such limitations may either be inherent in the exercise of the power itself or imposed by the Constitution (RECALDE, supra at 35-36). Inherent and Constitutional Limitations Inherent Limitations (PENIS) ‘Public Purpose: Exemption of the Government: Non-delogabilty of the taxing power: International Comity Situs oF Terstorialty (ABAN, supra at 53). Constitutional Limitations A. General or Indirect: (JIP-F2LED) 16 | 2018 SAN BEDA CENTRALIZED BAR OPERATIONS, 1. No taking of private property without Just compensation; Non-Impairment of obligations of contract Presidential power to grant reprieves, ‘Commutations and pardons, and remit fines and forfeitures after conviction by final judgment, Ereedom of speech and expression: Freedom of religion: Law-making process; Equality of taxation and requirement of uniformity and equitabilty of taxation; and Due process, }. Specific or Direct (UP-NOV-TReVoRS-SLN) | Uniformity and equitability; Progressive system of taxation; ‘Non-imprisonment for non-payment of poll tax; Origin of revenue or tariff bis and appropriations Veto power of the President; Delegated authority of President to impose rates, import and export quotas, tonnage hartage dues; exemption of charitable institutions, parsonages or convents thereto, mosques, non-profit Reterigs and all lands, buildings | and in re actually, directly, and exclusively 13 fof Religious, charitable or educational a. fgn-use of public money or property for ligids purposes; ohistion on use of tax levied for Special ‘ap /pupepo of special assessments: ‘Supreme Court's power to review judgments or ‘orders of lower courts; 12-Grant of taxing authority to LGUs; and siee413. Tax exemption granted to Non-stock, non-profit ‘educational institutions (id. at 66). |. Inherent Limitations ‘Those which proceed from the very nature of the taxing power itself They are otherwise known as elements, tenets, or characteristics of taxation (DIMAAMPAO, supra at 40). {A violation of these inherent limitations can amount to the taking of property without due process of law (Pepsi-Cola Bottling Co. v. Municipality of Tanauan, Leyte, G.R. No, L-31156, February 27, 1976). Hence, in this sense, it can be said that any tax law ‘contravening any limitation of taxation, in effect, will likewise be unconstitutional (VITUG' & ACOSTA, supra at 5) A. Public Purpose The term “public purpose” is not defined. It is an elastic concept that can be hammered to fit modern standards. Jurisprudence states that “publicGENERAL PRINCIPLES AK BEDA purpose” should be given a broad interpretation. It does not only pertain to those purposes which are traditionally viewed as essentially governmental functions, such as building roads and delivery of basic services, but also includes those purposes designed to promote social justice (Planters Products, Inc. v. Fertiphil Corp., G.R. No. 166006, March 14, 2008). Public use is no longer confined to the traditional notion of use by the public but held synonymous with public interest, public benefit, public welfare, and, public convenience (Commissioner of intemal Revenue v. Central Luzon Drug Corp, G.R. No. 159647, April 15, 2005). ‘The phrase has now been broadened to cover uses which redound to the general public indirect advantage or benefit (CRUZ, Constitutional Law (2015), p. 149-150) Itis the essential character of the direct object of the expenditure, which must determine its Incidental advantage to the publigrr the St results from the promotion of private inter not lastly ther a by the useeaf pubic (Pascual v. Secretary of Public Wc 10405, December 28, 1960). ‘The legislature may determine withh bounds what is necessary for its pot expedient for the promotion of It ee of international law that a foreign gov may nol be sued without ils consent trould be useless to impose a tax wi David, G.R. No. 159402, February 23, 2011) C. Non-delegation of Taxing Power General Rule: Delegata potestas non potest delegare (a delegated power cannot be further delegated). Since the power of taxation is a power that is exercised by Congress as delegates of the people, then as a general rule, Congress could not redelegate this delegated power (VITUG & ACOSTA, supra at 11). Basis: Delegated power constitutes not only a right but also a duty to be performed by the delegate through the instrumentality of his own judgment and rot through the intervening mind of another. The following matters cannot be delegated by Congress: ‘Selection of property or transaction to be taxed; Determination of purposes; Rate of taxation; and, Rules of taxation (ABAKADA Guro Party List v Ermita, G.R. No, 168056, September 1, 2005) 1B SAN BEDA CENTRALIZED Bal could not be collected (Air Transportation Offige 'v. Sps._ Exceptions: (PAL) 1. Delegation to the President ~ delegation of: (TE) a. Tarif powers by Congress under the flexible tariff clause (CONST. Art. VI, Sec. 28, Par. 2); and, b. Emergency powers (CONST: Art. VI, Sec. 23, Par. 2) 2. Delegation to Administrative agencies - also known as the power of subordinate legislation, subject to the following tests: a. Completeness Test - the law must be ‘complete in all its essential terms and conditions when it leaves the iegislature so that there will be nothing left for the delegate todo when it reaches him except to enforce it (CRUZ, Philippine Political Law (2014), p. 176), b. Sufficient Standard Test ~ the law must offer ‘a sufficient standard to specify the limits of the delegate’s authority, announce legislative land specify conditions under which itis ation 36. Local Government — the tion grants each LGU the power to create soytces of revenue and levy taxes, fees tharges, which shall accrue exclusively to U (CONST. Art. X, Soc. 5) F cptnod wth no power of toxaion. I chatet stal{te must clearly show an intent to confer offer or the municipal corporation cannot gésume and exercise it, and that any such power “granted must be constiued strictly, any doubt or mbguily arising from the terms of the grant to fesolved against the municipality (Pepsi-Cola © symm“ Bottling Co. v. City of Butuan, G.R. No. L-22814, August 28, 1968). Limitations of the Exceptions: The delegation shall not contravene any constitutional provisions or the inherent limitations; . 1. The delegation is effected either by the Constitution or by validly enacted legislative measures or statutes; and 2. The delegated levy power, except when the delegation is by an express provision of the Constitution itself, should only be in favor of the local legislative body of the local or municipal government concemed (VITUG & ACOSTA, supra at 9) D. Exemption of the Government The inherent limitation of exemption of government from tax covers: 1. Government entities; 2. Government agencies; and 3. Government instrumentalites.GENERAL PRINCIPLES Government Entities (Government of the Republic of the Philippines) Itrefers to the corporate governmental entity through which the functions of the government are exercised throughout the Philippines, including, save as the ‘contrary appears from the Context, the various arms through which the political authority is made effective in the Philippines, whether pertaining to the autonomous regions, the provincial, city, municipal or barangay subdivisions. or other forms of local ‘government (REV. ADM. CODE, Sec. 2) Reason: Properties of the national government as ‘well as those of the local government units are NOT subject to tax, otherwise, it will result in the absurd situation of the government "taking money from one pocket and putting itn another.” Hence, it would not be serve the purpose of taxation. {COOLEY on Taxation, Sec. 621, 4th ed. as cited in Board of Assessment Appeals of Laguna v. Court of Tax ‘Appeals, G.R. No. L-18125, May 31, 1963). ‘As amaiter of public policy, property of the States ofits municipal subdivisions devoted to go uses and purposes is generally deemed to. be ‘exempt from taxation although no @xpress. provision" in the law is made therefor (51 An’. Yur. 503): oa The Constitution is silent on whether Congress is prohibited from taxing the properties of the agencies Of the government. Therefore, nothing can. prevent the Gongress trom decreeing | that, even instrumentalities or agencies of the govertiniertisy performing governmental functions may be to tax. I is wellaccepted principle th Government may tax itself (1 DIZON, supra at Bisaya Land Transportation Co., “Inc. Commissioner of Internal Revenue, G.R.\Nos. 12100 and L-11812. May 29, 1959). operational autonomy, usually through @ charter (REV. ADM. CODE, Sec.2) Examples: 1. Philippine Fisheries Development Authority (PFDA) (Philippine Fisheries Dev't. Authority v. The Municipality of Navotas, G. R. No. 150301, October 2, 2007); and 2, Manila International Airport Authority (MIAA). ‘The SC held that the real properties of MIAA are. ‘owned by the National Government and thus ‘exempt from real estate tax. It considered MIAA aS @ government instrumentality under Sec. 133(0) of the LGC which provides that exercise of the taxing powers...shall not extend to the levy of: “taxes, fees or charges of any kind on the National" governinent, its agencies. and instrumentalities and local government units” (Manila Int'l. Airport Authority v. Court of Appeals, GR. No. 155650, July 20, 2006). reduce the amount of money that has to be JY" hafidled bythe government in the course of its tions} (Meceda v. Macaraig, G.R. No. , lune 8, 1983). = fe: However, the Constitution is silent on whether Ref Pretest tng ne eperin fhe Zjgncies of to government. Therefore, nothing ‘can pevert Congress from decreeing that even ‘ F the Rule on Exemption: the functions of the government shall not \ be uhidly ee (51 Am. Jur. §50-51); and instryfentalities or agencies of the government @perférming! governmental functions may be subject to fax (Mactan Cebu Intl. Airport Authority v. Marcos, G.R. No. 120082, September 11, 1996). ‘ssageste"PuFsuant to the provisions of the NIRC, the National Government Agencies W refers to any of the various units of the ‘government, including a department, bureau, office, instrumentality, or government-owned or controlled corporation (GOCCs), or a local government or a district unit therein (REV. ADM. CODE, Sec. 2). Taxability of Government Agencies: 1. Agencies performing governmental functions are ‘exempt from tax unless expressly taxed, 2. Agencies performing proprietary functions are ‘subject to tax unless expressly exempted (DIMAAMPAO, supra at 59) Instrumentality of the Government It refers to any agency of the National Government, ‘not integrated within the department framework, vested with special functions or jurisdiction by law, endowed with some if not all corporate powers, administering special funds, and enjoying Government may levy income" tax corporations, agencies and instrumentalities owned ‘or controlled by the government subject to exceptions as provided therein (NIRC, Sec. 27(C)) However, income derived by the government from ‘any public utility and from the exercise of any ‘essential governmental functions are exempt from income tax (NIRC, Sec. 32(B)(7)(b). upon Unless otherwise provided by law, the exemption applies only to government entities through which the government immediately and directly exercises its government powers (Infantry Post Exchange v. Posadas, G.R. No. 33403, September 4, 1930). Government-Owned or Controlled Corporations, (Goccs) Refers to any agency: 1. Organized as a stock or non-stock corporation; 2OIS SAN BEDA CENTRALIZED BAR OPERATIONS | 21GENERAL PRINCIPLES 2. Vested with funetions relating to public needs, whether governmental or proprietary in nature: and 3. Owned by the Government directly through its instrumentalities either wholly, or where applicable as in the case of stock corporations, to the extent of at least 51% of its capital stock (REV. ADM. CODE, Sec. 2) Taxability of Goccs AGOCC is generally subject to tax, except that the following are not subject to income tax: Government Service Insurance System (GSIS); Social Security System (SSS); Philippine Health Insurance Corporation (PHIC); Local Water Districts (LWDS); and, Philippine Charity Sweepstake Office (PCSO) (NIRC, Sec. 27(C), as amended by R.A. No. 10026) open Note: See case of Mactan Cebu International Airport Authority v. Marcos, G.R. No. September 11, 1996, where MCIAA was c: ‘a8 a GOCC and thus not exenipt fom real property. COLLEGE tax. xX Not jection 13 of PD 1869 states that p: contractees and licensees exempls them, payment of any other taxes, including cbtporate’ income tax (Bloomberry Resorts and Hotels inc. |vs. BIR, G.R. No. 212530, August 10, 2016). Unless otherwise provided herein, the! exe the taxing powers of provinces, cities, minicip and barangays shall not extend to the levy of following: xx (0) Taxes, fees or charges often kit ‘on the National Government, its agencios. and instrumentalities and local government units: No. 7160, Sec. 133) E. Territoriality or Situs of Taxation Situs of Taxation Itis also known as place of taxation. It is the place or authority that has the right to impose and collect taxes (Commissioner of Internal Revenue _v. ‘Marubeni Corp., G.R. No. 137377, December 18, 2001). General Rule: A state may not tax property lying outside its borders or lay an excise or privilege tax Upon the exercise or enjoyment of a right or privilege derived from the laws of another state and therein ‘exercised or enjoyed (51 Am. Jur. 87-88). Reasons: 1. Taxing power of a country is limited to person and property within and subject to its jurisdiction (DIMAAMPAO, supra at 47); and {018 SAN BEDA CENTRALIZED BAR OPERATIONS. 2. Benefits-Protection Theory, Exceptions: : 1, Where tax laws operate outside territorial jurisdiction (DIMAAMPAO, supra at 47); of Example: Taxation of resident clizens and domestic corporations on their income from ‘sources without the Philippines, 2. Where tax laws do not operate within the territorial jurisdiction of the state: a. When exempted by treaty obligations; or b. When exempted by international comity (DIMAAMPAO, supra at 47). Factors that Determine Situs: (K-PRICE) 1. Kind or classification of the tax being levied; 2. Situs of the thing or Property taxed; 3. Residence of the taxpayer, 4. Source of the Income; ship of the taxpayer; and the Excise, privilege, business or ‘occupation being taxed (ABAN, supra at 61). CSitis 86 Subjacts of Tax: fons ~/poll, capitation, or community taxes séd/upon the residence of the taxpayer, lesg of the source of income or location of ‘operty of the taxpayer. “Property 2 Real property ~ lex rei sitae or lex situs Awmere the property is located). b, Tangible personal property — where the property is physically located although the ‘Owner resides in another jurisdiction (51 Am. sr-457), “intangible personal property ~ General Rule: Mobilia sequuntur personam (movables foliow the person). The situs is the domicile of the owner Exceptions: 1. Franchise exercised in the Philippines; 2. Shares of stock, obligations, bonds issued by domestic corporations organized and constituted in accordance with Philippine laws: 3. Shares, obligations, bonds issued by a foreign corporation where 85% of its business is located in the Philippines. It is Subject to donor's tax and estate tax; 4, Shares, obligations, bonds issued by foreign ‘corporations which has acquired business situs, when such have been used in the furtherance of the business of the foreign corporation; and 5, Share's rights in a partnership business or industry established in. the Philippines (DIMAAMPAO, supra at 49)GENERAL PRINCIPLES mORY AID 2018 3. Income — Factors that determine the situs of income tax (NIRC, Sec. 23): 1. Nationality or citizenship of the taxpayer; 2. Residence or domicile of the taxpayer: and 3. Source of the income i.” From sources within the Philippines ~ all kinds of taxpayers are subject to income tax on income derived from sources within the Philippines, li, From sources without the Philippines — ‘only resident citizens and domestic corporations are liable to income tax. Partly within and partly without the Philippines ~ taxable income attributable to sources within the Philippines may be determined by processes or formulas of general apportionment prescribed by the Secretary of Finance. it 4. Excise or Privilege upon the performance of an act or the engaging in an occupation — depends upon the place where th performed or occupation isvenigaged in tupon the domicile of the subj excise nor upon the physi property and. in connection cocupation taxed) (Allied Thread 2 Manila, G.R, No, L-40296, Noverier 24, 1994). Rule on situs of business tax: 1. Sale of real property — where theyproperty is located : 2. Sele & personal property - wing andl perfected and consummated. 3. VAT — the place where the tranactiorta made (Please see further es 5. Gratuitous Transfer: 1. The transmission of property from a donor Wa donee; 2. From a decedent to his heirs may be subject, to taxation in the state where the transferor is. a citizen or resident; or 3, Where the property is located in case of a non- resident. (DIMAAMPAO, supra at 51). U, Constitutional Limitations Constitutional limitations are provisions of the fundamental law of the land that restrict the supreme, plenary, unlimited and comprehensive power to tax by the State. As a rule, the Constitution does not create the power to tax on the State. Instead, it simply defines and regulates the exercise of tax power in order to safeguard the interest of affected taxpayers (VALENCIA & ROXAS, supra at 17) A. General or Indirect Constitutional Limitations. 1. Due Process Clause No person shall be deprived of life, liberty, or property without due process of law (CONST. Art. Il, Sec. 1) Two Aspects of Due Process: a. Substantive due process — the tax statute must bbe within the constitutional authority of Congress and that it must be fair, just and reasonable (SABABAN, supra at 8) b. Procedural due process — requires notice and hearing, oF alleen an opportunity to be heerd ‘Must the adverse party always be notified? NO. As a rule, notice and hearing or the ‘opportunity to be heard is necessary only when expressly required by law. Where there is no such requirement, notice and the opportunity to are dispensable (SABABAN, supra at es fagunians are required to conduct Daye int Code, Secs. 186 & 187). up prokess in taxation requires: (PTA) 4, rae gust befor @ Public purpose. ‘fee 2° Impgsed within Territorial jurisdiction; and As. Ng bibirariness or cppression in assessment “ greotection (DIMAANIPAO, supra at 69) “Due process in taxation does not require: 1. Determination through jucicial inquiry of the property subject to tax or the amount of tax to be imposed; and Notice and hearing as to the amount of the tax or the manner of apportionment (DIMAAMPAO, supra at 68, as cited in Pepsi Cola Botting Co. v. Mun. of Tanauan Leyte, GR. No, L-31156, February 27, 1976) Where the due process clause is invoked, considering that itis not a fixed rule but rather a broad standard, there is a need for proof of ‘such persuasive character as would lead to ‘such conclusion. The taxing power has authority to make reasonable classifications {or purposes of taxation. Inequalities resulting {from singling out of one particular class for taxation or exemption do not infringe any constitutional limitation. The real estate industry is, by itself, a class and can be validly treated differently from other business 2018 SAN BEDACENTR, D BAR OPERATIONS | 3GENERAL PRINCIPLES enterprises (Chamber of Real Estate and Builders’ Associations, Inc. v. Romulo, G.R. ‘No. 160756, March 9, 2010). Ulustrations of Violations of the Due Process Clause: 1. If the tax amounts to a confiscation of property; 2. If the subject of confiscation is outside the jurisdiction of the taxing authority; 3. Ifthe law is imposed for a purpose other than ‘a public purpose; 4. If the law which is applied retroactively imposes unjust and oppressive taxes; or 5. Where the law is in violation of inherent limitations. Equal Protection Clause nor shall any person be denied the equal protection of the law” (CONST. Art. Il, Sec. 1) Equal protection neither requires equa taxation on different clasbes of prop} prone unerualtaxaion Hoy ro seo inequality isnot based “upon. arb equality is pon api (or property, of the same class) 8 legislation shall be treated circumstances and conditions, sboth ia” the privileges conferred and in the liabilities (mposed (Cooley, as cited in Sison, Jr. v-Apcheta, GR. No, -9431, July 25, 1984) > ee Apsolute Equality Not Required} Praca equally & cnattaonel Sy. i na mperaive equronan a tn be aoe Seu TOMNAAMEN, Su The equal protection clause may be violated” in two ways: 1, When classification is made where there should be none (i-e., where classification does ‘not rest upon substantial distinctions); or 2. When classification is called for (Le., when substantial distinctions exist) but_n0 corresponding classification is made on the basis thereof. ‘The legislative power to select subjects of taxation and apportion the public burden among them includes the power to make classifications (Villegas v. Hiu Chiong Tsai Pao Ho, G.R. No. L-29646, November 10, 1978) Requisites for a Valid Classification: (SAGE) 1. It must be based on Substantial distinctions, 2. It must Apply both to present and fulure ‘conditions: 12018 SAN BEDA CENTRALIZED BAR OPERATION: raat THe. 3. It must be Germane to the purposes of the law; and 4. It must apply Equally to all members of the same class (Ormoc Sugar Co. v. Treasurer of Ormoc, G.R. No. L-23794, February 17, 1968). ‘Substantial Distinction ‘The principle of equality admits of classification © distinction as long as they are based upon real and substantial differences between the persons, property, or privileges. (Matic Jr., Taxation in the Philippines, Vol.1, pp. 79-80). Vertical Equity and Horizontal Equity Vertical equity connotes a difference. in the tax treatment between those who are financially well- off and those who have relatively less. It is fairly in relation to each taxpayer's ably to pay the tax, Horizontal equity implies that those who are situated in life should be taxed similarly DE, supra at 44-45). reine: law'shall/be passed abridging the freedom of eco eiseate eet ae out primary reasons why freedom of expression is ebsenfial to a free society: './ tis the foundation of sel-fulfilment; Db! Lig vital to the attainment and advancement ‘of Knowledge; GoW is necessary to our system of self- “A government; and, @. It provides’ a ‘*check” against possible government corruption and excess, which Seem to be permanent features of the human condition (7 DIZON, supra at 162). There is curtailment of press freedom and freedom of thought and expression if a tax is levied in order to suppress these basic rights and impose a prior restraint thereto. A license fee ‘may not be imposed on the press because it lays a. prior restraint on the exercise of its right (Tolentino v. Secretary of Finance, G.R. No. 115455, August 25, 1994). The U.S. Supreme Court held that to apply an ordinance requiring @ business license to be obtained before a person could sell newspapers iin the streets would be to impose a prior restraint ‘on press freedom because a newspaper is not in the same category as a pineapple or a soap powder, of a pair of shoes whose sale may be conditioned on the possession of a businessGENERAL PRINCIPLES vA MEMORY license (People v. Korins, 385 N.Y.S. 2D 474, allowed (Tolentino v. Secretary of Finance, 6.R. 1976). No. 115455, October 30, 1995) Separate sales tax on newspapers with Income of Certain Organizations Circulation of over 20,000 imposed was a General Rule: Income is exempt from taxation if deliberate and calculated device in the guise of the following is complied with tax to limit the circulation of information to which 4. That itis a Non-stock corporation; the public is entitled in virtue of the Constitutional 2. Organized and operated exclusively for guarantees (Grosjean v. American Press, 297 religious, charitable, scientific, athletic or cultural, USS. 233, 1936) and social welfare purposes: and 3. _ No part of the income inures to the benefit However, if the fee imposed is not for the (of any member, organizer, or any specific person ‘exercise of a privilege but only for the purpose of (MIRC, Sec. 30(€)) defraying part of the cost of registration (0.9. ‘annual registration fee) or when a tax is imposed Exception: Income of such organizations is ‘on the sale, barter, lease or exchange of goods taxable regardiess of the disposition made of and properties or’ services purely for revenue ‘such income if realized from. purposes (¢g. VAT), the Constitution is not 1. Productive use of property, real or personal Violated (Tolentino v. Secretary of Finance, G.R. ((e. rents, dividends, interests): or No. 115455, August 25, 1994) 2, Profitable business pursuits (Id). Religious Freedom * A Test ‘The Constitution provides fSnthese two - I of separation that must be maintained a. "No law shall be made respecting, an, .,; between the ‘church and the state is blurred, establishment of religion, ok prohibiting, the. irdistinct andvariable barrier depending on all free exercise thereot” — also balled the hdn= | OF Gircustanges. of particular relationship. The establishment clause, it! covbrs the fiii@following are the three tests to assess whether a prohibition to establish a national dr ffial | lated the establishment clause: Feligion since in that case, ther would'be an the law have secular purpose? ‘2ppropriation from taxes paid by the people: he primary effect ether to advance religion ang i £5 to ighibit religion? b. “The free exercise and enjoyment of ‘Boss! the law foster an excessive profession and. worst governmental entanglement with religion? discrimination or preference, shall forevs $ allowed." ~ Also called the free. ex: Clause, which is the basis of tax ekemptio granted to religious institutions (CONST. A order to pass constitutional muster under the _Non-Eétablishment Clause, a statute: 4; Most have a secular legislative purpose, Im, Sec. 8}. 2.’Mast have a principal or primary effect that neither advances nor inhibits religion; ‘The Constitutional Guaranty of the free exercise 3, Must not foster an excessive governmental and enjoyment of religious profession and entanglement with religion (1 DIZON, citing worship carries with it the right to disseminate Lemon v. Kurtzman, 403 US 602.) religious information (INGLES, supra at 12) _ c i : 5. No Taking of Private Property without Just. ‘Thus, a municipal license tax on the sale of bibles, Compensation (CONST. Art. Ill, Sec. 9) and religious articles by a non-stock, non-profit missionary organization at minimal profit Please refer to previous discussions on power of Constitutes curtaiment of religious freedom and taxation as an implement of the power of eminent worship guaranteed by the Constitution domain. (American Bible Society v. City of Manila, G.R. Mio" 1-9037, Apri 30, 1957). 6, Non-Impairment Clause No law impairing the obligation of contracts shall Not every imposition of tax, however, constitutes be passed (CONST. Art, il, Sec. 10) Curtaiment oF religious freedom, “The free exorcise of religion clause does not prohib Imposing a generally applicable sales and use taxon the sae of religious materials by a religious thus in contemplation of law, to weaken the Grgarizaton (uinmy “Swaggert, Ministries. v postion oF nights of one or all ofthe partes 108 Board of Equalization, 493 U.S. 378, 1978). VAT, (ABAN, supra at 77). which fe nol a license tax bul a revenue ta, 13 To impair the obligation of a contract is to alter or change the terms or effect of the contract, and BOIS SAN BEDA CENTRALIZED BAR OPERATIONS | 25,GENERAL PRINCIPLES Non-Impairment Clause as a Limitation to the Power to Tax The non-impairment clause becomes a limitation to the power to tax when the taxpayer enters into an agreement with the government. applies only where one party is the Government and the other party, a private individual (SABABAN, supra at 13). Example: A tax exemption based on a contract cannot be revoked by a later taxing statute (Casanova v. Hord, G.R. No. 3473, March 22, 1907). Reason: When the State grants an exemption on the basis of a contract, consideration is 1 presumed to be paid to the State, and the public is supposed to receive the whole equivalent therefrom (Id.) Exception: Seer law and the same is withdrawn by’ “eA vp it ‘another law; £ franchise; A franchise is subject to! iteration, oF repeal by Congres ‘common good so requires (C ria Sec. 11) i eat sehen x me Note: The repeal expressly provided, or amendmeft mi S a R.A. No. 9334 failed to specifically No. 1590 (a special law governing the’ of PAL) as one of the acts intend repealed. Thus, the franchise of PAL remains tHE=™=e governing law’ on its exemption from taxes (Republic v. Philippine Airlines, Inc., G.R. Nos. 209353-54, July 6, 2018). Impairments are permitted, provided that the legislation: 1. Must serve important and legitimate public interest; and 2. Is a reasonable and narrowly tailored means. of promoting that interest Law-Making Process Requisites: a Bill should embrace only one (1) subject expressed in the ttle thereof ‘Treo (3) readings on three (3) separate days; and Printed copies in final form distributed three (3) days Before passage (CONST. Art. Vi Soc. 28) b, 26 | 2018 SAN BEDA CENTRALIZED BAR OPERATIONS 8. Presidential B. Specific or Power to Grant Reprieves, Commutations and Pardons and Remit Fines. and Forfeitures after Conviction by Final Judgment Except in cases of impeachment, or as otherwise provided in the Constitution, the President may {grant reprieves, commutations, and pardons, and remit fines and forfeitures, after conviction by final judgment, He shall also have the power to grant amnesty with the concurrence of the majority of all the Members of the Congress (CONST. Art. Vil, Sec. 19) Please refer to discussions on tax amnesty. .ct Constitutional Limitation Taxation shall be Uniform and Equitable (CONST. Art. VI, Sec. 28(1)). Uniformity A tax is “uniform in application” if it operates with 1e force and effect in every place where ect maybe found (Commissioner of ‘Revenue. Lingayen Gulf Electric Power Go, GR. Nodk029771, August 4, 1988) ryfrot Equality Fhe equal protection clause does not fe the universal application of the laws on all thout distinction. This. might in fact innequal protection. What the clause Terres equally among cous os determines ‘eccording to valid. classification. (ABAKADA Giro Party List v. Ermita, G.R. No. 168056, September 1, 2008). Pry Different articles or other subjects may be taxed _at different rates provided that the rate is uniform ‘on the same class everywhere (De Villata v. Standley, G.R. No. L-8154, December 20, 1915). Equitabi ‘Taxation is said to be equitable when its burden falls on those better able to pay (ABAN, supra at 82). The progressive system of taxation would place stress on direct taxes rather than indirect taxes. A good example is the current individual income tax system that imposes rates progressing upwards as the tax base increases (VITUG & ACOSTA, supra at 17). Uniformity v. Equitability Where the differentiation complained of conforms. to the practical dictates of justice and equity, itis, not discriminatory within’ the meaning of’ this clause and is therefore uniform. Equitable means fair, just, reasonable and proportionate to one's ability to pay (VITUG & ACOSTA, supra at 17)GENERAL PRINCIPLES EEDA MEMORY AID ‘Taxation may be uniform but inequitable where the amount is excessive or unreasonable. Progressive System of Taxation (CONST. Art VA, Sec. 28, Par. 1) Progressive taxation is built on the principle of the taxpayer's abilty to pay (DIMAAMPAO, supra at 96). As the resources of the taxpayer become higher, his, tax rate likewise increases (e.g. income tax ystem). VAT is admittedly regressive because it is imposed regardless of income (INGLES, supra at 13). However, itis stil valid as the Constitution does not entirely prohibit a regressive system but merely directs the Congress to evolve a progressive system of taxation. In a case, the VAT system minimizes the regressive effects by providing zero-rated transactions (Abakada Guro Party List v. Ermita, G.R. No, 168056, September 1, 2006). Non-Imprisonment for Non-Payment Tax (CONST. Art. Il, Sec. 20) a “hes EGE Poll tax A poll tax (or personal or capital lax of fixed amount on indhiuals re sa Aiea Specified territory, whether citizens br nok without regard to their property o the cocuption’ they may be engaged (51 Am. Jur 660). in whiich Reason: One cannot be imprisoned, f payment of pol tax because payment there mol mandatory (SABABAN, supra at 14) While @ person may not be imprisoned forrion- payment of pl Tax he may bo imprisoned terse hon-payment of other kinds of taxes where the law so expressly provides (e.g. tax evasion cases). Note: Non-payment of poll tax may be penalized by the fines because it is only imprisonment Which is prohibited by the Constitution (1 DIZON, supra at 203). Origin of Revenue or Tariff Bills All appropriation, revenue or tariff bills, bills ‘authorizing the increase of the public debt, bills of local application and private bills shall originate exclusively in the House of Representatives but the Senate may propose or concur with amendments (CONST. Art.VI, Sec. 24). bill originating in the House may undergo such extensive changes in the Senate that the result 19 of the whole (ABAN, supra at Note: It is not the law, but the bill which is required to originate exclusively from the House of Representatives. A bill originating in the House may undergo such extensive changes in the Senate that the result may be a rewriting of the whole (Tolentino v. Secretary. of Finance, G.R. No, 115455, August 25, 1994) 5. Veto Power of the President Veto any particular item'or items i a. Appropriation bill; b. Revenue bil; or cc. Tariff bill (CONST. Art. VI, Sec. 27, Par. 2). (ART) ‘The President shall have the power to veto any articular item or items in an appropriation, revenue, or tarif bill, but the veto shall not affect the item or items to which he does not abject (CONST. Art. VI, Sec. 27, Par. 2). 6. Delegated Authority of President to Impose Rates, Import and Export Quotas, and Wharfage Dues PED Peat (fciause tné: Gor 35 may, by law, authorize the pent tg fix within specified limits, and subject cn itona and seetions. as it may rates, import and export quotas, 19 dnd wharfage dues, and other duties or fsts “Within the framework of the national ment program of the Government :xemption of Properties for Religious, le, and Educational Purposes “ Bhaftabe institutions, churches and parsonages ‘Cofivents appurtenant thereto, mosques, non- fit cemeteries, and all lands, buildings, and SS improvements, actually, directly, and exclusively used for religious, charitable, or. educational purposes shall be exempt from taxation (CONST. Art. VI, Sec. 28, Par. 3). The Court ruled that the abovementioned constitutional provision, which grants tax exemption applies only to property and real taxes assessed on such properties used directly, actually and exclusively for religious, charitable ‘and educational purposes (ABAN, supra at 84). Test of Exemption: Itis the use of the property, and not ownership (Abra Valley College, Inc. v. ‘Aquino, G.R. No. L-39086, June 15, 1988). Nature of Use: The properties must be actually, directly and exclusively used for the religious, charitable, or educational purposes 2OIE SAN BEDA CENTRALIZED BAR OPERATIONS | 27GENERAL PRINCIPLES Actually — as opposed to seemingly, ‘The phrase “a majority of all the members of the pretendedly, or feignedly, as actually engaged in Congress” means at least fifty percent (50%) plus truly in fact one (1) of all the members of two houses voting separately. Directly ~ means in a direct way without anything intervening; not by secondary, but by direct Rules on Voting Requirement for Tax means Exemptions 1. Law granting tax exemption — majority of all Exclusively — means apart from all others; members (absolute majority); without admission of others to participation; in a 2. Law withdrawing tax exemption ~ majority of manner to exclude (Black’s Law Dictionary, 3° quorum of members present constituting a ed., cited in National Power Corporation v. quorum (relative majority) (ABAN, supra at Central Board of Assessment Appeals, G.R. No. 118). 171470, January 30, 2009). Reason: Taxation is the rule and exemption is It real property is used for one or more the exception (Id.). Thus, the law makes it easier, ‘commercial purposes, it is not exclusively used by requiring a ‘smaller number of votes, 10 for the exempted purposes but is subject to withdraw exemption compared to its grant. taxation, What is meant by actual, direct and exclusive use of the property for charitable ‘Tax amnesties, condonation and refunds are in insttutlon i the direct and immediate and ctu _the, nature of tax exemptions. Such being the pplication of the property ise to the law granting them requires the vote of an {for which the charitable insfitytion is org major is not the use of the income from the real _ that is determinative of whether the property is used for tax-exempt purposes" (Lung -Genter'of > tho PHL v. Quezon Gly, G.R. Nok 144108 June yp 29, 2000) > £ congitutdnal grant of exemption may be sett éxébiting of’ may require an act of Congress for righ: Whore 9 Conaiuonal proven : exemption is. self-executing, the A ean neither add nor detract from it. It May hdvevar" rescbe a “orasedure to ming whether a claimant is entitled to the ‘constitutional exemption (DIMAAMPAO, supra at 129. City Board of Assessment Appeals (GR No. L- 15270, September 30, 1961), that the exeiriphion| extends to facilities which are incidental to) Teasonably necessary for the accomiplishment of said purposes” has now been ABANDONED?" 69: Non-tde of Public Money or Property for Further, what is exempted is not thé'institlioh | eliggon Purpoame (CONST. At. Vi So, 20 itself, hose exempted from reat estate taxes af6) "Par: lands, buildings and. improvements actually, directly, and exclusively used for religious=se=™ Exception: If a priest is assigned to armed charitable or educational purposes forces, penal institutions, government (DIMAAMPAO, supra at 112-113). orphanages or leprosarium. (MUNOZ, Philippine Governance and Constitution, p. 82, 2002) 8. Voting Requirement for Tax Exemption No law granting any tax exemption shall be 10._Prohibition on Use of Tax Levied for passed without the concurrence of a majority of ‘Special Purpose or Special Assessments all the Members of the Congress (CONST. Art All money collected on any tax levied for a special Vi, Sec. 28, par. 4). purpase shall be treated as a special fund and paid out for such purpose only. If the purpose for Reason: To prevent indiscriminate grant of tax which a special fund was created has been ‘exemptions. {uliled or abandoned, the balance, if any, shall be transferred to the general funds of the ‘An exemption granted by a_ presidential Government (CONST. Art. VI, Sec. 29, par. 3). proclamation and not by law is therefore invalid : Wohn Hay Peoples Altemative Coalition v. Lim, 11. Suprenie Court's Power to Review GR. No, 11975, October 24, 2003). Judgments or Orders of Lower Courts The Supreme Court can review judgments or ‘The abovementioned provision requires the orders of lower courts in all cases involving: concurrence of a majority, not of the attendees ‘a. The legality of any tax, impost, assessment, or constituting a quorum but of all the members of toll, and the Congrass (VITUG & ACOSTA, supra at 20). 28 | 2018 SAN BEDA CENTRALIZED BAR OFGENERAL PRINCIPLES b. The legality of any penalty imposed in relation thereto (CONST. Art. Vil, Sec. 5(0) Principle of Judicial Non-interference ‘The courts cannot inquire into the wisdom of a taxing act, unless there is a violation of Constitutional limitations or restrictions (1 DIZON, supra at 207). The Constitution, as the fundamental law, overrides any legislative or executive act that runs counter fo it. Where it can be demonstrated that the challenged statutory provision fails to abide by its command, then the court must so declare and adjudge it null (DIMAAMPAO, supra af 22) 12.__ Grant of Taxing Authority to LGUs Each local government unit shall have the power to create its own sources of revenues and to levy taxes, fees and charges subject to such guidelines and limitations as the Cong provide, consistent with the basic pol autonomy (CONST. Art. X' See, 3) San Such taxes, fees and chargey pe oii exclusively tothe local governments. ' By necessary implication, the legis! Lsnars eteate political corporations for pur ose 1968). Congress cannot abolish the local govSkain power to tax as it cannot abrogate expressly granted by the fundamental law. only authority conferred to Congress is to provide guidelines and limitations on the local government's exercise of the power to tax (DIMAAMPAO, supra at 132). Please refer to Local Taxation chapter for further discussions, 13, Tax Exemption Granted to Non-Stock, Non- Profit Educational Institutions. A. Non-stock, Educational Institution. All revenues and assets of non-stock, non-profit ‘educational institutions used actually, directly, and exclusively for educational purposes shall be ‘exempt from taxes and duties (CONST. Art. XIV, Sec. 4, Par. 3). Non-profit Non-profit Educational Institution: 1. Incorporated as a non-stock entity; fsck 2. Paying no dividends; 3. Governed by trustees who ‘compensation; and 4, Devotes all ts income to the accomplishment and promotion of the purposes enumerated in its Articles of Incorporation (RMO 20-2013). Coverage of Exemption: Real property tax (soe previous discussions); 2. Income tx (OIMAAMPAO, supra at 120) 3. Donor's Tax- itis tax-exempt if the donee is a non-stock, non-profit educational institution (NIRC, Sec. 101 (A)(3)); and 4. Customs duties (INGLES, supra at 15). Taxability of Income Derived from the Operation of Dormitories, Canteens and Bookstores Exempt from taxation provided: 1. They are owned and operated by the educational institution as ancillary activities: in, Promises (BMC No, 76-2003). interest Income on Currency its and Yields from Deposit scome used actually, directiy and in pursuance of their purposes as {éational institution are exempt from the 20% id) 7:48 tax under the expanded foreign / Jeurfency ‘deposit system imposed under Sec. 27(0) ofthe NIRC subject to the compliance with {he conaltion thatthe incomes are included in the fs “annual information return and. duly gfe franca stators, together with “A. Certifications from depository banks as to the amount of inlerest income earned from aseive investments not subject to the 20% final withhoiding tax 2. Cortiication of actual, direct and exclusive Uilization of said. income for educational purposes; and 3. Board resolution on propesed projects to be funded out of the money deposited in banks or placed in money market placements (DOF Order No. 149-98), ‘The RDO shall conduct an audit of the annual information return filed to determine compliance with the conditions set forth (DOF Order No. 149- 98). Note: Sec. 30(h) in relation to the last paragraph of the NIRC appears to be unconstitutional. It disregarded the requisite of use (CONST. Art XIV, Sec. 4, Par. 4(3)), and instead used the phrase “regardless of the disposition made.” O16 SAN BEDA CENTRALIZED BAR OPERATIONS | 29GENERAL PRINCIPLES First View: Sec. 1 of DOF Order No. 149-95, which amended DOF Order No. 92-88 and DOF Order No. 137-87, provides that these non-stock, non-profit educational institutions shall “be subject to internal revenue taxes on income from trade, business or other activity the conduct of which is not related to the exercise or performance by such educational institution ofits educational purpose or function. Second View: Sec. 30 of the NIRC, which provides that the income from whatever kind and character from any of the properties, real or personal, or from any of the activities conducted for profit of non-stock, non-profit. educational institutions “regardless of disposition” appears to be unconstitutional. Sec. 4(3), Art. VI of the 1987 Constitution expressly provides that all revenues. and assets actually, directly, and. exclusively used for educational purposes shall be exempt from taxes and duties. The Constitution, bein, the basic and paramount law, the Nil . yield to its provisions (DIMAAMPAO, 121). : Taxability of Donation Y, COLLE Exempt from donor's tax if actually, directlyand exclusively. used for educatiotial purposes, provided that not more than 30% of the donation! bequests, devises or legacies shall be used by such institution for administration purposes (CONST. At XIV, Sec. 4, Par. 4(n relatianite NIRG, Sec. 101(a)(3)) Article XIV v. Article Vi_&. OS Te ey sO) eric Non-stock, non-profit] Religious, educational, educational institution, | charitable Ee Real property tax. "Income tax, 2. Custom duties; and | 3. Real property tax | (OF Order No. 137- ie (DIMRAMPAO, Supra at 120) B. Proprietary Educational institution Proprietary educational institutions, including those cooperatively owned, may likewise be entitled to such exemptions subject to limitations provided by law including: 1. Restrictions on divisions; and. 2. Provisions for reinvestments (ABAN, supra at 88) Tax exemptions of proprietary educational institutions require prior legislative implementation since the use of the permissive term "may" in the provision gives Congress discretion to determine Whether oF not assets and revenues of proprietary 30 | 2018 SAN BEDA CENTRALIZED BAR OPERATION! educational institutions should likewise enjoy exemptions from taxes. In short, the tax exemption here is not self-executing (ABAN, supra at 9) Taxability of Income Proprietary educational institutions shall pay a tax of 10% on their taxable income, provided that if the {gross income from unrelated trade, business or other activity exceeds 50% of the total gross income derived by such institution, a tax of 30% shall be imposed on its entire taxable income (Predominance Theory) (NIRC, Sec. 27(6) Taxability of Interest Income on Currency Bank Deposits and Yields from Deposit Substitutes It shall pay a final tax at the rate of 20% upon the ‘amount of interest on currency bank deposit or yield, provided, however, that interest income from 2 depository bank under foreign currency deposit system shall be subject to a final tax at the rate of 77A% of such interest income (NIRC, Sec. 27(D)). lity of Donation to proprietary educational institutions are subject ¥8 donor stax because a donation to an ellen) nein is exempt ony # the schools iicorpor -@ non-stock entity paying no MBE: See GOO). btérJo Income Taxation chaptor for frthor usSions bn taxabilty of propriotary educational ©. Goyern Govefnmes from) 1 Incomé tax (INIRC, Sec. 30()); 2. Real property tax (CONST. Ait. VI, Sec. 28, par. grand 3." Donor's tax (INIRC, Sec. 101(4)(3)) jenit Educational Institutions ‘educational institutions are exempt ‘Summary of Taxability of Educational Institutions ee eee RPT [exempt T Exempt Income | Exempt | 10% of 30% | Exempt Tax sence igaeecs Donors | Exemat | Taxable | Exempt | Tax oe | eee ee [FwT | Exempt | Taxable [Exempt Please refer to Tax Administration for discussion on ‘Stages or Aspects of Taxation.GENERAL PRINCIPLES Court of Appeals, G.R. No. 115349, April Tax Laws 18,1997). 7. Tax laws are special laws and prevail over Nature of Tax Laws: general laws (Philippine Bank of, 1. Not political in character; effective even under Communications v. Commissioner of Internal bolligerent occupation (Hilado v. Collector of Revenue, G.R. No. 112024, January 28, 1999) Internal Revenue, G.R. No. L-9408, October 31 1956); Construction of statute by predecessors is not 2. Civil in niature and not penal in character, binding on the successors. Thus, the Secretary hhence,); and of Finance is vested with authority to revoke, 3. Not penal in character, hence, not subject to ex repeal or abrogate the acts or previous rulings of ‘post facto prohibitions (RECALDE, supra at 5). his predecessor in office because the construction of a statute by those administering it Construction of Tax Laws: is not binding on their successors, if thereafter 1. Tax laws are prospective in operation, unless the the latter becomes satisfied that a different language of the statute clearly provides ‘construction should be given (Hilado v. Collector otherwise (Commissioner of Internal Revenue v. Of Internal Revenue, G.R. No. L-9408, October Acosta, G.R. No. 154068, August 3, 2007) 31, 1956). 2. Legislative intention must be considered (Ratio Legis et Anima) — tax statutes are to receive a ‘The NIRC being a special law, prevails over a reasonable conetructon witha view t | law like the Civil Code, in case of conflict ‘out their purpose and intent:{51, Am. provisions, (Republic v. Gancayco, G.R. a. Where there a doubt in tates Fppepa, ¢--NeTOCCOT Tepe 30. 1064. Commissioner of bayer fe tne ae cnet ae oe 199 Reuplue« logan Elect and ioe Pan, fgainst the gove/nment and befall davertof L-31364 March 30, 1979) the taxpayer (Manta Ralfoad \. CofGttor-oF Customs, GRIND L-10214, Novelber'. 1945 ‘Faxes, being burdens, ere not tobe predutfied beyond what the statute expressly ard clearly Geciares ‘The Tax Code may be considered a al iaW with respect to other laws. Itis settled getieral laws cannot repeal a special law implication for the legislature is presumed to 4, Where language is plain (Verba Legis efgstiets: Know all fhe laws on the subject (BIR Ruling No. Consiructon rule of stick construction agat 09-05, October 4, 2005). the government does not apply. where language of the tax law is plain andithere no si: Fhosigeo Legitatve ‘Approval by Reenactment doubt as to the legislative intent (51.Am. ‘Jur _/— it means that the reenactment of a statute 308). The words employed are to be given their ‘substantially unchanged is persuasive indication ordinary meaning, Lof the adoption by Congress of a prior executive 5. Public purpose is always presumed ~swepeee principal or capital; for while capital ista fund, Income is a flow. As used in our income tax law income refers tothe flow of wealth (Commissianer of Intel, Revenue v. Japan Air Lines, Inc., G.R NO, 60714; October 4, 1997) Income v. Capi Income Denotes a flow of rope wealth during a definite | existing at one'idistinct period of time, All| point of time, wit wealth other than as a| be used in’ producing mere return of capital. | goods or services. Service of wealth Wealth Income is subject to tax | Return of capital is not subject to tax Tree [Fruit (Madrigal v. Rafferty, GR. No. 1-12287, August 7, 1918) MORY AID Income Tax Itis a tax on all yearly profits arising from property, professions, trades or offices (Fisher v. Trinidad, GR. No. L-17518, October 30, 1922). Basis of the Right of the Government to Tax Income: Partnership Theory “The right of the government to tax income emanates from its partnership in the production of income by providing the protection, resources, incentive and proper climate for such production (Commissioner of Jgtemal Rovonue v. Ledhicky, G.R. No. L-18169, lity of Income (PRN): "a gain or Profit, whether in cash tually or physically transferred to a constructively received by him This Pitas vis-a-vis Recognized Income Tealized if there is a gain or profit derived Income is recognized if the transaction is reflected in the books of accounts. ‘Thus, not all realized income is taxable. To be taxable, an income must be realized and at the same time, recognized. Test of Realization Actual vis-a-vis Constructive receipt ‘Actual receipt ~ when income is actually reduced to EXECUTIVE COMMITTEE KATES JASTIN E. AGUILAR ‘SUBJECT COMMITTEE JAMES PHILIPPE MAC Subject Overall ‘Chairperson, Chair. SITE NAJUAH A. CHRISTINE P, MONDERIN AZIS" Assistant Subject Chav, Charrperon for "Academics, DIVINAG. VELASCO Electronic CHESKA’ARLA ©. AGRUPIS Data Processing. JOHN CALEB Chairperson for Hotel C- ANDAL General Principles, Operations, MARA CLARA M, IVAN PAULO B. SALANGUTT ESTRELLA "Vice Chair for Income” Tax, JENICA A. ‘Operations MARY CYRIELL'C. AQUINO Tansfor Tox, SUMANQUI. Vice Chair for ORLAND — JERICOM. Scrtarit, ARTLYN GEM G SERORAN Vice Chair for Finance. ZAIRE XANDRA M REMES. Vie Chath for Aut BARAMBANGAN Vice Chair for lecronic Data Prcesing, MARTIN ALEC N. BAUTISTA Vice Chair for Logistes MAR PAGCALIWANGAN Vice Chair CORDERO Value Added Tox ALEXANDER ABRAHAM. COLINA Tar Administration & [enforcement RAH L.JARETA Remedies.” "SALVADOR 5. FULGENCIO I Rel Property Local Tax, JOHN RALEIGH D. TEE Tarfe& Customs, CHRIST DENN A: MAGNO Court of Tox Appeals possession. The realization of gain may take the form of actual receipt of cash, MEMBERS ADVISERS ABDULJALIL A JUSTICE JAPAR B. ‘ABDULHALIM, CHARMAINE DIMAAMPAO, are, G. AGUILAR, JAMES LEN. ANTHONY (A. DY, ATTY, JAVENDANO, "GERARD DANTE, DELA CRUZ, ATTY, CEASAR BAGUIO, NICASIO' 0. CABANERO, BRANDON “"L_"BERAD, ATTY. DANTE R BRAVO, JOHNROM HOMER -M. ATIY. EFREN VINCENT M, BUENO; GRACE ANNE B, DE VEVRA, ADRIAN JARED M, GAFFUD. ANDREW. M. LEONARDO, " FAISAH A. MACABUAT, JEFFERSON B. MADRID, SHIELA. MARIE. M. MARASIGAN, MICHELLE 8. PADAYAO, FEDERICO C SORIANOAN GEDA ME INCOM ETAX | Constructive receipt — when income is credited to the account of or set apart for a taxpayer and which may bbe drawn upon by him at any time is subject to tax for the year during which so credited or set apart, although not then actually reduced to possession. To Constitute receipt in such sense, the income must be credited to the taxpayer without any substantial limitation or restriction as to the time or manner of Payment or condition upon which payment is to be made (RR. No. 2-40, Sec. 52). ° Examples of Income Constructively Received: 1. Matured interest coupons, due and payable, not yet collected by the taxpayer (RR. No. 2-40, Sec. 59): 2. Interest credited on savings bank deposit (R.R. No. 2-40, Sec. 53); 3. Dividends applied by the corporation against the indebtedness of a stockholder (RR. No. 2-40, See. 50); 4. Intended payment deposited in court (e.g. rental payments refused by the lessor, when fendored payment and the latter made deposit ofthe rental due); and eae 5, Distributive share ofthe proto. o paring general co-partnership (R.R. No.¥?-40,-Seé- 68). Recognition of Income =| Cash Method vis-a-vis Accrual Mt , Cash Method generally reports incorhe upon cash’ collection and reports expenses upof payment. If earned from rendering services, -Incomee Teported in the year when collected, whither or unearned. Acertal Method reports ficor fearned and reports expense when youre earned from sale of goods, income is fo Be repo in the year of sal, irrespective of collection, Revenue Audit Memorandum Order No. 1<2000%s===! provides that under the accrual method, expenses not being claimed as deductions by a taxpayer in the current year when they are incurred cannot be claimed as deduction from income for the succeeding year. ‘Tests in Determining Whether Income is Earned. for Tax Purposes: 1. Flow of Wealth Test — The test of taxabilty is the "source", ie., the property, activity or service that produced the income determines whether any gain was derived from the transaction (Commissioner of Internal Revenue v. British Overseas Ainvays Corp., G.R No. L-65773-74 April 30, 1987), 2. Realization/Severance Test ~ Also known as the Macomber test. There is no taxable income Until there isa separation from capital of something of exchangeable value, thereby supplying the realization or transmutation which would result in the receipt of income. The 34 | 2OIB SAN BEDA CENTRALIZED BAR OPERAT ce Ree essence of the test is that in order for income to be taxed, it is to be severed from the property from which it was derived, The Court analogized "capital" as being separate from “income” in the way that a tree is separate from its fruit. It requires the presence of a “tax event” which is an event which triggers a transfer of ownership of property (Eisner v. Macomber, 252 US. 189, March 8, 1920). 3. Claim of Right Doctrine — A taxable gain is conditioned upon the presence of a claim of right, to the alleged gain and the absence of a definite unconditional obligation to return or repay that which would otherwise constitute a gain. This is also called the Doctrine of Ownership, ‘Command or Control (Commissioner of Internal Revenue v. Wilcox, 327 U.S. 404, February 25, 1946) claim of right doctine, if a taxpayer money or other property and treats t 3s RS ‘under the claim of right that the payments age abxbltey and not contingent, such riOohNS ag included in the taxpayers income, BaRoUgh the right to the income has not been God at that time, ft does not matter that the jer'stitie to the property is in dispute and Aratihe property may later be recovered trom the Naxpayor} If the taxpayer who has included ‘amar repo ‘income pursuant to the claim of right > Sdogtrine Subsequently repays those amounts, the “taxpayet may be entitled to a deduction in the repayment (Commissioner of Internal j Vv. Manila Electric Co,, Inc., CTA EB No. Tox Aovombor 13, 2012) ‘All-Events Test — For income or expense to accrue, this test requires: The fixing ofa right toincome or ability o pay; and b. The availabilty of the reasonable accurate determination of such income or liability (Commissioner of internal Revenue v. Isabela Cultural Corp., G.R. No. 172231, February 12, 2007) 5. Economic Benefit Test or Doctrine of Proprietary Interest ~ Any economic benefit to the employee that increases his net worth, whatever may have been the mode by which itis, effected, is taxable (MAMALATEO, Reviewer on Taxation (2014), p. 114) [hereinafter MAMALATEO, Reviewer] 6. Control Test ~ The power to dispose of income is the equivalent of ownership of it. The exercise of that power to procure the payment of income. to another is the enjoyment, and hence theINCOME TAX ‘ealization, of the income by him who exercises it (Helvering’v. Horst, 311 U.S. 112, November 25, 1940), Income Tax Systems in the Philippines: T Gopal Tax System or more individual or corporate lende one time. Corollary, the more floatationfofa debt instrument is not considered to be a “public! borrowing and is not deemed. a "deposit substitute’ there are only nineteen (19) or less inividual or corporate landers at any of (RR. No. 14-2042, Sec. 8) t Meaning of “at any one time”, for purpo termining the "20 or more ienders™ Every transection executed in the’ pila Ot secondary market in-connection wiikaithe purchase or sae of securtien ‘The reckoning of “20 or more lenders/investors” is made at any transaction in connection with the purchase or sale of the government bonds, such as: 4. Issuance by the Bureau of Treasury of the bonds to Government Securities Eligible Dealer (GSEDs) in the primary market; 2. Sale and distribution by GSEDs to various lendersfinvestors in the Secondary market; 3. Subsequent sale or trading by a bondholder to another lenderlinvestor in the secondary market usually through a broker or dealer, o 4, Sale by a financial intermediary-bondholder of its participation interests in the bonds to individual or corporate lenders in the secondary market. ‘When, through any of the foregoing transactions, funds are simultaneously obtained from 20 or more lendersiinvestors, there is deemed to be a public borrowing and the bonds at that point in time are deemed deposit substitutes (Banco De Oro v. Republic, G.R. No. 198756, January 13, 2018). Government Securities Eligible Dealer (GSED) Refers to a SEC-licensed dealer in government securities accredited by the Bureau of Treasury to participate in the primary or origination sale of Government Securities (Department of Finance, D.O. No. 20-2010, Art. 1(15)). Notes: 1. The above rule on interest income only applies if the interest income is derived from banks. Ifthe interest income is derived from a source other than a bank (¢.g., interest paid on 5-6 business), then graduated rates of 5%- 32% shall apply. 2. Interest income must be derived from a bank we, ted within the Philippines to be me, dered as passive income subject to final ‘4s Yotated outside the Philippines, the interest 32 } NRC, RA, NRA-ETB, NRA-NETB — 1 Doeint Merch income derived from any other debt Tpainnene. nol win’ te coverage of FPaepast ‘substiutes" shall be subject 10 cretabio witholding tax of 20% (RR. No. 142012). S:If the depostor is an employee trust fund or falremont plan such itarest income, yield or taner' monetary benef Is exempt from the final. wititoldng. tax {Commissioner of Internal Revenue v. Court of Appeal, G.. no" 85022, Mrch 23, 1082) From a depositary bank under the expanded foreign currency deposit system Foreign Currency Deposit System - the conduct of banking transactions whereby any person whether natural or juridical may deposit foreign currencies forming part of the Philippine international reserves (R-R. No. 10-98). Final Tax Rate: RC, RA~ 7.5% NRC, NRA-ETB, NRA-NETB ~ Exempt Note: If the bank is jointly in the name of a NRC. ‘such as an OCW, or a Filipino seaman, and histher spouse or dependent who is a resident of the Philippines, 50% of the interest income from DA CENTRALIZED BAR OPERATIONS | 45,INCOME TAX such bank deposit shall be exempt while the other 50% shall be subject to 7.5% final withholding tax (RR. No. 14-2012, Sec. 5). 3. From long-term deposit (LTD) or investment in the form of Savings: ‘Common or individual trust funds; Deposit substitutes; Investment management accounts: Other investments evidenced by certificates in such form prescribed by the BSP (NIRO, Sec. 24(8)(1)) page ‘Common Trust Fund ~ A fund maintained by a trust corporation, bank or investment house authorized to perform trust functions under a written and formally established plan, exclusively for the collective investment and reinvestment of certain moneys representing participations in the plan received by it in its capacity as a trustee. Investment Managemerit,,;Account| investble funds or any ‘vgsiment “bog hancied by a bank or an investent ‘representative capacity as finandfal. oF. agent, edvieer, consutent or iii financial or investment manage! Coneultancy or any aanler aveipere does not create or result in trusteeship. Final Tax Rat 4. RC, NRC, RA, NRA-ETB (held for'5 o more) ~ exempt. 2. _NRA-NETB (regardless of holding perk 25%. 5 In case of pre-termination before the fifth year (NIRC, Sec. 24(8)(1)): : Stoless than 4 years | 12% a Less than 3 years | 20% Note: The above rule applies only to individuals. Interest income from LTD of corporations is always taxable, Please see discussions below on taxability of corporations, Prizes and Winnings (NIRC, Sec. 24(B)(1)) Prizes ~ results of efforts Winnings ~ products of chance or luck 46 | 2018 SAN BEDA CENTRALIZE: SPERATIONS Final Tax Rate 1. RC, NRC, RA, NRAETB (Prizes, except amounting to 10,000 or less, and winnings (regardless of amount)) — 20% 2. NRA-NETB (prizes and winnings regardless of amount) ~ 25%, Exception tofinal tax °CSO and lotto winnings are not subject Please see further discussion on Exclusions with respect fo Prizes and Awards. Notes: 1. Prizes amounting to 10,000 or less, although exempt from final tax, are to be included in gross, income and subject to the graduated rates, 2. Prizes and winnings from sources without the Philippines are included in the gross income of a RC, but not NRC, RA, NRA-ETB, NRA-NETB, share from the net income after tax of :S partnership, joint account, joint ‘paid the statutory minimum wage (SMW), oF to ‘an employee in the public sector with ‘compensation income of not more than the statutory minimum wage in the non-agricultural sector where he Is assigned (NIRC, Sec. 22(HH)). Tax Treatment: Exempt from income tax and withholding tax (R:R. No. 10-2008, Sec. 1). The holiday pay, overtime pay, night shift differential pay and hazard pay received by such minimum, wage eamers shall likewise be exempt from income tax. A senior citizen whose salary is equivalent to the Statutory minimum wage shall also be considered as a MWE entitled 16 exemptions (CASASOLA, supra at 88). ‘An employee who receives or eams additional ‘compensation such as commissions, honoraria, fringe benefits in oxcoss of the allowableINCOME TAX - statutory amount of _(P82,000), taxable allowances and other taxable income other than the SMW, holiday pay, overtime pay, hazard pay and nightshift differential shall not enjoy the privilege of being a MWE and. therefore, his/her entire earnings are not exempt from income tax, and consequently withholding tax (RR. No. 10-2008). MWEs receiving other income, such as income from the conduct of trade, business, or practice of profession, except income subject to final tax, in addition to compensation income, are not exempted from income tax on their entire income eared during the taxable year. This tule, notwithstanding, the SMW, holiday pay, overtime pay, nightshift differential pay and hazard pay shall still be exempt from withholding tax (2 DIZON, supra at 172-173). Individuals employed by: §. Regional or area headquarters ans operating headquartere x of multinational Companies in the Philppin b. Offshore banking units es Philippines: or ©. Foreign Service contract contractors engaged i operations Inthe Philippines. | whether Filipino or Alien Multinational Company — a foreign ‘frm entity engaged in. international’, rade affiliates or subsidiaries or branch dtfices 5 - Rela Regon snd te foray orks / (RR No. 11-2010). Tax Rate: 15% Tax Base: Gross income received as salaries, wages, annuities, compensation, remuneration and other emoluments, such as honoraria and allowances. Reason: Only alien individuals occupying managerial and technical positions in said establishments. and Filipinos employed in the same positions as those of aliens are subject to the 15% final income tax (R.R. No. 02-98), To be a managerial employee, the following ‘elements must concur: a. His primary duty consists of performance of work directly related to. management policies; b. He customarily and regularly exercises discretions and independent judgment in the performance of his functions; ©. He regularly and directly assists in the management of the establishment; and abished n-thés = OF LAW 1 Oey al 4d. He does not devote 20% of his time to work other than those above prescribed, On the other hand, the term “technical position” is limited only to positions which are: 2. Highly technical in nature; and b. Where there are no Filipinos who are competent, able, and willing to perform the services for which aliens are desired (R.M.C. No. 41-2009). Filipinos employed in said establishments have the option to pay by way of: 1. Fifteen percent (15%) final income tax; or Requirements: a. Multinational companies ~ Filipino must be holding a managerial or technical position though there are no. aliens holding the same position. b. Offshore banking units and petroleum service contractors and subcontractors: Filipino must be holding a managerial __ 2 ighnical postion; and are aliens holding the same jon (R.R. No. 12-2001), DA ,tg/be met by a Filipino to be allowed to be taxed at 15%: {and Function Test ~ must occupy ‘managerial or technical position and nqlually exorcise managerial or technical tions pertaining thereto; ipensation Threshold Test— must have ived, or is due to feceive under a sfoontract of employment, a gross. annual (yraxabie compensation’ of atleast YF--P875,000 (whether or not actually 2 received); and 3, Exclusivity Test ~ the Filipino managerial ‘or technical employee must be exclusively working for the RHQ or ROHQ as a regular employee and not just asa Consultant or contractual personnel (RR. No. 17-2010). 2. Graduated rates of 5% to 32% on taxable compensation income. 2018 SAN BEDA CENTRALIZED BAR OPERATIONS | 47INCOME TAX Rules on the Taxability of the Income of Individual Taxpayer Cid eed Resident Citizen (RC) Non-resident Citizen (NRC) Resident Alien (RA) es eee ce trade or business (NRA-ETB) atees aan aced bee year from all sources, within and | graduated rate of 5% to 32% without the Philippines year from sources within the | graduated rate of 5% to 32% Philippines year from sources within the | graduated rate of 5% to 32% Philippines Income derived during a taxable | Taxable net income subject to Income derived during a taxable | Taxable net income subject to Income derived during a taxable | Taxable net income subject to yraduated rate of 5% to 32% Ree eR REED income derived within the | 25% tax on the gross income In trade of business (NRA-NETS) [MISE tu | Dean Cen} oe ae . era mepecmerepenpeereat eee ee ui | end eC mm ee, | fe y Ronee meter stay ¢ ptt eres Filipinos Poet eG erred Pea ia me curd aed eee ecu ios erat’ 48 | 2018 SAN BEDA C Oemccuel contractors and | Cae eee -xempt from income tax Aro, ,salanibs 15% tax on gross income ‘eat Trompalisecurces, within and | graduated rate of 5% to 32% without the Philippines [ENTRALIZED BAR OPERATIONS Regular Income derived from | Taxable nat income subject to Nickne derived) duyig a taxable | Taxable net income subject 10 |INCOME TAX Summary of Rates of Passive Income Subject to Final Tax Cece fred eee bela [teal on We cna} Rives’ Ris au} NRA-NETE: ici ented deems | 5% to 32% ieee ct etc MN oat | graduated other monetary benefit rates oe etic TRU er ed Pa Lou Cea ameuse RC. RA-7.5% [Exempt | 5% to 32% | Exempt UO; MMs NRC, NRA. graduated Peer aeceee ETE — Exempt rates eet gs} From long-term deposit or im 5% to 32%| Exempt Pesan graduated ecm | rates Pees eer DEM urs 4) Less than 3 years Sere fe [m0 sae bene a en ar Sr aloed : a 15% to 32% | Exempt graduated rates Prizes and | Prizes 10,000 orless ECM Paes aduated rates; 5% to 32%| Exempt graduated rates Prizes more than P10,000 5% to 32% | Exempt graduated rates Tex to aoe Exenee eS PCSO and lotto winnings ESean Pins 25% ]5% to 32% | Exempt graduated rate BAR OPERATIONS | 49_INCOME TAX ee hah ac Sota OTS Philippines ‘a Passive income Pa ee Sa ae PP lsc Riri aes Nes neiat® Dividends “From a domestic [eats 5% to 32% | Exempt (Cash and | corporation or from a joint Jad graduated | ee mech} eeemee tT eee | a ae oa ecg eu ras | A cd peer aaa Cee? aR? Pet ee eee era? er ee corporation of which he Prete recited Cae eet ano graduated rates 50 | 2018 SAN BEDA CENTRALIZED BAR OPERATIONS:INCOME TAX AN BED MEMORY AID x CorPORATIONS Outline of Taxes on Corporations: UN. Normal Corporate Income Tax (NCIT) (NIRC, Sec. 27(A)) ML Minimum Corporate Income Tax (MCIT) (NIC, See. 27(E)) IN. Gross income Tax (GIT) (NIRC, Sec. 27(A)) V. Capital Gains Tax (CGT) (NIRC, Sec. 27(D)(2) and (5)) VL. Final Tax on Passive Income (NIRC, Sec 27(0)) Vil. Improperly Accumulated Earnings Tax (IAET) (NIRC, Sec. 29) Vill. Branch Profit Res 28(A)(5)) 1X. Tax on. Non-Resident Foreign Corporation (NIRC, See. 26(8)) tance Tax (NIRC, Sec. |. Normal Corporate Income Tax (NCIT) Sec. 27(A)) Sy Corporations liable: DC and Tax Rate: 30% Tax Base: Taxable income Formula: Sas an =. nese \ Me creomen ks: Gee met Si peamralcane ove meas Se dactera 1. Minimum Corporate Income Tax (MCIT) (NIRC, See. 27(E)(1)) Corporations liable: DC and RFC Tax Rate: 2% Tax Base: Gross income except income exempt from income tax and income subject to final withholding tax, Reason of MCIT: As a tax on gross income, MCIT prevents tax evasion and minimizes tax avoidance Schemes achieved through sophisticated and artful manipulations of deductions and other stratagems. Since the tax base was broader, the tax rate was lowered (Chamber of Real Estate and Builders’ Associations, Ine. v. Executive Secretary, G.R. No. 160756, March 9, 2010). When does MCIT commence MCIT is imposed beginning on the fourth (4%) taxable year immediately following the year in ‘h corporation commenced its business. which is the year when the corporation the BIR and not when. the sted commercial operations (NIRC, income is zero; income is negative; or itatigns: “feast Meft does not apply if the OC or RFC isnot to NCIT; ‘DC whose operations are partly covered Ly the NCIT and partly covered under a ‘special income tax system, the MCIT shall apply only on operations covered by the NCIT; and For RFC, only the gross income from sources within the Philippines shall be considered for determining applicability of MCIT (R.R, No.9- 98). Formula: Sal \ds/Sales of services Gross sales/receipts Xx Less: Sales returns xx Sales xx allowances { Sales discounts xx fa) Net Sales Less: Cost of goods oa sold/services | Gross income from |_ sales. x 2018 SAN BEDA CENTRALIZED BAR OPERATIONS | SlINCOME TAX EMORY At | Addr Other income 4 cannot be carried forward in Year 8 because | x ‘Year 8 was beyond three years from Year 4. 4. In Year 5, the taxpayer will pay the 50k MCIT since it is. stil higher than the NCIT. The ‘excess MCIT of 60k in Year 4 cannot be used Grows nce | 3 tear oper oy the MENT at | So ‘paca te" CIT e Inger than te Matin oy: | Nei he oxccs MCI of 60 (6020) can nome | Doc fsa me sotto yor oo Rules on Carry-Forward of Excess MCIT: in this instance. But the excess MCIT of 20k 1. The excess of MCIT over the NCIT can be ‘can be carried forward in the next three years, carried forward on an annual basis (DIZON, 5. In Year 6, whera the NCIT of 40k is higher than aA in Taxation (2006), p. 2790) [hereinafter the MCIT of 30k, the taxpayer is allowed to DIZON, Q&A): claim as credit the excess MCIT of Year 4 but 2, Itean be credited against the NCIT due in the only to the extent of the amount of the NCIT next three (3) immediately succeeding taxable for the current year (e.9., up to 40k only) years (1a) Hence, the taxpayer will not be lable to pay 3. Any excess not credited in the next three (3) any tax. The remaining MCIT in Year 4 of 20k years shall be forfeted (G0k-40k) may stil be cartied forward in Year Carry forward is possible only if NCIT is 7 and the excess MCIT in Year § of 20k may still be carried forward up to Year 8, if the NCIT yreater than the MCIT in such year, as itis MciT ithin the 3-year period. However, in the NIT ~ W6n ilustration, the MCIT in Year ? is greater Excess MCIT 60k 20k © * than the NCIT. Hence, excess MCIT is not Nerden nla ath a eae Less: Carry forward From Year4. ————» (40k) From Year 5 From Year 6 “Tax Due greator than CIT; 5. The maximum amount that can b Lp to the amount of the NCIT; an ments for the Suspension of the ition of MCIT (ALL-FR): fespefsion was upon the Authority of the retary of Finance: 2. Substantial Losses were sustained; and 3o.The Josses must be due to any of the Aeoliowina: ‘Gee / a. Prolonged Labor dispute — losses arising 6. The excess MCIT cannot be cl Atom a strike by the employees for more rr a fe than six (6) months win @axeble period ther losses (NIRC, Sec. 27(E)) causing temporary shutdown of business Seenenee operations; Mustration: b. Force majeure — cause due to an ‘A domestic corporation had the following data on ifresistible force as by “act of god” like computation of the NCIT and the MCIT for five lightning, earthquake, storm, flood and the oe like; also includes armed conflicts lke war Yeara Year5 Year Year? Years and insurgency; MCIT 80k 50k 30k 40k 35k c. Legitimate business Reverses ~ include NGIT 20k 30K 40k = 20k 70k substantial losses sustained due to fire, robbery, theft, or embezzlement, or for The excess MCIT over NCIT carry-forward is, other economic reasons as determined by shown below: the Secretary of Finance (NIRC, Sec. 27(E)(3). BIR Memorandum 6-2002). Notes: : 4. Arrow pointing downward means that the Entities to which MCIT Is Not Applicabl NCIT is higher so that there can be an excess 1. Domestic proprietary educational institutions — MIT carry-forward against it subject to ten percent (10%) of their taxable 2. The figure with asterisk (*) ~ Cannot carry- income, forward an amount higher than NCIT, hence only the 40k of the excess of 60k from Year 4 Note: This is subject to the Predominance may be cartied forward against the NCIT in Theory. if the gross income from unrelated trade, business, or activity exceeds fifty Year 6, The unused 20k remaining from Year ea percent (50%) of gross income from all SAN BEDA CENTRALIZED BAR OPERATION:INCOME TAX sources, the domestic proprietary educational institution shall be subject to 30% NCIT, and thus also to MCIT. 2. Domestic non-profit hospital ~ subject to ten percent (10%) on their taxable income; 3. Domestic depository banks under the expanded foreign currency deposit system — subject to final income tax of ten percent (10%) of their taxable income; 4. Resident foreign international carrier ~ subject to two and one half percent (2.5%) of their Gross Philippine Billings; 5. Resident foreign offshore banking units ~ subject to final income tax at ten percent (10%) of such income; 6 Resident foreign regional operating headquarters — subject to tax at ten percent (10%) of their taxable income; 7. Firms enjoying special income tax rate under the PEZA law, Bases Conversion and Development Act of 1992 and those, income tax holiday incentives; 8. Nonresident foreign corporations; and 9. Real Estate Investment Trust (R.A, No, 9856. otherwise known as the’, Réal~ Estate Investment Trust Act of 2009, Sec. t ~ Reason: The entities sagen ig ‘exempt from MCIT because they. ate not Subject toNCIT (RR. No.9-98). i a Note: MCIT shall apply to the quarterly corporate income tax but the final comparison betwé NCIT due and the MCIT shall be mad@ at we of the taxable year taking into coljsideration, quarterly tax payments made (R.R. No.12-2007}-" Il. Gross Income Tax (GIT) (IIRC, Sec. 27(A)) ‘Tax Rate: 15% optional rate ‘Tax Base: Gross income When GIT is applicable: 41. Available only to firms whose ratio of cost of sales to gross sales or receipts from all sources does not exceed fifty-five percent (55%); and 2. Its application in lieu of the NCIT must be authorized by the President upon. recommendation. by the Secretary of Finance (NIRG, Sec. 27(A)) Note: To date, no authority has been given by the President Conditions to be satisfied before the grant of President's authority: 1, Tax effort ratio — 20% of GNP; 2. Ratio of income tax collection to total tax revenues ~ 40%. VAT tax effort — 4% of GNP; and Ratio of Consolidated Public Sector Financial Position (CPSFP) to GNP ~ 0.9% (id). Note: The election of the GIT option shall be itrevocabie for three (3) consecutive years during which the corporation is qualified under the scheme (NIRG, Sec. 27 (A)) Ml Capital Gains Tax (CGT) (NIRC, Sec. 27(0)(2) and (5)) Corporations liable: DC, RFC, NRFC There is no provision for CGT on sale or disposition of real properties for RFC and NRFC because foreign corporations cannot own real properties in the Philippines. w to Consolidated Rules on Capital Gains for discussions ean wee W Sak Jax ba Passive Income (NIRC, Soc. ble: DC, RFC, NRFC ‘Tax Base: Same rules as those Go Coen g Cenc Ceomgt —|S0%NCIT nro [esent ‘| som now were [oReT— famanor (subject (sources within) [onditions) Note: Where the foreign corporation meets the 50% threshold, a portion of its dividends will be treated as coming. ‘from Philippine source (NIRC, Sec. 42(A)(2)(b)) Conditions for the 15% final tax imposed on dividends received by a NRFC from a domestic ‘corporation (Tax Sparing Rule) 4, The country in which the non-resident foreign corporation &s domiciled allows a tax credit against the tax due from the NRFC taxes deemed to have been paid in the Philippines equivalent to fifteen percent (15%); or 2018 SAN BEDA CENTRALIZED BAR OPERATIONS | 53INCOME TAX 2. Such country does not impose tax on dividends (IIRC, Sec. 28(8)(5)(b)) Effect if tax credit is not allowed: Itis subject to final tax of thirty percent (30%) ifthe ‘country within which the NRFC is domiciled does not allow a tax credit, ‘Tax Sparing Rule ‘The fifteen percent (15%) represents the difference between the NCIT of thirty percent (30%) on corporations and the fifteen percent (16%) tax on dividends. It Is the amount of tax forgone by the Philippine government in favor of the non-resident corporation. To expound, the ordinary 30% tax rate applicable to dividend remittances to non-resident. corporate stockholders of a Philippine corporation goes down to 15% if the country of domicile of the foreign stockholder corporation “shall allow’ such foreign ‘corporation a tax credit for taxes deemed ae Philippines.” applicable againstthe tax payable.to" the domiciliary country by the foreign stockholder corporation (2 DIZON, supra at 35%358),. Note: The Tax Code does not ret d. The amount of net operating loss carry- over (NOLCO) deducted; 2. Reduced by the sum of: a. Dividends actually or constructively paid ‘ssued from the applicable year’s taxable Income tax paid/payable for the taxable year; and amount reserved for the reasonable needs of the business emanating from the covered year's taxable income (R.R. No. 2-2001, Section 5) Rationale of (AET earnings and profits were distributed, shareholders would be liable to income tax thereon, whereas if there is no distribution, they would incur no tax in respect to the undistributed earnings and profits of the corporation. Thus, a tax is being imposed: 1. As penalty for the improper accumulation of its ‘earnings (penalty tax); and ‘"Asa.form of deterrent to the avoidance of tax thareholders who are supposed to pay dividends tax ort the earning distributed to them ‘by.the corporation (R.R. No. 02-2001, Sec. 2). e [thatthe ea me improper accumulation of surplus is to foreign tax law deem the parent-corpdratiog to have |» Wisteourage tax avoidance through corporate surplus paid the fifteen percentage points (15%) of dividend tax waived by the Philippines: it only requires that the foreign country “shall allow” the taxpayer a "deemed Paid” tax credit in an amount equivalentto thefteen percentage points (15%) (Id.), \ Vi improperly Accumulated EarningstTax (nen (NIRG, Sec. 29). : Corporation liable: DC and corporations Tax Rate: 10% Improperly accumulated taxable income Imposed on improperly accumulated taxable income earned, starting January 1, 1998, of domestic corporations and are classified as closely- held corporations. clesely-held IAET refer to profits of a corporation that are permitted to accumulate instead of being distributed to its shareholders for the purpose of avoiding the income tax with respect to its shareholders or the shareholders of another corporation (R.R. No. 2- 2001, Sec. 2). ‘The term ‘improperly accumulated taxable income’ means taxable income: 1. Adjusted by: ‘a. Income exempt from tax; b. Income excluded from gross income, ©. Income subject to final tax; and Ga | 2018 SAN BEDA CENTR! ZED BAR OPERATIONS. tig When corporations do not dectare dividends, income taxes are not paid on the undeclared dividends received by the shareholders, The tax on improper accumulation of surplus. is ‘essentially /a penalty tax designed to compel Corporations to distribute earnings so that the said ‘earnings -could, in tum, be taxed (Cyanamid Philippines, Inc. v. Court of Appeals, GR. No. 108067, January 20, 2000). Period for Payment of Dividend or Payment of IAET Dividends must be declared and paid or issued not later than one (1) year following the close of the taxable year. Otherwise, IAET (if any) should be paid ‘within fifteen (15) days thereafter (R.R_ No. 02-2001, Sec. 6), Note: If a taxable partnership does not declare dividends, it is not subject to IAET because under ‘See. 73(D) of the NIRC, the net share of a partner is deemed constructively received (Constructive Distribution). Touchstone of the Liability: It is the purpose behind the accumulation of the income and not the consequences of the accumulation. Thus, if the failure to pay dividends is due to some other causes, such as the use of undistributed earnings and profits for the reasonable needs of the business, such purpose would not generally make the accumulated or undistributed eamings subject to the tax_ INCOME TAX © on MEMORY However, if there is a determination that a Corporation has accumulated income beyond the easonable needs of the business, ten percent (10%) IAET shall be imposed (R.R. No. 2-2001, Sec. 2. ‘The controlling intention of the taxpayer is that which js manifested at the time of accumulation, not subsequently declared intentions, which are merely the product of afterthought. A speculative and indefinite purpose will not suffice, Definiteness of plan/s coupled with action/s taken towards its ‘consummation is essential (Basilan Estates, Inc. v. CIR, G.R. No, L-22492, September 5, 1967). Limitation: The profit that has been subjected to IAET shall no longer be subjected to IAET in later years even if not declared as dividend. However, Profits which have been subjected to IAET, when declared as dividends, shall be subject to tax on dividends except in those instances where the recipient is not subject thereto (RR. No, Sec. 5), Reasonable Accumulation of Income the purpose of the business, considé circumstances of the case. The terth “reasonable needs of the business” is construed, to mean'the, mediate needs of the business, including” reasonably anticipated needs (IRC, Sec, 29(E) RR No. 2.2001, Sec. 3). To determif reasonable needs of the business in ofder t@ ‘an accumulation of earnings, the immediacy Te used (Cyanamid Philippines, Inc. vi Co Appeals, G.R. No. 108067, January 20, 2000). fering immediacy Test It construed the reasonable needs of the busingsere= as the immediate and reasonably anticipated needs supported by a direct correlation of anticipated Reeds to such accumulation of profits. If the corporation did not prove an immediate need for the accumulation of the eamings and profits, the accumulation was not for the reasonable needs of the business, and the IAET would apply (Cyanamid Philippines, Inc. v. Court of Appeals, G.R. No. 108067, January 20, 2000) The following constitute proper accumulation of needs of the : (PLACES) for the increase in accumulation of earnings up to one hundred percent (100%) of the Paid-up capita The basis of the one hundred percent (100%) threshold of retention shall be the paid-up capital for the amount contributed to the corporation representing the par value of the shares of stock SAN BEDA stock ‘The secumblation ls reasonable tity nebesdbry BSE OF Nobu ‘Any excess capital over and above the par {APIC/Premium) shall be excluded (R.M.C. No. 35-2011), 2. Eamings required by Law or applicable regulations to be retained: 3. Earnings reserved for building, plants or equipment Acquisition as approved by the Board Of Directors or equivalent body; 4, Eamings reserved for Compliance with any loan ‘covenant or pre-existing obligation; 5. Eamings reserved for definite corporate Expansion projects or programs approved by the: Board of Directors or equivalent body; and 6. In case of Subsidiaries of foreign corporations in the Philippines, all undistributed earnings intended or reserved for investments within the Philippines (R.R. No, 2-201), ‘The following instances con: accumulation of earning -acie Instances tment of substantial earnings and profits ion in unrelated business or in of unrelated business; in bonds and other long-term and ite improper stock or § Dower instances By Accumulation of liquid net assets Se approximately equal to the annual operating ‘Needs for the year to cover cost of goods sold aid operating expenses because it excludes proper consideration of funds generated by the collection of notes receivable or trade accounts during the course of the year (Basilan Estates, Inc. v. Commissioner of Internal Revenue, G.R. No. L-22492, ‘September 5, 1967); and b. Indirect loans fo stockholders (2- DOMONDON, supra at 137). Prima Facie Evidence of Purpose to Avoid Income Tax: 1. The fact that the corporation is a mere holding company or investment company (NIRC, Sec. 29(C)(1)); and 2. The fact that the earings or profits of a corporation are permitted to accumulate beyond the reasonable needs of the business (RR. No. 2-2001, Sec. 7). Holding or Investment Company ~ a corporation which has practically no activities except holding property, and collecting the income therefrom or investing the same (RR. No. 2-2001, Sec. 7) 1 SAN BEDA CENTRALIZED BAR OPERATIONS | 55.INCOME TAX Corporations Exempted from the IAET: (BPI- TENG) Banks and other _ non-bank intermediaries (NIRC, Sec. 29(8)(2)) Publicly-held corporations (IRC, Sec. 29(8\(2)) ~ domestic corporations not falling Under the definition of closely-held corporations (RR. No. 02-2001, Sec. 4): Insurance companies (NIRC, Sec. 29(8)(2)): Taxable partnerships — deemed to have actually ‘or constructively received the taxable income; Enterprises duly registered with the Philippine Economic Zone Authority (PEZA) under R.A ‘No. 7916 (Philippine Special Economic Zone Act of 1995), and enterprises registered pursuant to RA. No. 7227 (Bases. Conversion and Development Act of 1992), as well as other enterprises duly registered under special economic zones declared by law which enjoy payment of special tax rate on their registered operations or activities in lieu of other sty national or local; Nor-taxable joint ventures! General professional parinerships taxable against the partners) 300 financial 6. 7. (exer 8. Branches of Eoreign corporations, (AZAD NB, e 3 2001, Sec. 4). Notes: ie 7 Te For nos. 1-3: exempted without ualiicaon; For nos. 4-7: qualification that |AE must be forthe uldbe 2. reasonable needs of the business shi satisfied; and 3. For no. &: not covered. V. _ Branch Profit Remittance Tax (BPRT) (IRC, Sec. 28(A)(5)) : Corporation liable: RFC Tax Rate: 15% Tax Base: Total profit applied or earmarked for remittance without any deduction for the tax ‘component thereof. Note: The branch profit remittance tax applies whether the remittance of profit is done actually or constructively, as when the Philippine branch of a foreign banking corporation did not actually remit the profit to its foreign head office because such profit was made part of the assigned capital of the foreign head office in the Philippine branch (ING Bank (Manila. Branch) v. Commissioner of Internal Revenue, CTA Case No. 6017, March 11, 2002) Exceptions: 1. Those activities which are registered with the Philippine Economic Zone Authority (PEZA) (NIRC, Sec. 28(A)(5)). Enterprises ‘registered with ‘Authority the Subic Bay Metropolitan (SBMA) and Clark Development Authority (CDA) covered by RA No. 7227. Reason for imposition of BPRT In order to neutralize the unequal tax treatment as between a local branch of a foreign corporation and adomestic subsidiary of another foreign corporation, Prior to the imposition of the BPRT, local branches of foreign corporations are subject only to 1 layer of income taxation (when income is realized in the Philippines) whereas domestic subsidiaries of foreign corporations are subject to two layers of taxation (when income is realized in the Philippines and when income is declared as dividends by the local subsidy to its parent-company abroad). Hence, the remittance was conceived in an attempt to equalize the tax burden on foreign corporations maintaining, on the one hand, local branch offices and organizing, on the other hand, subsidiary domestic corporations (Bank of America NT & SA v. Court of Appeals, G.R. Nos. 103092 & 103106, July ec reigi icorporation deriving income fe following shall not be treated as purposes of remittance tax (IDR3- ‘ation for technical services; ‘Salanes, and wage premiums; Annuities, emoluments or other fixed or detepminable annual, periodic or casual gains; and~ -Bfofits, income and capital gains Excoption: if effectively connected with the conduct Of its trade or business in the Philippines (NIRC, Sec. 28(A)(5)). Note: If income is not effectively connected with the conduct of the corporation's business within the Philippines, then the corporation is liable for the 30% NIT, Payment of Remittance ‘The income tax on BPR shall be collected through withholding by the payor-corporation andlor persons, covered by a retum and paid to an authorized agent bank, to the Revenue District Officer, Collection Agent, or duly authorized treasurer of the city or municipality (NIRC, Sec, 28(A)(5) in relation to Secs. 57 and 58). Income Tax on Branch ProfitINCOME TAX AN BEDA Note: The 15% BPRT is in addition to the regular tax imposed on resident foreign corporations (RR No. 2, ‘Soc. 15(b), as amended by R.R. No. 8-75). VI. Tax On Non-Resident Foreign Corporation (NIRC, Sec. 2(8)) Tax Rate: 30% Tax Base: Gross income received from all sources within the Philippines such as interests, dividends, rents, royalties, salaries, premiums (except reinsurance premiums), annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits and income, and capital gains except capital gains resulting from the sale of shares of stock of a domestic corporation not listed and traded through a local stock exchange, held as a capital asset Reason: A NRFC is not subject to NCIT on its taxable income but instead subject to final tax on gross income without the benefit of any (MIRC, Sec. 26(6)). SY Special Domestic Corporations ». These are the domestic corporat to concessionary tax rates that are imposed upon ordinary domestic c are not usually conducted for profi are, they are usually engaged in activ ‘would General "benett the pubic (2A -BOMGNDON, Supra at 141), : The following are Corporations: 1. Proprietary Non-Profit Educational Wyetitutl and Hospitals; ae 2. Depositary Banks (Foreign Currency: Denes Units); and 3. Government owned and controlled corporation instrumentalities or agencies. 1. Proprietary Non-Profit Educational Institutions and Hospitals (NIRC, Sec. 27(6)) Proprietary educational institution — Any private school maintained and administered by private individuals or groups with an issued permit to operate from the Department of Education (DepEd), or the Commission on Higher Education (CHED), or the Technical Education and Skils Development Authority (TESDA). Non-profit means no net income or asset accrues 0 oF benefits any member or specific person, with all the net income or asset devoted to the institution's purposes and all its activities, conducted not for profit’ (Commissioner of 16Ry Alt Internal Revenue v. St. Luke's Medical Center, Inc. G.R. No, 195909, September 26, 2012). Note: Hospitals and educational institutions that fail to meet the above definition of "proprietary” and “non-profit” shall be taxed as a regular ‘corporation (R.M.C. No. 67-2012) Requisites for Applicability of 10% Rate: (SPUF) 1. Stock and non-profit institutions; 2. Private educational institution or hospital; 3. Gross income from Unrelated trade, business, or activity does not exceed fifty percent (50%) of gross income from all sources (Predominance Theory); and or educational institutions, issued a permit to ‘Operate from DepEd, CHED, or TESDA (NIRC, Sec. 27(B)). Unrelated Trade, Business or Other Activity ~ business or activity, the conduct of which pstantilly, related to the exercise or on their taxable income (except income | subject to capital gains tax | and passive income) 0 ackspocone from | 30% on the entire taxable —Yungelgtéa” trade, | income (including income [busifiess or other | subject to tax and income ly exceeds fifty | which are exempt) or 2% ppercent (50%) of the | MCIT. {otal gross income derived from all sources Note: Non-stock, non-profit educational institutions are exempt from income tax (CONST. Art. XIV, Sec. 4) Mlustration: Ifa proprietary educational institution eared a net income of 100,000,000, 50,000,000 of which came from unrelated trade, business or activity, the net income would be subject to 10% tax. On the other hand, if 51,000,000 came from unrelated trade, business or activity, the 100,000,000 would be subject to 30% (2 DIZON, supra at 290) Exemption extends to incidental income from ancillary activities such as those derived from cafeterialcanteen, bookstore, dormitory and other 2018 SAN 1A CENTRALIZED BAR OPERATION:INCOME TAX aGRY AID ZC facilities, which are located within the school premises (Finance Department Order No. 137-87, Sec. 2, as amended by Finance Department Order No. 92-88; BIR Ruling 248-88 dated June 6, 1988; BIR Ruling ENPS-012-98 dated November 25, 1998; and BIR Ruling ENPS-006099 dated May 17, 1999) If the income derived from educational-related activities is invested in a non-related activity, the earnings realized therefrom, like interest, are taxable. However, if such earnings are used actually, directly and exclusively for educational purposes, they are also exempt (Finance Department Order No. 137-87, Sec. 2, as amended by Finance Department’ Order No. 92-88; BIR Ruling 248-88 dated June 6, 1988; BIR Ruling ENPS-012-98 dated November 25, 1998; and BIR Ruling ENPS-006099 dated May 17, 1999). ‘Thus, unlike other non-stock, non-profit corporations, interest. income from Ri currency bank deposits and‘yleld fro substitute instruments used actly, dircctly.and «15 JRASNO. 9294) ‘exclusively in pursuance of the education: waco. for which an educational insituton was crested eres Cereus exempt from the twenty perc (20%y~Tar wmtnnoiding tax and the seven and Rall pergent (7.5) ton tet ncome under ine ard foreign currency deposit systera imposed 27(D)(1) of the NIRC (2 DIZON, supra'pt 292). Exemption of Schools and Hospitals trom tax ¥ As to nonstick, non-profit educational into fevenues and ssccts used actually, dkecly Seley ter aaeatonal panes, agent (CONST. Art XW, Seo. 4(3)) ropetary exsebi ins: ‘educational institution is entitled only to the reduce rate of 10% corporate income tax if it is non-profit and its gross income from unrelated trade, business. cF activity does not exceed 50% of its total gross. income (Commissioner of internal Revenue v. De La Salle University, G.R. No. 196596, November 9, 2016.) Note: Income” from cafeterias, canteens and bookstores are also exempt if they are owned and ‘operated by the educational institution and are located within the school premises (RMC 76-2003). With regard to a hospital, it is exempted provided that: 1. Itis non-stock and non-profit 2. Its assets, property and revenues are used actually, directly, and exclusively for the primary purpose (NIRC, Sec. 30). Please see exempt corporations for further discussions SB | 2018 SAN BE ENTRALIZED BAR OPERATIONS Section’ Note: Non-stock, non-profit corporations or associations which claim {0 be charitable or social welfare but are not organized and operated "exclusively" for charitable or social welfare: purposes are not entitled to the income tax ‘exemption under Section 30(E) and (G) of the NIRC, a amended, and their taxable income shall be Subject to ordinary 30% corporate rate under Section 27(A) of the NIRC, as amended (R.M.C. No. 67- 2012). The Court finds that St. Luke's is a corporation that is not “operated exclusively’ for charitable or social welfare purposes insofar as its revenues from paying Patients are concerned. However, an institution under Section 30(E) and (G) does ‘not lose its tax exemption if it eams income from its. for-profit activities, Such income from for-profit activities is ‘merely subject to income tax at the preferential 10% rate (R.M.C. No. 67-2012). itary Banks (Foreign Currency Deposit (NIRC, Sec. 27(D)(3), as amended by smpt from all taxes on income ‘the Expanded Foreign Currency (EFCDS) from foreign currency mercial banks, including branches of yanks that may be authorized by the system units; and (depositary banks under the EFCDS. “Net income from such transactions as may be specified by the Secretary of Finance, upon recommendation by the Monetary Board to be subject to the normal corporate income tax payable by banks; and 2. Final tax of ten percent (10%) on interest income from foreign currency loans granted by such depository banks under said expanded system to: ‘a. Residents other than offshore units in the Philippines; or b. Other depository banks under the expanded system. Note: Income of non-residents (individual or Ccorperation) from transactions with depositary banks under FCDS is exempt from final tax.INCOME TAX BEDA ME 3. Government Owned and Controlled Note: The tax attaches only when the carriage of Corporations (GOCC) persons, excess baggage, cargo, and mail ‘originated from the Philippines in a continuous General Rule: The rules governing domestic and uninterrupted flight, regardless of where the corporations engaged in a similar business, industry, passage documents were sold (Air Canada v. cor activity shall apply. In short, they are taxable Commissioner of Internal Revenue, G.R. No. (NIRC, Sec. 27(0)). 169507, January 11, 2016) Exceptions: If the international air carrier does not have flights 1. Government Service Insurance System to and from the Philippines’ but nonetheless earn (sis); income from other activities in the country, then it 2. Social Security System (SSS); shall be subject to the thirty percent (30%) NCIT 3. Philippine Health Insurance Corporation for the thirty percent (30%) final tax on gross (PHIC); income, respectively (South African Airways vs 4, Philippine Charity Sweepstakes Office CIR, G.R. No. 180356, February 16. 2010). (PCSO); and 5. Local Water Districts (LWD) (R.A. No. 10026, {An offline carrier which has @ branch/agent in the Sec. 1), Philippines and sells passage documents to cover offline fight of its principal or other airlines is taxed, Note: RA No. 9337 deleted PAGCOR from the list of for the sale of the tickets even if the service to be exempt GOCCs. PAGCOR's income derived from its rendered is outside of the Philippines based on the gaming operations is subject to 5% franchi lieu of all national and local taxes, while ‘ from other related services or optrations © subject to the regular corporate, inom tax (Phobia Amusement and Gaming Corp. v. ‘Bareat Revenue, G.R. No, 215427, December 10,2078) ines in'the Philippines. + a! tax rate of 2.5% based on GPB; or Wf the GOCC is not included it thy RBEN Emiption: ‘enumeration, does it follow that all of itsiincome: jed on tax treaty or international is automatically subject to tax? | agreement to which the Philippines is a signatory; of the basis of reciprocity (ie. home gountry grants income tax exemption to ees / Philippine carriers) (R.A. No. 10378). taxation principle (Air Canada v. ioner of Internal Revenue, G.R. No. Januarye41, 2016) NO. income derived from any public tity & the exercise of essential government fe accruing to the government of the Pilippines' any political subdivision is exempt from income: 7S Therefore, even if the GOCC is not one of those ‘ntersational Air Carrier — a foreign airline enumerated under Sec. 27(C) of the NIRCSitumay \cerporation doing business in the Philippines Stil be exempt under Sec. 32(8)(7) of the NIRC'TrP=="Faving” been granted landing, rights in any is performing governmental functions (NIRC, Sac. . Philippine port. to perform international air 3281). transportation servicesiactivties or fight ‘operations anywhere in the worl What is the difference between Sec. 27(C) and ‘Sec. 32(B) (7) of the NIRC? On-line flights or voyages ~ refer to flight or Sec. 27(C) of the NIRC exempts from income tax voyage operations carried out or maintained by an those enumerated without any qualification while in international carrier between ports or points in the ‘See. 32(B)(7) of the NIRC, qualification (i.e, income territorial jurisdiction of the Philippines and any is derived from any public utlity or from exercise of port or point outside the Philippines. any essential governmental function) must concur before it may be exempted, Oftine flights or voyages — refer to flight or voyage operations carried out or maintained by an, Special Resident Foreign Corporations international carrier between ports or points, 1. International Carriers doing business in the outside the territorial jurisdiction of the Philippines, Philippines (Air Carrier and Sea Carrier) (RR. No. 15-2002, Sec. 2). (IIRC, Sec. 28(A)(3)); RR. No.15-2013) Gross Philippine Billings Tax Rate: 2.5% a. International Air Carrier ~ Gross revenue ‘Tax Base: Gross Philippine Billings (GPB) from carriage of persons, excess baggage, cargo and mail originating from the Philippines ina continuous and uninterrupted. flight, OIG SAN BEDA CENTRALIZED BAR OPERATIONS | 5880 | 20168 SAN BEDA CENTRALIZE INCOME TAX — Sey aro ’ lirespective of the place of issue and the place ‘of payment of the ticket or passage document (NIRC, Sec. 28(4)(3)(a)) b. International Shipping ~ Gross revenue ‘whether for passenger, cargo or ail originating from the Philippines up to final destination, regardless of the place of sale or payments of the passage or freight documents (IRC, Sec. 28(A)(3)(0)) Continuous and Uninterrupted Flight or Voyage Refers to a flight or voyage in the carrier of the ‘same company from the moment a passenger, excess baggage, cargo, and/or mail is lifted from the Philippines up to the point of final destination of the passenger, excess baggage, cargo and/or mail (RR. No. 15-2002, Sec.2(h). Notes: 1. The flight or voyage is not considered continuous and uninterruy transshipment of _ passenger, baggage, cargo andior-mail-takes place, ny port outside the Philippines on aircraft or vessel belongi company; + Effoct of fight interruption (Le. chahGe ot Transchypmont at ary. port outs (he Fhilppines trom en arrine a Gniy the aliquot portion of Ine fexet corresponding tothe 1G oy the Phiippines tothe point of ranachi Billings. (known as, flown revenue) DIZON, supra at 343) pr 3). So 2. Offshore Banking Units (OBUs) authorized by the BSP (NIRC, Sec. 28(A)(4), as amended by RA. No, 9294) Offshore Banking Unit A branch, subsidiary or affiiate of a foreign banking corporation which is duly authorized by the BSP, General Rule: Exempt from all taxes on income derived under the EFCDS from foreign currency transactions with: 41. Non-residents; 2. Offshore Banking Units; and 3. Local commercial banks, including branches of foreign banks that may be authorized by the BSP to transact business with foreign currency deposit system units. Exception: It is subject to final tax of ten percent (10%) on interest income derived from foreign y loans granted to RESIDENTS other hore banking units or local commercial local branches cf foreign banks thorized by the BSP to transact "offshore banking units. Lome of non-residents, _ whether “corporation, from transactions with cempt from final tax. » Note! Same rules as discussed above under Special Domestic Corporations No. 2. nal or Area Headquarters _ of 2. Incase of a stopover, tis stil considerad BE" “Multinational Companies (NIRC, Sec. uninterrupted if the stopover does not exceed 48 hours (R.R. No. 15-2013, Sec. 3). 3. An offline international carrier with no landing rights in the Philippines, is not liable to tax on Gross Philippine Billings ((Air Canada v. Commissioner of Internal Revenue, G.R. No. 169507, January 11, 2016) 4. A foreign airline company selling tickets in the Philippines through their local agents shall be considered as RFC engaged in ‘trade or business in the country. The absence of flight operations within the Philippine territory cannot alter the fact that the income received was derived from activities within the Philippines. The test of taxabilty is the source, and the source is thal activity which produced the income (Air Canada v._ Commissioner of Internal venue, CTA Case No. 6572, December 2004} > BAR OPERATIONS 28(A)(6)(a) ‘Tax Rate: Exempt from income tax. Note: It is also exempt from all kinds of local taxes, fees, or charges imposed by a local government unit except real property tax on land improvements and equipment (E.0. 226). Regional or Area Headquarters (RHQ) — office ‘whose purpose is to act as an ‘administrative branch of a multinational company which: a. Principally serves as a_ supervision, ‘communications and coordination center for its subsidiaries, branches or affiliates in the Asia-Pacific Region; and b. Does not derive income in the Philippines.INCOME TAX Operating ational Companies 28(A)(6)(b)) Headquarters _ of (NIRC, Sec. Tax Rate: 10% Tax Base: Taxable income within the Philippines Regional Operating Headquarters (ROHQ) ~ foreign business entity which is allowed to derive income in the Philippines by performing qualifying services to its affiliates, subsidiaries or branches in the Philippines, in the Asia-Pacific Region and in other foreign markets and may ‘engage in the following activities: a. General administration and planning; b. Business planning and coordination: ¢. Sourcing and procurement of raw materials ‘and components; d. Corporate finance advisory services; 2. Marketing control and sales promotion; f. Training and personnel management; g. Logistic services; ee ‘fh. Research and development servi ius product development; “<\. -- i. Technical support and maintenance; J. Data processing and communications: and k. Business development. , $oecla Non esdent Foreign Conrt sitio aad tb hae org Lee Sata, Cartons or Bett me, Se (28(B)(2)) Tax Rate: 25% ‘epaee Tax Base: Gross income from all soirces wit the Philippines 2. Non-Resident Ow: Chartered by Philippine Nationals (NIRC* Sec. 28(B)(3)) Tax Rate: 4.5% ‘Tax Base: Gross rentals, lease or charter fees. from leases or charters to Filipino citizens or Corporations, as approved by the MARINA 3. Non-Resident Owner or Lessor of Aircraft and Machineries and Other Equipment (NIRC, Sec. 28(8)(4)). Tax Rate: 7.5% Tax Base: Gross rentals or fee ‘Tax-exempt Corporations (IRC, Sec. 30) ‘The following organizations shall not be subject to tax provided they are not organized for profi: (BLOG-COM-F2EN) 4, Business league, chamber of commerce, or board of trade, not organized for profit and no part of the net income of which inures to the benefit of any private stockholder or individual; ep& h | we Business league ~ An association of persons having some common business interest, which limits its activities to work for such common interest and does not engage in a regular business of a kind ordinarily carried on for profit (RR. No. 02-40, Sec. 31) It ceases to be tax exempt if it engages in a regular business for profit even if it conducts business on a cooperative basis or produces only sufficient income to be self-assessing. ‘An association engaged in furnishing information to prospective investors, to enable them to make sound investment, is not exempt, since its members have no common business interest, even though all its income is devoted to the purpose stated (R.R. No, 02-40, Sec. 31). 2. Labor, agricultural or horticultural organization ot organized principally for profit tural or horticultural organizations: ist _havg-no net income inuring to the ‘any member; jcational or instructive in character; fed pve ‘as their objects the betterment of ine conditions of those engaged in such suits (R.R, No, 2-40, Sec. 25). 3. Civic Jegatie or Organization not organized for \ prpfit byt operated exclusively for the promotion of sotial welfare, _ Boveriment educational institution 5./ Cemetery company owned and operated Exclusively for the benefit of ts members; 6.JA beneficiary society, Order or association, ‘operating for the exclusive benefit of the members such asa: fratemal organization ‘operating under the lodge system, or a mutual ‘aid. association or a non- stock corporation ‘organized by employees providing for the payment for life, sickness, accident, or other benefits exclusively to the members of such society, order or association, or non-stock ‘corporation or their dependents; Operating Under the Lodge System — Means carrying on its activities under a form of ‘organization that comprises local branches, chartered by a parent organization and largely self-governing, called lodges, chapters, or the like (2 DE LEON, NIRC '(2011), p. 303) [hereinafter 2 DE LEON), Notes: A grand lodge established for the care of thie members, their dependents, and members. of an affiliated lodge unable to earn a livelihood 2018 SAN BEDA CENTRALIZED BAR OPERATIONS | 61INCOME TAX : MEMORY At by reason of the infirmities of age was held tax The exemption of _non-stock, non-profit exempt ‘educational institutions refers to internal fevenue taxes imposed by the National ‘Mutual protective societies not operating under the lodge system and traveler's association providing for fixed death benefits to the beneficiaries or members are not tax exempt, Government on all revenues and assets used actually, directly and exclusively for educational purposes (CONST. Art. XIV, Sec. 4(3)) Note: Revenues derived from assets used in the 7. Mutual savings bank not having a capital stock. operation of eafeteriasicanteens and bookstores Tepresented by shares. and cooperative bank ‘exempt from taxation are exempt trom taxation, without capital stock organized and operated for provided that they are owned and operated by ‘mutual purposes and without prof; the educational institution ae ancillary activities : and the same are located within the school In order that a corporation may be entitled to premises (MAMALATEO, Phillppine Income exemption, it must. appear that it is an ‘Tax, 2010, p. 174), organization 2. Which has no capital stock represented by Note: The currency bank deposits and the yield shares: and from deposit. substitute instruments used b. Whose earnings less only the expenses of actually, directly and exclusively in pursuance of operation are distributable wholly among the they purpose as an educational institution are depositors (RR. No. 02-40, Sec. 26 EXEMPT from Y% final tax; and Notes: Exemption applie8:to both f 2% tax on interest income under the domestic banks. SAN BED A. Mpandeyteralan curency depost sytem Not qualified as mutual savings Wank @epodiSSE OF LA are made compulsory under cobtract wat * uirements: the bank and the depositors ands operated for fia mation Return; and speculation rather for savings. ‘augted financial statement to gather with 8. Farmers, fruit growers or like association ication from their depository banks as organized and operated as a salesiager to the amount of inlerest income earned purpose of marketing the. products spo] Mor esve investment not subject 0 the members and turning back to them the prog a 20% final withholding tax and 7%-12% tax of sales, less the necessary selling éxpensé ar / off interest income under the expanded the basis of the quantily of produce fs /, _«pbeign currency deposit system imposed by them: es. 27(0)(1) of the NIRC- 9. Earmers or other mutual typhoon ‘ée.fire Certification of actual utilization of said insurance company, mutual ditch or irigat income: and company, mutual “or cooperative. telephone ©. Board “Resolution by the _ school company, oF like organization of a purely local administration on proposed projects (Le. character; the income of which consists solely of ‘onstruction and/or improvement of school assessments, dues oF fees collected. from buildings and. facilites, acquisition -of members for the sole purpose of meeting its ‘equipment, books and the lik) tobe funded expenses: ‘ut of the money deposited in banks or 10. A non-stock and non-profit Educational placed in money markets, on or before the insttutions; and {ath day of the fourth month following the end of its taxable year (Finance Department General Rule: Non-stock, _ Nomprofit Order No. 137-87, Soc. 3). Educational Institutions are exempt from taxation (IRC, Sec. 30). Exception: Private educational institution which deviates from its purely educational purposes ‘and activities shall be treated like any private domestic corporation engaged in business for profit (MAMALATEO, Philippine Income Tax, supra at 171). G2 | 2018 SAN BEDA CENTRALIZED BAR OPERATION! Note: The exemption does not cover withholding taxes. As educational institution, they are constituted as withholding agents for the government required to withhold the tax on ‘compensation income of their employees, or the withholding tax income payments to persons subject to tax pursuant to Sec. 57 of the Tax Code of 1997 (MAMALATEO, Philippine income Tax, supra at 175).INCOME TAX Note: Interest from savings and time deposits are exempt from the 20% final withholding tax, if earned by non-stock, non-profit educational institutions as all revenues and assets of these institutions “which are actually, directly and exclusively used for educational purposes are exempt from taxation, 11. Non-stock corporations or association organized and operated exclusively for religious, charitable, scientific, athletic or cultural purposes, or for the rehabilitation of veterans, no part ofits net income or asset shall belong to or inure to the benefit of any member, organizer, officer or any specific person, In case of religious activities, income from the conduct of strictly religious activities, such as fees received for administering baptismal, solemnizing marriages, attending burials, holding masses and the like, are exempt. sooner revoked or cancelled (R.M.O. No. 20- 2013, Sec. 9). Effect if a charitable institution engages in activities conducted for profit It does not lose its tax-exempt status for its not-for profit activities. However, such profit is subject to tax (INGLES, supra at 101). ‘Common Limitation ‘They are not subject to income tax on income received by them from undertakings which are essential to or necessarily connected with the Purposes for which they were organized and operated. However, those that are derived from: ‘a. any of their properties, real or personal or b. any of their activities conducted for profit regardless of the disposition made of such income, shall be subject to tax. Example: te Dividends; Charitable Corporation includes!associat received from property; tale of the felis of clorayieny en tnBuGh the. a terests fron) Philippine currency bank deposits latter make contributions to the {6 this purpose, or for furnishing the:¢ nurses to persons unable to pay) aiding the general body of Iigants. ‘Scientific Corporation includes an the scientific study of law with a view ta administration. 4 Requisites for Tax Exemption | 1. Itmust be a non-stock corporation’ organized and operated exclusively’ charitable, scientific, athletic, ‘or cultural purposes, or for the rehabilitation “of veterans; 2, It should meet the following tests: a. Organizational Test — Its purpose is, exclusively limited to one or more of those described in Section 30(E) of NIRC. b. Operational Test — Its regular activities must be exclusively devoted tothe accomplishment of the specified purpose. Note: A corporation/association fails to meet this test if a substantial part of its operations is considered “activities conducted for profit” 3. Allthe net incomelassets must be devoted for its purpose and no part accrues to any person; and 4, it must not be a branch of a foreign non-stock, non-profit corporation (R.M.O. No. 20-2013, Sec. 6) Note: A Tax Exemption Ruling for non-stock, non-profit corporations/associations shall be: valid for @ period of three (3) years unless prin: to other persons; Yecricultural Lands; 1e Sale of Property. Yiien earned by a Non-Stock, Non- onal Institution (CONST. Art. XIV, Sec. farigay Micro Business Enterprises (R.A. No. 9178); BMBE refers to any business entry or enterprise engaged in the production, processing or manufacturing of products or commodities, including agro-processing, trading and series, whose total assets including those arising from loans but exclusive of the land on which the particular business. entity's office plant and ‘equipment are situated, shall not be more than 3, 000,000. Exempt only for income arising from the operations of the enterprise but not from final taxes on deposits, interest income, capital gains tax, royalties, etc. 44, Foster Child Agencies (R.A. No. 10165); 5. Tourism Enterprise Zone Operators (R.A, No. 959) TEZ Operators are given an income tax holiday for six years, DIB SAN BEDA CENTRALIZED BAR OPERATIONS 163INCOME TAX 6. Association Dues. The association dues and income derived from rentals of the homeowner's, association's properties are exempt from income tax provided: a, The homeowner's association must be a duly constituted “association” under Section 3 (B). R.A. 9904; b. The LGU having jurisdiction over the homeowner's association must issue a certification identifying the basic services provided by the association, and stating its lack of resources to provide such basic services; and ‘The homeowner's association must present proof that the income and dues are used for Cleanliness, safety, security and other basic services needed by the members (RMC 9- 2013). Rules on the Taxability of Income of Corporate Taxpayers eee etd Pa cee (roy De CucL eee rete) Peete uc) Perera Bee reed to Cees Ce Cum aS eter) eV Nar cer ace GNP cen Either NCIT = 30% of Taxable Income or MCIT — 2% of Gross Income | Whichever is higher Income from all within and without Philippines the Optional Rate of ‘sources, within and_ without | 15% of Gross Income ‘the Phitigpines,., Rca eh es Ce lagu) el etree one ord rong Perea Co Comrie ENT Fcomé deriydl trom sources | 10% of Taxable Income ~it| within cade wihout the gross income trom| ippiies Unrelated “activities dose | | not exceed 80% of total | gross income | Nor McrT - it exceeding | 50% Income derivad from sources | Either within the Philippines NCIT ~ 30% of Taxable Income or Meir Income | whichever is higher Gross 2% ofINCOME TAX sw EM ORY Pe keueice pet r Red rome ee eesee) Income derived during a | Optional Rate of Pee PM Sst eercs taxable year from sources | 15% of Gross Income Pe lgceee ase catekia) within the Philippines cain ae eemer Cicer a itd oe Ces eae am i Pe SUA as ug Perea a Ree ear Gross Philippine Bilings | Either | sp Preferential Tax Rate of 2.5% or Tax. Exemption {on the basis of reciprocity or Tax Treaty) Cee mm ee a. foreign / etn} ‘gurrency—= transactions | Exempt With Aonresidents father bub, Aodat cormercial jluding ‘ot foreign ¥ @st Inconje derived | 10% final tax foreign currency y granted to fesidenfs, “gther than those /ncluged inthe | eebovetist Fi # ET IRC Incomé.dérived within the | Exempt PORRa Ieee aCe ERS IPrilppices only Ce Regional Re yey Income derived within the Pere ae eLey Philippines only ‘Companies | Exempt Ree ae Income derived within the | 30% of Gross Income eer Philippines, except. capital Ceca gains from sale of shares of zo) stock nat traded in the stock exchange | Dryece ra Income derived within the | 25% of Gross Income Cinematographic Film Owner FaMagesteay or Distributor | Rt erred Gross rentals, lease or | 4.5% of. Vessels Chartered by [epaaneatnen Memes ie Barer charters o Filipino citizens oF | ‘corporations 2018 SAN GEDA CENTRALIZED BAR OPERATIONS | 65INCOME TAX Kinds of Corporations Rene 5 seit ecnnaieeeetey fees pera ont it Gross IncomE Gross Income All income derived from whatever source, including but not limited to the following: (CARD-GRIP4) ‘Compensation Annuities; Rents; Dividends; Gains from dealings in property: Royalties; interests; yy Gross income from Profession, trade business; Prizes and winnings: Bensions; and \ ; Bartner's share in the net incometot the || General professional partnership (WIRG, 82(A)) y | Meaning of the Phrase “Gross Incom@iti® ag2 @Nogsens 0, 0 income under our laws (Commissioner of Ynto Revenue v. AIR India, G.R. No. 72443, January 29; 1988, citing Commissioner of Internal Revenue v. British Overseas Airways Corp., G.R. Nos. L-65773=50 73, April 30, 1987). Gross Income and Taxable Income Distinguished earner Petit All income, gain, or profit subject to income Pertinent items of gross income specified in the tax under Sec. 32(A) of |NIRC, less deductions the NIRC. and/or personal and additional exemptions, if Note: Gross income | any, authorized for such | does not include monies | or receipts entrusted to | the taxpayers which do not belong to them and | do not redound to the | taxpayer's benefit (CIR | v. Tours Specialists Inc... GR No. 166416, | March 21, 1990), types of income by this Code or other special laws (NIRC, Sec. 31) 66 | 2018 SAN BEDA CENTRALIZED BAR OPERATIONS, ftemte geadea tag Rentals, charters, and other | 7.5% tines | Bead derived within the ‘The enumeration under Sec. 32(A) not exclusive. The following are likewise included in the taxpayer's {gross income: 1. Treasure representing profits lost; found or punitive damages 2. Amount received by mistake (Commissioner of Internal Revenue v. Javier, G.R. No. 78953, July 31, 1991); 3, Cancellation of the taxpayer's indebtedness on account of service rendered: 4. Payment of usurious interest; 5. Illegal gains (e.g, gains from extortion, ‘ement, jueteng, and gambling) (James v. 36 U.S. 213, May 15, 1961); tho taxpayer acquires earings, lawfully, without the consensual Fexpress or implied, of an obligation rid. without restriction as. to their itiog, he has received income which he is, fed fo return, even though it may still be 1g€d liable to restore its equivalent (Id) t 56 °Tax refiinds and bad debis recovered to the sextent of the income tax benefit derived from » deduction of the tax and bad debts (please seo /the concept of Tax Benefit, Rule under Dethictions); Subsidy (CIR v. Sony Philippines, Inc., G.R. No. 178697, November 17, 2010); and Unutiized or excess of the campaign funds, which is the excess of campaign contributions, ‘over the candidate's campaign expenditures (CASASOLA, supra at 238). ‘Cash deposits or advances received by taxpayers other than GPPs covered by R.M.C. No. 89-2012 form part of the Gross Income of the taxpayer (R.M.C. No. 16-2013), Passive Income Not Included in the Computation ‘of Gross Income Subject to the Regular Income Tax Rates The definition of gross income is broad enough to include all passive income subject to specific rates cor final taxes. However, since these passive incomes are already subject to different rates and taxed finally at source, they are no longer included in the computation of gross income which determines taxable income subject to the regular income tax rates (Commissioner of Internal_ INCOME TAX Revenue v. Philippine Airlines, Inc., 160528, October 9, 2006). GR. No. 1. Compensation ‘All remunerations for services performed by an ‘employee for his employer under an employer- employee (ER-EE) relationship, unless. ‘exempted under the provisions of the NIRC. (RR. No. 02-98, Sec. 2.78.1) The name by which the remuneration for services is designated is immaterial Remuneration for services _ constitutes ‘compensation income even if the ER-EE relationship does not exist any longer at the time the payment is made between the person in whose employ the services had been performed and the individual who performed them, as long as the ER-EE relationship is existing at the time the services were performed (R.R. No. 02-98, Soc. 2.78.1(A)) Test to Determine her Ini Compensation or Not: Whelhier such received by virtue of an Thus, the income receivec performed by an independent of there is no EE-ER relation recorded as income from trade or! 1 payment ts made in 4 ‘Cash ~ full amount received, 2. Gitar than cash "far market Of the thing taken in payment 3. Stipulated price — such pri Presumed to be the FMV Sof ‘compensation received in the abs®ned of pes ‘evidence to the contrary; @ 4, Promissory note_or_other_evidence indebtedness — FMV of the ndte or evidence of indebtedness; 5, Stocks — FMV of the stock at the time the employee received it. Itis to be treated as if the corporation sold the stock for the market value and paid the employee in cash; and 6 Li rs furnished in addition to cash salary ~ the rental value of such quarters (RR. No. 02-40, Sec. 41-42). ‘Compensation Income includes: 1. Wages - means all remuneration (other than fees paid to a public official) for services performed by an employee for his, employer, including the cash value of all remuneration paid in any medium other than cash (NIRG, Sec. 78(A)) Note: It does not include remuneration paid for the following i ‘ome coe 2. Separation pay ~ AID a Agricultural labor paid entirely in products of the farm where the labor is performed; Domestic service in a private home: ©. Casual labor not in the course of the ‘employer's trade or business; and d. Services by a citizen or resident of the Philippines for a foreign government or fan international organization (NIRC, ‘Sec. 78(A)). taxable compensation of the separated official or employee when the cause of the separation is not beyond the control of such official or employee (e.g., the employee is separated under a voluntary ‘separation program of the employer); Retirement benofits — taxable compensation to the retiring official or employee if such benefits were received by an employee who fails to meet the minimum requirements of a ;onable private benefit pian under R.A. 4917 (An Act Providing that Retirement iployees of Private Firms shall eZ Subject to Attachment, Levy, ‘or any Tax whatsoever) or RA. Yo. 442, as_amended, otherwise ‘s the Labor Code of the Philippines, jing for Retirement Pay to Qualified jté Sector Employees in the Absence of tirement Plan in the Establishment) ise refer to discussion on Exclusions ‘Gross Income); (e.g, bonuses, 13% th pay) in excess of the P&2,000 ireshold for exclusion (please refer to \J2eiscussion on Exclusions from Gross Income); Director's fees — if the director is, at the seme time, an employee of the employer/corporation (¢.g., President of a corporation sitting as a member of the board Of directors) (RR. No. 02-98, Sec.2.78.1; RM.C. No. 34-2008); and Note: Director's fees paid to an individual who is not an employee of the corporation paying such fees (ie., whose duties are confined to the attendance of and Participation in the meetings of the board of, directors) are not treated as compensation because of the absence of EREE relationship, but rather, the same should squarely fall as gross income derived from the conduct of trade or business or exercise of a profession (R.M.C. No. 34-2008). JAN BEDA CENTRALIZED BAR OPERATIONS | 67INCOME TAX 6. Fringe benefits employes However, fringe benefits given to rank-and file employees may be included as part of their exempt 13" month pay and other benefits up to P82,000 since rank-and-file employees, unlike — managerial or supervisory employees, are not usually entitled to fringe benefits yanted_to_rank-and-file Note: Compensation earners are _not allowed to deduct any other deductions from their salary but they may have deductions applied to income eamed from other sources (IIRC, Sec. 34). Please refer to separate discussion on Fringe Benefits 2. Annuities Refers to annuity policies sold by insurance ‘companies, which provides installment is for life, or for a quaranteod fixed per whichever is longer. It is paid ennualy, monthly oF periodically, computed uponthe amount paid yearly, but not necessary for'ife (Peralta v: ‘Auditor General, G.R. No. L-8480, Mare 29, 1957). te The annuity payments represent bwo dpits that ‘are either taxable or not taxable; Tha portion representing return of premium-ig. not taxable: ‘while the portion that represents thd excess over premium and interest is taxable. Mustration: Mr. A purchased a tte inuty for 500,000 which will pay him P'120,000 per year ‘Assume that the life expectancy of Mr. Ais fve years, reckoned from the date of purchase. Mit A.will receive a total of 600,000 (P'120,000 per ‘year x 5). Out of the 600,000 to be received by ‘A, 500,000 shall be excluded from gross income as it represents the return of premiums paid while the excess of 100,000 shall be taxable. Note: Life insurance annuities are excluded from gross income (NIRC, Section 32(B)(1)). 3. Rents The amount paid for the use or lease or enjoyment of a property, whether real or personal property, to the owner of the property (CASASOLA, supra at 220). Scope: All rentals derived from lease of property, whether used in business or not. from eal or personal property, earings "from copyright, trademarks, patents and natural resources under lease. It includes 68 | 2018 SAN BEDA CENTRALIZED BAR OPERATIONS raya ee a Agreed amount per month or per year; b. Obligations of lessor to third parlies which the lessee undertakes to pay as further Consideration of the lease, such as: i, Real estate taxes on leased premises; ji, Insurance premiums paid by lessee on policy covering leased property, ili’ Dividends paid by lessee to stockholders of lessor-corporation, in lieu of rent; and iv, Interest paid by lessee to holder of bonds issued by lessor-corporation, instead of rent Notes: 1. Prepaid or advance rental is taxable income to the lessor in the year received, if 50 received under a claim of right and without restriction as to its use, regardless. of method of accounting employed 2. Security deposit applied to the rental of the -ayigrminal month or period of contract must be |Fetognized as income at the time it is plied. 3. I the security deposit is to ensure contract \eempliahce (Security deposit with “WagNBERBccelafation clause), itis not income to the 2m Sf until the lessee violates any provision the contract (CASASOLA, supra at 222) AWhelirer an agreement which in form is a Jlegsé, is in substance a conditional sales "contract, depends upon the intent of the parties as evidenced by the provisions of the agreement, read in the light ofthe facts and Greumstances existing at the time the agreement was executed (2 DIZON, supra 40521) Note: The different treatment for leases and conditional sales: ‘+ Lease: the amount paid for the lease shall be considered part of the gross ‘= Conditional sales (rent to own schemes; tc.): this will be treated as sales hence, the rules on gains from the sale of assets will apply and these gains will be treated as income. Whether an agreement, which if form is a lease, {is in substance a conditional sales contract, depends upon the intent of the parties, as evidenced by the provisions of the agreement, read in the light of the fact and circumstances. NO general rule, applicable to all cases can be laid down (RECALDE, supra at 302-303), Operating Lease: An operating lease is a contract under which:INCOME TAX — 1. The asset is not wholly amortized during the primary period of the lease, and 2. Where the lessor does not rely solely on the rentals during the primary period for his profits, but looks for the recovery of the balance of his costs and for the rest of his profits from the sale or release of the returned asset of the primary lease period Note: In an operating lease: ‘+ The amount paid for the use of property is considered as rental income which form part of the Gross Income of the lessor. + The lessor may deduct all ordinary and necessary expenses pald or incurred during the taxable year which are attributable to the earnings of the income. + The lessor may claim a deduction for depreciation on the property which is, ‘subject to the lease (RECALDE, supra at 297-298). 2 Financing Lease: A finaitiig lease payout lease is a contract characterized by, the, following: ~ 1. The contract must be a fon Ea Gaheettabis- lease; i 2. The lessor purchases the pioperty atthe Feng pase oly lis 3. The consideration for the saig purchase is the periodic payment by the lobe of a eed ‘amount of money; The periodic lease payment mi sulficient to amortize at least'70% purchase price or acquisition eBst 0 Obligatory period of not less than two! years: During the period of lease, the lessee-has s the right to hold and use the property with™ the right to expense the lease rentals paid to the lessor, as well as bear the cost of repairs, maintenance, insurance, and preservation of the property leases; 6. At the end of the lease contract, the lessee has no obligation or option to purchase the leased property from the owner-lessor. Note: In an operating lease: ‘+ Ifthe agreement is considered a finance lease, the periodic payments are considered rentals. ‘+ For VAT purposes, a finance lease is taxed ike an operating lease (RECALDE, supra at 301-302, 304). Income from Leasehold Improvements When the lessee erected or built permanent improvements in the leased property which will become the property of the lessor upon the expiration of the lease, the value of the improvements should be reported as income of the lessor (R.R. No. 02-40, Sec. 49) Methods of Reporting income from Leasehold Improvements: 1. Outright Method - recognized as income to lessor at the time when such buildings improvements are completed, at fair market value; oF 2. Spread-out Method — the lessor spread over the life (or remaining period) of the lease the estimated depreciable value of such buildings or improvements at the termination of the lease and report as income for each year of the lease, an aliquat part thereof Mlustration: Mr. X leased his land to Ms. Y for three (3) years. It was stipulated that Ms. Y shall ‘construct a building thereon. The building was completed at the end of the 1* year of the lease. Ithas a fair market value of 1.5 Million and an AB Yeapected lito of five (6) years. In addition to the rent of 50,000 paid by Ms. Y, Mr. X shall the (yaiue of the improvement as, »Madtional ipfome. In reporting, Mr. X may ‘ohboSé beboen the two methods: fr the Outright Method, Mr. x shall report 1,500,000 0,000 'P1,550,000 Note: It shall be Mr. X who shall record and Claim the depreciation of the building, Under the Spread Out Method, Mr. X shail report an additional income of 450,000 derived a follows: Value of building 1,500,000 Less: Accumulated depreciation (600,000) atthe end of the lease (71,500, 000/5yrs.) x 2 yrs. Value of improvement at the 900,000 end of the lease Divide: Remaining term of the 2Uyrs.) lease ‘Annual income on leasehold ® 450,000 improvement ‘Add: Annual rental 50,000 Total lease income P 500,000 Note: No income accrues to the lessor if the improvements are subject to removal by the lessee. 2018 SAN BEDA CENTRALIZED BAR OPERATIONS 169INCOME If for any other reason than a bona fide purchase from the lessee by the lessor the lease is terminated, so that the lessor comes into possession or control of the property prior to the time originally fixed for the termination of the lease, the lessor shall recognize income in accordance with the following rules: a. The amount of income shall difference between i. The value of the building at the time of the pre-termination of the contract; and i. The amount already reported as income on account of the introduction of such property b.No appreciation in value due to causes ‘other than premature termination of the lease shall be included (RR. No. 2-40, Sec. 49; RECALDE, supra at 299), be the vidends Any distribution made by a corporat shareholders out of the earnings payable to its shar ‘money, property or stock. Stock dividends are exempt except when the stock dividends. of the shares issued whereby they interest of the stockholders after thé (Section 252, R.R. 2- 1940) X It also does not cover liquidating “dient. However, the capital gain or loss derivédssese< therefrom shall be subject to the regular income taxrrates (FR. No.6-2008). Dividends received from a domestic corporation are either exempt or subject to final tax depending on the recipient. Accordingly, only dividends distributed by a foreign corporation are included in the computation of gross income, subject to the rules under Sec. 42(A)(2) of the ‘Tax Code (2 DIZON, supra at 530). Gains from Dealings in Property Please refer to Consolidated Rules on Capital Gains and Losses and on Rules on Exchanges of Property for discussion Royalties ‘These are payments for the use and exhaustion of property such as earnings from copyrights, patents, trademarks, formulas and natural resources under lease 70 | 2018 SAN BEDA CENTRALIZED BAR OPERATIONS Hor TAX The definition covers both payments made under a license and compensation which a person would be obliged to pay for fraudulent copying or infringing the right (R.M.C. No. 44- 2008, Sec. 3) Royalties may be passive or non-passive (active) income, Where the royalties are derived from the active pursuit of the primary purpose of the business (eg, distribution of licensed ‘materials, licensing and sub-licensing of musical compositions). the royalty fees are in the nature Of active income (BIR Ruling DA-368-06, June 13, 2006; BIR Ruling DA-684-07, December 27, 2007). Accordingly, the royalties included in the Computation of gross income are those which are not subject to final tax, such as: ‘2. Those royalties derived from sources outside 1 Philippines; and fe which are not passive income (2 NN, supe at 528) of Gross income: income from long-term deposits by erage of deposit substitutes): pound interest: fous interests earned by a loan shark Ungonscionable interest income (even if _Kgowingly and voluntarily assumed); and jeorelical interest income (id. at 517-518) weHEDA ME INCOM E TAX Interest income which are already subject to final tax need not be included in the computation for {gross income, Interest earnings received trom: | 1. Cooperatives 2. BSP prescribed torn Investments (more than 8 years) 3. A tenant who pald interest 10 a Tangowner on the pace of the land under a. enant-purchaser ‘agreement, CARP Tax xempt Inerest nome 4. Expanded foreign currency Gepost system ‘earned by non residents Interest earned trom: -Financial companies (20% FW) NOt BSP preseribed form Investments (5%, 1236, 20% FWT) “Expanded fore currency ‘Gepost system earned by residents (7.5% FWT) otra v ¥ t ‘Principal business actty “incidental interest earings not ‘Eubjected to final witntolding te Self-Employment Income It consists of earnings derived by an individual from the practice of profession, or condact “aps trade or business carried on by him as a sole proprietor, or a partnership of which he is a member (IRC, Sec. 74). Professional Income It refers to fees received by a professional from the practice of his profession, provided that there is no ER-EE relationship between him and his clients (MAMALATEO, Reviewer, supra at 128) Business Income It refers to income derived from merchandising, mining, manufacturing, farming, and other similar operations. Note: It is not material whether they have a business license or whether they are registered, oF self-declared, 2 9. Prizes and Winnings Only the prizes and winnings that are not subject, to final tax are properly includible in the computation of gross income, to wit: a. Prizes derived from sources. within the Philippines which do not exceed 10,000.00; b. Prizes and winnings derived from sources. outside the Philippines, regardless of amount; and ©. Prizes ‘and winnings of corporations, whether domestic or foreign (2 DIZON, supra at 539). 10. une mney recelved in Amp sum oF on Co ee eee Bees ohn aor ar eividsel acs e YD ‘age of retirement. Retirement benefits and pensions received, than those received under R.ANo. 4917, lo. 7641,,R.A. No. 8282 (The Social a ty Law#8 amended) and R.A. No. 8291 Se Eheegexeigisnt Service insurance System) EC \et Jaws on pension benefits excluded some are considered taxable. 1er"§ Distributive Share in the Net mej of a General Professional ership (GPP) PP shall not be subject to income tax since it fs she idividual partners who shall be subject to income fax in their separate and. indWvidual Gapacties. Each partner shall report as gross igegp his tbe share actualy: Constructively received, in the nel income of the Jpettriership (R.M.C. No, 3-212). Note: Income payments made periodically or at the ond of the taxable year by a GPP to the partners, such as drawings, advances, sharings, allowances, stipends and the like, are subject to creditable withholding tax ExcLusIons FRoM Gross INcoME Exclusions Income received or earned but is not included in the determination of gross income and thus not taxable either because (NIRC, Sec. 32(6)) 1. They are not income, gain or profit; Example: life insurance proceeds paid to the heirs or beneficiaries upon the death of the OI SAN BEDA CENTRALIZED BAR OPERATIONS | 71INCOME TAX cn EMORY Fringe benefits employee. However, fringe benefits given to rank-and- file employees may be included as part of their exempt 13" month pay and other benefits up to 82,000 since rank-and-file employees, unlike managerial or supervisory employees, are not usually eniitled to fringe benefits. yanled_to_rank-and-file Note: Compensation eamers are not allowed to deduct any other deductions from their salary but they may have deductions applied to income earned from other sources (INIRC, Sec. 34) Please refer to separate discussion on Fringe Benefits 2. Annuities Refers to annuity policies sold by insurance companies, which provides installment pay for life, or for a guaranteed fixed peri whichever is longer. It is paid annually. or periodealy, computed upon fe yearly, but nok necessary fore {Pr Iudtor ‘Gonoral, GR. No. 1-246, 7957) ‘ The annuity payments represent wo ace either taxable or not taxable, Th Tepresenting return of premium. i not wie the portion that represents tha xc premium and interest is taxable Mustration: Mr. A purchased a life annul 500,000 which will pay him ®120,000'per ye: ‘Assume thal the life expactancy of Mr. Ris. five years, reckoned from the date of purchase, Mos A.will receive a total of 600,000 (P120,000 per year x 5). Out of the P600,000 to be received by ‘A, P500,000 shall be excluded from gross. income as it represents the return of premiums paid while the excess of P100,000 shall be taxable, Note: Life insurance annuities are excluded from grass income (NIRC, Section 32(8)(1)). Rents ‘The amount paid for the use or lease or enjoyment of a properly, whether real or personal property, to the owner of the property (CASASOLA, supra at 220), Scope: All rentals derived from lease of property, whether used in business or not, from eal or personal property, earnings | from copyright, trademarks. patents and natural resources under lease. it includes: 72 | 2018 SAN BEDA CENTRALIZED BAR OPERATIONS Agreed amount per month or per year; Obligations of lessor to third parties which the lessee undertakes to pay as further consideration of the lease, such as: i. Real estate taxes on leased premises; ji, Insurance premiums paid by lessee on policy covering leased property; Dividends paid by lessee to stockholders of lessor-corporation, in lieu of rent; and Interest paid by lessee to holder of bonds issued by lessor-corporation, instead of rent. Notes: 1 Prepaid or advance rental is taxable income to the lessor in the year received, if so received under a claim of right and without restriction as to its use, regardless of method of accounting employed. Security deposit applied to the rental of the minal month or period of contract must be gnized as income at the time it is ie — (security deposit _—_ with on clause, is not income to the ntl the lessee violates any provision Feontract (CASASOLA, supra at 222). yer an agreoment which in form is. @ is substance a conditional sales Gt, depends upon the intent of the Patios as evidenced by the provisions of the ‘afeement, read inthe ight ofthe facts and Gfeumstances existing at the time the yooment was executed (2 DIZON, supre fat 82r) ‘Note: The different treatment for leases and conditional sales: ‘+ Lease: the amount paid for the lease shall be considered part of the gross. income, Conditional sales (rent to own schemes; ‘tc.): this will be treated as sales hence, the rules on gains from the sale of assets will apply and these gains will be treated as income, Whether an agreement, which in form Is a lease, is in substance a conditional sales contract depends upon the intent of the parties, as evidenced by the provisions of the agreement, read in the light of the fact and circumstances. No general rule, applicable to all cases can be laid down (RECALDE, supra at 302-303) Operating Lease: An operating lease is a ‘contract under which:: INCOME TAX — EMORY 7. The recipient of the insurance proceeds is a partnership in which the insured is the partner land the insurance was taken to compensate the partnership for any loss in income that may result from the dissolution of the partnership caused by the death of the insured partner; and 8. The recipient of the life insurance proceeds is a corporation in which the insured was an ‘employee or officer. B. Return of Insurance Premium Reason: The amounts returned are not income but return of capital. They represent earings which were previously taxed (2-A DOMONDON, supra at 426). Conditions for Exclusion: The amounts must be received as a return of premiums paid by him under life insurance, endowment or annuity contracts (IRC, Sec. 32(B)(2)) Notes: 1. Where the total premiunis aggregate premiums paid, included in the gross income: Sec. 62). of a life insurance, endowed contract, or any interest therein; éniy th value of such consideration andthe amount of the premiums and other sume. Subsequent! paid by the transferee are exempt from tats (RR. No. 02-40, Sec. 62) C. Gift, Bequest, Devise or Descorit Reason: They are neither productshot caf nor industry, thus, there is no inodtne -( DOMONDON, supra at 434) Note: Only donated property is excluded from gross income. However, the income from such Property, as well as gift, bequest, devise, or descent of income from any property, in cases. of transfers of dividend interest, ‘shall be included in the gross income (NIRC, Sec. 32(B)(3)). Gift Tax Test 1. If there is no legally demandable obligation to give the gift not taxable; and 2. I there is a legally demandable obligation to give, there is income — taxable (2A DOMONDON, supra at 436) D. Compensation for Injuries or Sickness Reason: This is just an indemnification for the injuries ‘or damages suffered; the amount received is intended to make the injured party as he was before the injury. The term injury includes death, even if there is no injury. If the person dies, the compensation received on account of his death is also excluded from the gross income. Itincludes amounts received: 4. Through accident or health insurance; 2. Workmen's compensation; and 3. Damages received whether by suit or ‘agreement on account of such injuries or sickness (NIRC, Soc. 32(B)(4); R.R. No. 02-40, Sec. 63). Note: Punitive or exemplary damages are included in gross income. They are includible in gross income because they are not a substitute for any amounts, lost by the plaintiff or a substitute for any injury to the plaintiff or plaintiff's property, but are extracted from the wrongdoer as punishment for unlawful conduct (2 DIZON, supra at 564) Compensation for Lost Profits Excluded from gross income since they ned by the taxpayer as a result of the Zotirement Benefits, ratios son: Retirees are most deserving of sion and should not be given a strict férpretation under the law. Retirement laws Pensions and Sepa gim to assist retirees in his old age, not to punish him for having survived. It includes: 1. Those received by officials and employees of private employers in accordance with a reasonable private benefit plan under R.A. No. 4917; 2. Those derived under RA. No. 7641 from private firms without a BIR-approved Feasonable retirement plan; 3. Separation pay due to death, sickness or ‘other disability or any other cause beyond the control of the employee or the official (e.g. retrenchment); 4, Social security benefits, retirement gratuities, pensions and other similar benefits received by citizens or aliens who come to reside permanently in the Philippines from foreign government agencies, private or public 5. Benefits due to residents under laws of the United States administered by the United States Veterans Administration; 2018 SAN BEDA CENTRALIZED BAR OPERATIONS | 73.INCOME TAX SAN BEDA MEMORY AID 2018 6. SSS benetits received in accordance with (BIR Ruling No. SB (041) 603-2009, RA. No, 6282; and September 22, 2009) 7. GSIS benefits received under RA. No. 8291 (NIRC, Sec. 32(8)(6). b. The retirement benefits under the CBA or ther agreements must not be less than Retirement Benefits under R.A. No: 4917 those provided in situation under Letter (b) In order to avail of the exemption with respect to below (R.A. No. 7641, Sec. 1) retirement benefits under a reasonable private plan, the following requirements must be met 2. Where the retirement benefits are received not 1. The plan must be reasonable (Please see the under any agreement requirements of a reasonable retirement benefit These are given in the absence . of plan under Deductions of Pension Trust agreement providing for retirement benefits Contributions); cof employees in the establishment; 2. The benefit pan must be approved by the BIR: b. The retiring employee has served at least 3. The retiring official or employee must have been five (6) years in the said establishment; in the service of the same employer for at least cc. That he is not less than sixty (60) years of ten (10) years and must at least be fity (50) ‘age but not more than sixty-five (65), which years old at the time of retirement; and 4s doclared as the compulsory retivement 4. The retiring official or employee should not have ‘age; and Previously availed of the privilege under the 4. That he shall be entitled to retirement pay fetirement benefit plan of the same or another equivalent to at least one-half (4) month employer (NIRC, Sec. 32(8)(6)(2); R lary for every year of service, a fraction of 98, Sec. 2.78.1(8)(1)) {8) months being considered as Wile year. voluntary. As long as the requireraiy teliement proceeds are exch income. However, f the retirement there is'no need to comply. vip requirements before the retremes be excluded because the same wo 3 “separation pay beyond. the employee (2° DOMONDON, supra 9 [867 no longer working, iso longer atioy fr services rendered. monetized value of retiree’s bf cation teavo (VL) and sick leave (St) inty (60) years for inty-five (65) years for rent employees; seventy (70) years for ary — exempt and it SLi taxable; VL up to fan be availed of only once” ~ 3 retirement benefit from a subsed employer. It does not apply to subs employer as the benelits are sill exempt One® No. 8291 SS taxable (Please refer to de minimis benefits for Retirement Benefits under R.A. No. 7641 further discussion). In order to avail of the exemption of the retirement Separation Pay Excluded from Gross Income benefits from private employers without a BIR- If due to death, sickness, or other physical disability ‘approved reasonable retirement plan, the following _or for any cause beyond the control of the employee. conditions must be met: (NIRC, Sec. 32(8)(6)(b)) 1. Where the retirement benefits are received under a collective bargaining agreement (CBA) Cause Beyond the Control or other applicable employment contract: This connotes involuntariness on the part of the a. The employee must be retired upon official or employee. The separation from the service reaching the retirement age established in _of the official or employee must not be asked or the CBA or other applicable employment _initiated by him (R.R. No. 12-86, Sec: 2(b)).. contract (R.A. No. 764%, Sec. 1) Mlustrations: However, if the CBA or other applicable .__-Retrenchment of employees as a consequence employment contract does not provide for a ‘of either the sale of the entire. business to ‘retirement age, the minimum requirement of another corporation or the cessation of the fifty (50) years provided for under Sec. ‘employer's business; 32(B)(6) of the NIRC shall apply in order to -—-2._-‘Separation of employee due to dissolution of a qualify for the exemption granted therein law firm; and. 74 | 2018 SAN BEDA CENTRALIZED BAR OPERATIONSINCOME TAX SAN BEDA MEMO 18 3. Separation due to installation of labor saving devices or bankruptcy. Notes: 1. The exemption holds regardless of the employee's age and length of service. 2. The law does not require that the exclusion be enjoyed once. GSIS Benefits under R.A No. 8291 The retirement of most government officers or ‘employees under the GSIS is made automatic and ‘compulsory at the age of sixty-five (65) years, after having served a certain number of years of service. The law also grants such officer or employee the ‘option to ratir: 1. Upon completion of thity (30) years of total service and attainment of age fifty-seven (57) years: 2. After rendering a total service of thirty (30) years regardless of age; or 3. After having rendered a total of at (20) years of service, Continuous regardless of status. The retirement benefits oF persion shal be exempt from i F. Income Exempt under Treaty Reason: Public policy recogni of reciprocity and com DOMONDON, supra at 230) {OTCs), or Double Taxation AgreerieaK(p Negotiated between the Philippines and “th contracting States or jurisdictions for the avoid of double taxation and prevention of fiscal evs with respect to taxes on income (RR. No. 10-2010, Sec. 1(F). Income of any kind to the extent required by any treaty obligation binding upon the Government of the Philippines may be excluded from gross income (NIRG, Sec. 32(8)(5)). The provisions of a tax treaty must take precedence over and above the provisions of the local taxing statute consonant with the principle of international comity. Tax treaties are accepted. limitations to the power of taxation (USAFFE Veterans Ass'n., Inc. v. Treasurer, G.R. ‘No. L-10500, June 30, 1959). G. Miscellaneous Items (13-P31G3) 1. 43" month pay and other benefits up to 82,000 (IRC, Sec. 32(B)(7)(0), as amended by RA. No. 10653): These are excluded from gross income to the extent of 82,000. Any excess will be included {as part of the gross compensation income. ‘Other benefits’ include Christmas bonus, productivity incentive bonus, loyalty award, gits in cash or in kind and other benefits of similar nature (R-R. No. 02-98, Sec. 2.78.1(B)(1)(b). 2. Passive income by: ‘a. Foreign governments; b. Financing institutions owned, controlled, or enjoying refinancing from foreign ‘government; and cc. International or regional institutions established by foreign governments (NIRC, Sec. 32(6)(7)(a)) Reason: To lessen the burden of foreign loans inasmuch as the interest of these loans are, by contractual agreement, borne by the domestic be received in recognition of Ailistic, Religious, Civic, al, Literary, or ‘Scientific. 3t did not take an active part to join Kigh he participated; and ent Snot required to render Ficntial future services (unconditional of such prize) (NIRC, Sec. Scholarship of student granted by gEational institution may be considered as gift ‘compensation in payment of past or future services (the value of the same is considered as compensation income of the recipient) Wthere is @ penalty clause that requires. the recipient to reimburse certain amounts if he does not render any service or where he is not able to render full service, then the reimbursement does not form part of the gross. income of the grantor because it is considered ‘as_ merely a payment of a loan (2A DOMONDON, supra at 271-274). 4, Prizes and awards granted to athletes in sports Competitions locally or abroad and sanctioned by their national sports association (NIRC, Sec. 32(B)(7)(A) National Sports Associations ‘They refer to those duly accredited by the Philippine Olympic Committee (POC) (R.A. No. 7549, An Act Exempting All Prizes and Awards 2018 SAN BEDA CENTRALIZED BAR OPERATIONS | 75,INCOME TAX, Emory Alo Gained from Local and International Sports Tournaments and Competitions from the Payment of Income Tax and Other Forms of Taxes And for Other Purposes, Sec. 2(2)) 5. Income derived by the Philippine government and its political subdivisions from: a. Any public utility; or b. The exercise of any essential governmental function (IIRC, Sec. 32(8)(7)(b). 6 GSIS, SSS, Modicare (now Phiiheatth) and PAG-IBIG. contributions and_union dues. of individuats (NIRC, Sec. 32(6)(7)(0): ‘These include both the contributions and union dues of private and government employees. Only the _ mandatory contributions are: considered as exclusions. Voluntary social security contributions made by employees are, subject to income tax (R.M.C. No. 53- 7. Gains derived from sale 0 ‘Gebentures, or other certitic Sec. 32(B)(7)(Q)); and ‘The term “gain” as used in Sealif does not include interest, whid forbearance for the use of mo ‘sale or exchange or retirement certificate of indebtedness fall wi falls within the category of “interoat Section 32(A)(4) (Banco De Oro v. GR No. 198756, January 13, 2015) = 8. Gains from redemption of shares in mutual fund (MIRC, Sec. 32(8) (7) (h). FRINGE BENEFITS Fringe Benefits ‘Any good, service, or other benefit furnished or granted by an employer, in cash or in kind, in ‘addition to basic salaries, to an individual employee (RR. No. 03-98, Sec. 2.33 (8) Fringe benefit taxis a final tax: a. Imposed on the — managerial/supervisory ‘employee. bb. Withheld by the employer who files the return and remits the tax within 25 days from close of each. calendar quarter. 76 | 2018 SAN BEDA CENTRALIZED BAR OPERATIONS Valuation of Fringe Benefits: 4, Money; if directly paid by the employer ~ the value is the amount granted or paid: 2. Property other than money and ownership is transferred to the employee ~ the value of the fringe benefit shall be equal to the fair market value of the property as determined in accordance with the authority of the BIR to prescribe real property values (zonal valuation); or - 3. Property other than money but ownership is not transferred to the employee — the value of fringe benefit is equal to the depreciation value of the property (RR. No.03-98, Sec. 2.33(A)). Tax Treatment of Fringe Benefits: 1. if given to managerial or supervisory ‘employees ~ subject to Fringe Benefits Tax. Fringe Benefits Tax (FET) Final withholding tax imposed on the grossed-up value (GMV) of fringe benefit agted, or paid by the employer to yee, except. rank-and-file whether such employer is an professional partnership, or regardless of whether the is taxable or rfot, or the government rumentalities (R.R. No. 03-98, Sec. byisimposed on the employee and not on idyer, but to be paid by the employer. Collected from the eraployer even if BHslByer is a tax-exempt corporation or an Aiéntality of the Philippine government. In itis imposed on the employer and not on ployee who receives the fringe benefit “D> Reason: Valuation of benefits is easier at the level of the firm. The problem.of allocating the benefits among individual employees is avoided Collection of FBT is also ensured because the FBT is withheld at source and does not depend (on the seff-declaration of the individual. 1 Employees ‘They refer to those who are vested with powers. ‘or prerogatives to lay down and. execute management policies and/or to hire, transfer, suspend, lay-off, recall, discharge, assign, or discipline employees (RR. No. 03-98, Sec. 2.33(A)). ‘Supervisory Employees ‘Thay are those who effectively recommend such managerial actions if the exercise of such authority is not merely routinary or clerical in nature but requires the use of independent judgment (R.R. No. 03-98, Sec. 2.33(A)).INCOME TAX SAN BEDA MEMOR Berry ary RC, NRC, RA, NRA-ETB. 32%; NRA-NETB 25% | individuals employed by RHQ | 15%. or ROHQ, OBU, foreign service contractor or foreign service subcontractor engaged in petroleum operations in the Philippines 2. If given to rank-and-file employees — the value of such fringe benefit is not subject to FBT but shall be considered as part of the ‘compensation income of such employee subject to applicable income tax rates. Rank-and-File Employees ‘They are the employees who are hoidi managerial not supervisor¥sgpsition. supervisory or rank-and-file a. Fringe benefits are or under any special law; b. They are contributions of the benefit of the employe insurance and hospitalizatior established by employees, such as the “hig Personal Equity and Retirement-Abi (PERA). The employer's contribution to the ‘employee's PERA shall not form part of the ‘employee's taxable gross income, hence, exempted from withholding taxon ‘compensation and fringe benefits tax (RR. No. 17-2011, Sec. 7). c. They are de minimis benefits (Please refer to separate discussion on these); 4. “The grant of fringe benefits is required by the nature of or necessary to the trade, business or profession of the employer; or fe. If the grant is for the convenience or advantage of the employer (R.R. No. 03-98, Sec. 2.33(0)). Convenience of the Employer Rule — grants ‘exemption to the benefits which are given for the exclusive benefit or convenience of the ‘employer. Fringe Benefit Tax Rates ‘Tax Base: Grossed-up monetary value (GMV) of the fringe benefit, Grossed-up monetary value of fringe benefits represents: 1. The whole amount of income realized by the ‘employee which includes the net amount of money or net monetary value of property which has been received; plus 2. The amount of FET thereon otherwise due from the employee but paid by the employer for and in behalf of the employee. Determination of Grossed-up Monetary Value GMI of the fringe benefit shall be determined by dividing the actual monetary value of the fringe bonefitby 1.68% ~ for citizens, resident aliens, and non- resident aliens engaged in trade or business In tippines, oF resident alien individual not 46 0 business inthe Philippines, fon individual employed by regional sdquartersor regional operating fof | multinational companies, yanking units of a foreign bank in the Philippines, foreign service sor subcontractors engaged in ‘operations, or any Filipino individual ‘who are employed and occupying STEP 2: Compute for the FBT Grossed-up monetary value * FBT rate 2016 SAN BEDA CENTRALIZED BAR OPERATIONS | 77INCOME TAX MEMORY Fringe Benefits Subject to Fs 7 HEV-HIM-HEEP) Housing (R.R. No.03-98, Sec, 2.33(B)(1)) See ‘meld rus BEG Employer | Amount 50% of the teases rental paid | value of the | residential benetit | property for tse of the | employee [eEmpioyer [Annual value |50% of the owns the|is 5% of the| value of the residertial | higher amount | benefit | property and | between | assigns ‘the | a. The FMV in Same for use|the Real by the | Property Tax | ‘employee "| Declaration and b The | value ofa | cry | ¥ | Employer | Annual value purchases alis 5% of the residential | acquisition property on] cost, instalment | exclusive of | basis and] interest allows use by the employee Employer | Acquistion | Entive value purchases a| cost or zonal| of the fesidential | value, benefit property and | whichever is transfers the | higher ownership to employee 2018 SAN BEDA CENTRALIZED BAR OPERATIONS: Roe Eon eee Value (MV) Employer —_| Difference purchases a] between: residential a. The higher property and| ofthe FMVin transfers the| the Real ownership to| Property Tax Declaration Entire value of the benefit employee at a priceless than| and the the acquisition | zonal value of the CIR; and b. The cost to the employee, Non-taxable Housing Fringe Benefit: (MTB) 1. Housing privileges of Miltary officials of the AFP consisting of officials of the Philippine @ State shall provide its soldiers ‘ary quarters which are within or 81915 from the military camp so that they ‘be on call to meet the exigencies F unit which is situsted Inside or D> Expense account General Rule: Expenses incurred by the employee but which are paid by his employer land expenses paid for by the employee but reimbursed by. the employer are taxable fringe benefits (RR. No. 03-98, Sec. 2.33(8)(2)(a) and ). . Exception: If such expenses are duly receipted for and in the name of the employer and the expenditures do not partake the nature of a personal expense attributable to the employee, the said expenses are not taxable (R.R. No.03- 98, Sec. 2.33(8)(2)(a) and (b)). Note: Personal expenses of the employees ‘whether paid by the employer or reimbursed to the employee shall be treated as taxable fringe benefit (RR. No. 03-98, Sec. 2.33(8)(2)(c))_ INCOME TAX MEMOE EDA jehicle of any kind (RR. No.03-98, Sec. 2.33(6)(3) es Pe NTNU) Employer purchases vehicle ‘employee's name ‘Acquisition cost Entire value of the the benefit Employer furnishes employee. with cash ‘for the purchase —_ of vehicle and ownership is, placed in the name of the employee Cash Entiro value of] received the benefit ‘Amount shouldered by the ‘employer Employer shoulders a portion of the amount of the purchase price of the vehicie and ownership is placed in the name of the) employee Employer | Acquistion purenases the | cost Vehicle in| exclusive of C installment and | interest ownership is divided’ by placed in the| five (6) fame of the] years employee Employer owns | Acquistion | 50% ofthe value a fleat -of| cost of all |of the benefit Vehicles for use| the vehicles Of the business | not normally and employees |used for sales, freight, | delivery | service and | other non- | personal’ | Use divided by five (8) years Employer leases a fleet of vehicles for use | of the business | and employees Rental payments for motor vehicles. not normally used for sales, | freight, delvery service ‘and other non- personal use 80% of the value of the benefit Notes: The use of aircraft (including helicopters) ‘owned and maintained by the employer shall be treated as business use and not subject to FBT (RAR. No. 03-98, Sec. 2.33(8)(3)(Q). The use of yacht whether owned and gigis'sined leased bythe employer shall be or employees which are borne by the for household personnel, such as pffousehold help, personal driver of the age dues, etc.) shall be taxable as efits (RR. No, 03-98, Sec. 2.33(6)(4)). hE extent of the difference between the ‘market rate and actual rate granted If the employer lends money to his employes free of interest or a rate lower than 12%, such Interest foregone by the: employer or the difference of the interest assumed by the ‘employee and the rate of 12% shall be treated ‘as taxable fringe benefit (RR. No. 03-98, Sec. 2.33(6)(5)). Membership fees, dues, and other expenses borne by the employer for the employee in social and athletic clubs and similar organizations (R.R. No. 03-98, Sec. 2.33(B)(6)) Holiday and vacation expenses (R.R. No. 03- 98, Sec. 2.33(8)(8)) Expenses for foreign travel 2016 SAN BEDA CENTRALIZED BAR OPERATIONS | 7340. INCOME TAX SAN BEDA MEMORY AID 201 General Rule: Expenses for foreign travel are taxable fringe benefits, The travelling expenses of the family members of the employee which are paid for by the employer are subject to FBT (RR. No. 03-88, Sec. 2.33(B)(7)(c)) Exception: Business expenses paid for by the employer shall not be treated as taxable fringe benefits if the following conditions are met: 4. The expenses were reasonable; 2. Expenses were paid for the foreign travel of employee for the purpose of attending business meetings or conventions; and 3. The employee's travel abroad was supported “by documentary evidence proving the actual occurrences of the meetings or conventions (R.R. No. 03-98, Sec. 2.33(8)(7)(a)).. ‘The exemption covers inland travel expenses, such as expenses for food, beverages and local transportati lodging cost at dxyhotel orf ‘establishments amour more than US$300 per airplane ticket shall not However, 30% of the cost Educational assistance to thet is dependents. General Rule: The educational taxable fringe benefit (RR Nol 2.33(6)(9)(2)). Exceptions: Education or study is directly connected wittr ‘employer's trade or business and there is @ written contract that employee shall remain ‘employed with the employer for a period of time mutually agreed upon (Id); and 2. In case of dependents, the assistance was provided through a competitive scheme Under the scholarship program of the ‘company employer (R:R. No. 03-98, Sec. 2,33(6)(9)(b)) Insurance Premium General Rule: The premiums paid for life or health insurance and other non-life insurance borne by the employer are taxable fringe benefits (R.R. No. 03-98, Sec. 2.33(8)(10)). Exceptions: 1. Cost of premiums bome by the employer for the group insurance of employees; and 80 | 2018 SAN BEDA CENTRALIZED BAR OPERATIONS Bay NRA BE COLLEGE O as 2. Contributions of the employer for the benefits of the employee to the SSS, GSIS, and similar contributions arising from provisions of any existing law (id). The following benefits are not subject to the FBT: 1. Fringe benefits which are authorized and exempted from income tax under the NIRC or under Speciat Law; 2. Contributions of the employer for the benef of the employee to the retirement, insurance, and hospitalization benefit plans; 3. Benefits given to rank and fle employees, whether granted under a CBA or not; 4, De minimis benefits; 5. Benefits granted 'to employees as required by the nature of, or necessary to the trade, business or profession of the employer; and jenefits granted for the convenience of he employer. “benefits above may be éxempt still for part of the employee's is subject to Ka benefits granted to managerial or employees which are subject to FBT $é be given to rank-and-file employees. (tary value of the fringe benefits given to le employees, although not subject to be considered as part of their pimpensation subject to applicable income tax yates. De Minimis Benefits Exempt from Income Tax: These are the facilities or privileges furnished or offered by an employer to his employees that are of relatively small value and are offered or furnished by the employer merely as a means of promoting the health, goodwill, contentment and efficiency of his employees (R-R. No, 03-98, Sec. 2.390). Thay aro hewn: (RUM?-C*OLA) ‘Rice subsidy of P1,500 or one (1)'sack of 50kg fice per month amounting to.not more than P1500; 2, Uniform and clothing allowance not exceeding 15,000 per annum: 3. Monetized Unused vacation leave (VL) credits of private employees not exceeding ten (10) days during the year: Note: Monetization of unused VL credits in ‘excess of ten (10) days and monetization ofINCOME TAX MEMORY D 2018 10. n, sick leaves even if not exceeding ten (10) days are not exempt. Monetized value of vacation and sick leave Credits paid to government officials and ‘employees (no limit as. to the number of credits); Medical cash allowance to dependents of ‘employees not exceeding 750 per employee per semester or P125 per month; Actual yearly Medical benefits not exceeding 10,000 per annum; Gift’ given during’ Christmas and major anniversary celebrations not exceeding 15,000 per employee per annum; Benefits received by an employee by virtue of ‘a Collective bargaining agreement (CBA) and productivity incentive schemes not exceeding 10,000; Daily meal allowance for Overtime work and nightigraveyard shift not exceeding twenty. ‘on a por region basis; Laundry Allowance not month; and. Employees’ achievement length of service or safety achigivemet must be inthe form of a tangible established written’ plan wid iscriminate in favor of highly pale ern Biase (RR. No. 03-98, Sec. 2.33(C). asteine RR. No, 05-2011, RR. No. 08-20 No. 1-2015). of the property or service is so smaif ‘accounting for the property or service be unreasonable or administratively impractical Notes: 1 The list of benefits enumerated is exclusive. All other benefits given by employers which ‘are not included in the enumeration shall not be considered as de minimis benefits, hence, shall be subject to income tax (R.R. No. 05- 2011, Sec. 1). 2. The ‘de minimis benefits enumerated are ‘exempt from income tax only up to the extent ‘of the celling prescribed. Any amount in ‘excess of the ceiling provided shall be taxable to the employee only if such is beyond the 82,000 threshold for exempt 13 month pay and’ other benefits (RR. No. 02-98, Sec. 2.33(C)). tustratio: Mr. A received a rice subsidy of 2,000 per month. He also receives a 13" month pay of P80,000. In the present scenario, the rice subsidy received exceeded P500. Before determining whether the excess is taxable, the total excess thereof must be added to his 13" month pay and other benefits, Should the sum thereof exceeded P82,000, the ‘excess amount over P82,000 is taxable. the pr by 1 aaa it problem, the excess of P50 spresenting 12 months for one ‘month pay amounts to 86,000 (000). The 4,000 excess is ié expense of the employer. The fringe “is also deductible (R.R. No. 03-98, changes in business conditions and (Eapital asset is terminated — occurs nen the taxpayer discontinues in ines or discards. such assets permanently from use in such business. He may claim deduction only to the extent of actual loss sustained after adjustments for improvement, depreciation, and salvage value (R.R. No. 02-40, Sec, 98). k. Losses of farmers — losses incurred in the ‘operation of farm business are deductible (RR. No. 02-40, Sec. 100). | Net Operating Loss Carry-Over (NOLCO) 2. Losses are personal and not transferable to another. ‘The loss of predecessor partnership is not deductible by a successor corporation. ‘The loss of the parent company may not be deducted by its subsidiary. However, a branch may claim the following home office expenses: 2018 SAN BEDA CENTRALIZED BAR OPERATIONS | 101_ INCOME TAX MEMORY BEDA Alp 2018 a. Losses, expenses and other deductions. properly allocated to the Philippine branch; and b. A ratable portion of the losses, expenses 5. ‘and other deductions effectively connected with the business or trade conducted exclusively within the Philippines which cannot be definitely be allocated to some items or class of gross income (R.R. No. 16-86). 3. Closed and Completed Transaction General Rule: Losses must be evidenced by a closed and completed transaction to be deductible. Closed and Completed Transaction — one which the facts indicate that the transaction is sufficiently final to ascertain that loss has ‘occurred (MERTENS, Law of Federal Income Taxation). claimed as deduction for estate tax purposes (NIRC, Sec. 34(0)(1)(c)) General Rule: Loss is deductible in the year the loss was sustained. Exception: If the loss is compensated by insurance or otherwise, the loss is postponed to a subsequent year in which it appears that no compensation at all can be had, or there is a remaining net loss (or there is no full compensation) (Plaride! Surety & Insurance Co. v. Commissioner of intemal Revenue, GR. No. L-21520, December 11, 1967). Casualty Losses Requisites for Deductiilty (RR. No. 12-77, Sec. 2): a. Filed swom declaration of loss with the BIR through the nearest RDO within 45 days after the date of the occurrence. fof Loss: Thus, {the oes ie ue tPapnkage pss — documentary proof of the stock through fluctuation’ oH Glograph- showing extent of e mount toss snot deduct tn fas been disposed, Tho ors maa actually suffered when the stat farmers arising from the shrinkag physical value of farm produ ‘are not deductible except as In case of loss from a sales tranSa Se consumption of the sale is the fevent which fixes the toss, (DIMAAM Basic Approach to Income Taxation, sup 121) Other examples of non-deductible losses. because they were not evidenced by closed and completed transaction: a. Losses arising from revaluation of property, plant and equipment; and b. Unrealized foreign exchange arising from foreign loans. Exception: In case of loss of useful value of capital assets due to changes in business conditions (as previously discussed under Special Losses), the loss may be deducted even though there was no sale or disposition of the property. 4. Losses can be claimed as itemized deduction within six (6) months after the death of the decedent provided that the same are not 102 | 2018 SAN BEDA CENTRALIZED BAR OPERATIONS jligh not conclusive of the loss 14,0. No. 31-2009). 6 record in the books the alleged loss Ahat the loss had not been suffered, jet Operating: Loss Carry-over (NOLCO) (NIRC, Sec. 34(D)(3); R.R. No. 14-2001) Itis the excess of allowable deductions over ‘gross income of the business for any taxable year, which had not been previously offset as deduction from gross income, General Rule: NOLCO shall be carried over as a deduction from gross income for the next three (3) consecutive taxable years Immediately following the year of such loss. Exception: In the case of oil and gas well, losses incurred in any of the first ten (10) years of operation may be carried over as a deduction from the gross income for the next five (5) years following such loss.INCOME TAX Requisites for Deductibility: 1.1U is from the Net operating loss of the business for any taxable year immediately preceding the current taxable year; 2. has not been previously Offset as ‘deduction from gross income; 3. It shall be Carried over as a deduction from gross income, for the next three (3) consecutive taxable years immediately following the year of such loss only; 4. The taxpayer was not Exempt from income taxin the year the loss was incurred; and 5. There has been’ no Substantial change in the ownership of the business or enterprise. Note: In the case of oil and gas well, losses incurred in any of the first ten (10) years of operation may be carried over as a deduction from the gross income for the next five (5) years following such loss (IIRC, Sec. 34, Par. (013) ‘Substantial Change in the Ow! the Business or Enter Refers to a change in business or enterprise as, from its merger or ‘combination with another per 01, Sec. 3.8). substantial change in the 0 business or enterprise in that 1. Not less than seventy-five pat nominal value of outst shares; or 2, Not less than seventy-five pefoaX the paid up capital of the corpér business is in the name of the. is held by or on behalf of the persons (RR. No. 14-01, Sec. 2.4) ‘The term “by or on behalf of the same persons” shall refer to the maintenance of ‘ownership despite change as when: 1. Noactual change in ownership is involved in case the transfer Involves change from direct ownership to indirect ownershipy or vice versa; and 2. No actual change in ownership is involved in the case of merger of the subsidiary into the parent company (R.R. No. 14-01, Sec. 3.12) /e (75%) equity, ownership shall only apply'to a transfer cor assignment of the taxpayer's net operating losses as a result of or arising from the said taxpayer's merger or consolidation of business combination with another person (RR. No. 14-01, Sec. 2.4). ory Alo 2 In such case, the transferee or assignee shall not be entitled to claim the same as a deduction from gross income except when as a result of the said merger, consolidation or combination, the shareholders of | the transferorassignor, or the transferor gains control of: a At least seventy-five (75%) or more in nominal value of the outstanding issued shares or paid-up capital of the transferee/assignee, of a corporation, or b. Atleast seventy-five (75%) or more interest in the business. ofthe. transferee/assignee, if not a corporation (id). Note: However, in-a recent ruling by the BIR, in case of tax-free merger, it held that NOLCO of the absorbed corporation is not one of the assets ofthe latter that can be transferred and bsorbed by the surviving corporation as this Je can be availed of merely by the 36d cgrporation (BIR Ruling No, 214-12, is engaged in trade or business or Sercise of his profession; Kal corporations subject to preferential fates (e.g. private educational fions, hospitals, and regional ting headquarters); and ‘and trusts (R.R. No.14-01, Sec. 4) {2hsiyers Not Entitled to NOLCO: Ze offshore banking units (OBU) of a foreign banking corporation, and Foreign Currency Deposit Unit (FCDU} of domestic or foreign banking corporation duly authorized by the BSP; 2. An enterprise registered with the Board of Investment (BO!) with respect to its BOI- registered activity enjoying Income Tax Holiday (ITH) Incentive; 3. An enterprise registered with the PEZA with respect to its PEZAregistored activity; 4. Enterprises registered with the Bases Conservation and Development Act (BCDA) (e.g., SBMAregistored entorprises with respoct to its registered business activity) 5, Foreign Corporations engeged in international shipping or a carriage business in the Philippines; and 6. Any person, natural’ or juridical, enjoying ‘exemption from income tax (i). 2018 SAN BEDA CENTRALIZED BAR OPERATIONS |103INCOME TAX SAN BEDA MEMORY ‘Summary Rules on NOLCO: 1. NOLCO shall be allowed as a deduction from the gross income of the taxpayer who sustained or accumulated the net operating losses regardless of the change in its ‘ownership. This rule shall also apply in case of @ merger where the taxpayer is the surviving entity (R.R. No. 14-01, Sec. 2.2). 2. The three (3)-year reglementary period for claiming NOLCO will continue to run despite the fact that the taxpayer paid income tax under the MCIT or availed of the OSD (R-R. No. 14-01, Secs. 2.5 and 2.6). 3. NOLCO is deducted on a first in, first out (FIFO) basis (R.R. No. 14-01, Sec. 2.7). 4, The net operating loss incurred by a taxpayer in the year in which a substantial change in ownership in such taxpayer ‘occurs shall not be affected by such change in ownership (R.R. NO. 14-01, Sec. 2.8) 5. NOLCO shall be allowed as deduction in computing the taxpayers income tax return (R.R. No. 1 6. A taxpayer who claims E. Bad Debts Requisites for Deductibility: (IR-WAS 1. Existing, valid, and legally-{4 2. Must have been Reported as the income tax return of the years; 4. Actually charged off in the books of ace of the taxpayer as of the end of the tax year of worthlessness; ‘5, Must not be Sustained in a transaction entered into between related parties (please see who are related parties under Interest); 6. Connected with the taxpayer's trade, business, (or practice of profession; 7. For Insurance or surety companies, bad debts . must have been declared closed due -to insolvency or for any such similar reason by the Insurance Commissioner; and 8. For Banks, the taxpayer shall submit to the BBSP/Monetary Board the written approval of the writing off of the indebtedness from bank's books of accounts at the end-of the taxable year (IRC, Sec. 34(E); RLR. No. 25-2002). Notes: 1. Before a debt can be considered worthless, the taxpayer must also show that itis indeod Uncollectible even in the future. 104 | 2018 SAN BEDA CENTRALIZED BAR OPERATIONS BEDA pasa OF LAR hplg Furthermore, there are steps outlined to be undertaken by the taxpayer to prove that he exerted diligent efforts to collect the debts (Philippine Refining Company v. Court of Appeals, G.R. No. 118794, May 8, 1996) Good faith on the part of the taxpayer is not enough. He must show that he had reasonably investigated the relevant facts and had drawn a reasonable inference from the information thus obtained by him (Collector of Internal Revenue v. Goodrich International. Rubber, GR. No, L-22265, December 22, 1967). ‘A mere recording in the books of account of estimated uncollectible accounts does not Constitute a write-off of the said receivable. In no case may any bad debt reduction be allowed unless the facts pertaining to the money or property lent and its cancellation or write off from the taxpayer's accounting records, after having been determined that the 1e has actually become worthless, have ith by the taxpayer (R.R. No. 25% cansonabie steps which may taken by the taxpayer to prove Ping of statement of accounts: ding of collection laters; ing the account to a optéction; or lawyer for Refining Co. v. Court of Appeals, G.R. No. Sees May 8, 1996). attors affecting worthlessnes: Bankruptoy or insolvency of the debtor: Insufficiency of the collateral; Statute of limitations; Death of the debtor leaving no assets; Injury of the debtor making it impossible for him to earn a living: f. Meager amounts involved: 9g. Improbabilty of success of collection; and Destruction ‘by fire of original invoices ‘evidencing indebtedness _ (Goodwill International Rubber Co. v. Collector of Internal Revenue, CTA Caso No. 468, June 8, 1963). judicial Note: Despite additional requisite provided for to be satisfied by banks, its non-fulfilment shall not prejudice the CIR's determination of worthlessness and uncollectibility of debts (RR. No. 25-02, Sec. 2)INCOME TAX SAN BEOA MEMOR Tax Benefit Rule ‘The recovery of bad debts previously allowed as deduction in the preceding year/s shall be included as part of the taxpayer's gross income in the year of such recovery to the ‘extent of the income tax benefit of said deduction (NIRG, Sec. 34(E)(1)) Mlustration: In 2010, A Corp. reported net income amounting to 480,000. Juan dela Cruz, a debtor of A Corp. in the amount of 500,000 was deciared to be insolvent. Hence, A Corp. charged off the entire amount owed by Juan, resulting to net loss of 20,000 at the end of, the year. In 2012, Juan was able to recover from insolvency and paid A Corp. the entire amount of 500,000. How much should A Corp. report as income from bad debt recovery? ANS: Only 480,000, since this is ‘amount of income tax from the deduction madé In a case where securities be worthless and chi Philippines a substantial pa business is the receipt of dept treated as bad debts, but as last_day of the taxable year 34(E)(2)) Where under the foreclosure of BING the mortgagee buys the mortgaged: and credits the indebtedness purchase price, the difference between 4 purchase price and the indebtedness is not allowable as a deduction for a bad debt because in such case the property which was security for the debt stands in place of the debt. The determination of loss in such case is. deferred until the disposal of the property (RR. No. 02-40, Sec. 103). Depreciation Concept: itis the gradual diminution in the service oF Useful value of tangible property due from exhaustion, wear and tear and normal obsolescence. ‘The term depreciation is also applied to the amortization of the value of the intangible assets, the use of which in trade or business. is of limited duration (Basilan Estates, Inc. v. Commissioner of Internal Revenue, G.R. No. L-22492, September 5, 1967). SAN BEA Fa fahdahSSE OF LAWS SS year, AID 2018 Reason: Properly gradually approaches a point where ils usefuiness is exhausted. By using the property, a gradual sale is made of it, and the depreciation charged is the measure of the cost which has been sold (US. v, Ludey, 274 U.S. 295, May 16, 1927). Requisites for Deductibility: (PORAL-V) 1, The allowance for depreciation must be for Property arising out of its use in the trade or business, or out of its not being used temporarily during the year (Connell Bros. Co. iL) v. Commissioner of Internal Revenue, CTA’Case No. 411 & 610, April 30, 1966; NIRC, Sec. 34(F)(1)): 2. ttmust be charged Off within the taxable year (RR. No.02-40, Sec. 113); 3. Allowance must be Reasonable (NIRO, Sec. BHM): 4, Statement on the allowance must be Attached tothe return (R.R. No. 02-40, Sec. 118); non-resident alien and foreign ration ,psoperty must be Located within DKK (IIRC, Sec. 34(F)(6)); and ty of depreciation of Vehicles, Y that is used for trade, business or of @ profession or held for the ion of income; of tangible property (other than land) jory: kinds’ of intangible property (other than Shares of stock) with life of more than one such as patents, copyrights and franchises; and 4, Properties. subject to exhaustion within a determinable period of time, that is, it has a limited useful life (Italian Thai Development Public Co. Ltd. v. Commissioner of Internal Revenue, CTA Case No. 6172, November 12, 2002). Properties Not Subject to Depreciation: Land apart from the improvements of physical development added to it (Limpan Investment Corp. v. Commissioner of Internal Revenue, GR. No. L-21570, July 26, 1966; R.R. No. 02- 40, Sec. 106): 2. Inventories or stock in trade: 3. Personal effects or clothing, except costumes Used in theatrical business; 4, Bodies of minerals which through the process. of removal were already subject to depletion allowance; 2018 SAN BEDA CENTRALIZED BAR OPERATIONS |105INCOME TAX SAN BEDA MEMORY AID 2018 Automobiles and other _ transportation ‘equipment used solely by the taxpayer for pleasure; Buildings used solely by the taxpayer as his residence; Furniture or furnishings used in the building used solely by the taxpayer as his residence (RR. No. 02-40, Sec. 106); Intangibles, the use- in trade, business or exercise of a profession is not of limited duration (R.R. No. 2-40, Sec. 107); and Incidental repairs which neither materially add to the value of the property nor appreciably prolong the life, but keep i"in an ordinary efficient operating condition (R:R. No. 2-40, Sec. 68). Notes: 1 4 Ifthe property is being used partly for personal and partly for business, depreciation expense must be pro-rated and only the portion attributable to business use is dedi Inc. v. Commissioner of GR. No. L-22492, Septem! Depreciation Rate is Based —Y) Rule: The BIR and the taxpayectney into consideration during the adoption agreement. Any change shall not be eff prior to the taxable year on which notice in writing by certified mail or registered mail is served by the paity initiating (NIRC, Sec. 34(FV(3)) Exception: If there is no agreement and the BIR does not object in writing to the rate and useful life being used by the taxpayer, the same shall be binding (id). - Methods of Computing Depreciation: a. Straight-line method; b. Declining balance method using a rate not exceeding twice the rate which would have been ‘used under straight-line method; cc. Sum-of-the-years method; and d Any other’ method which may be prescribed by the SOF — upon 2018 SAN BEDA CENTRALIZED BAR OPERATIONS recommendation of the CIR (NIRC, Sec. 34(F)(2)) 5. Special Cases: @ Properties used in Operations i, Properties directly used in or related to production of petroleum — depreciation shall be allowed under Straightline method or declining balance method at the option of the service contractor. The useful life shall be ten (10) years or such shorter life as may be permitted by the CIR. Petroleum Note: If service contractor initially elects fhe declining-balance method, it may subsequently shift to straight-line, li, Property not used directly in production ~ depreciation shall be Under straight-line method on. the basis of an estimated useful lfe of five vor less. f expected life is more than ten (10) property shall be depreciated ver any number of years between Ave (5) years and the expected life, Fprovided that the contractor notifies the CIR at the beginning of the depreciation period. which. YF depreciation rate will be used (NIRC, Sec. 34(F)(5)) acauisiion cost loss salvage Value (without adjustment for revaluation losses or increments) (R.M.C. No. 70-10) Who can claim depreciation expens: ‘The person who sustains an economic loss from the decrease in property value due to depreciation, which is usually the owner. 8 Special Ruiea: In case the property is held by one person for life (beneficial owner) with remainder toanother person (naked title) — deduction shall be computed as if the tenant was the absolute owner of the property and, as such, the expense shall accrue to him. b. For property held in trust — deduction shall be apportioned between the income beneficiaries and the trustees in accordance with the pertinent provisionsINCOME TAX SAN BEDA MEMORY AID 2018 of the instrument created or in the absence of such provisions, on the basis, of the trust income allowable to each. (NIRG, Sec. 34(F)(1)) 9. Rules on Deductibility of Depreciation of Vehicles (R.R. No. 12-12, Secs. 2 and 3) a. The taxpayer must substantiate the purchase with sufficient evidence, which Contains the following, among others: {Specific motor vehicle identification number, chassis number or other registrable identification numbers of the vehicle; Total price of the specific vehicle subject to depreciation; and li, Direct connection or relation of the vehicle to the development, management, operation andlor conduct of the trade or business or profession of the taxpayer; b. Only one vehicle allowed for the ‘employee, the value d exceed P2.4 milion; Note: The _ thresholds prospectively from Octo does not apply to vehicles Bt to such date (R.M.C. No. tinless. the taxpayer's business is transport opera of transportation equipment Vehicles purchased are used ‘operations Note: Depreciation on such vehicles stl be disallowed in case of failure to moet all the. requirements, The. maintenance expenses and loss on sale of the non- Gopreciable vehicles shall tikewise bo disallowed, G. Depletion of Oil and Gas Wells and Mines Concept: It is the exhaustion of natural resources (wasting assets) as in mines, oil, and gas wells asa result of production or ‘severance from such mines or wells Notes: 1. Theory and Purpose of _ Depletion The allowance for depletion is based on the theory that the extraction of minerals gradually exhausts the capital investment in the mineral deposit. The purpose of the depletion deduction is to permit the owner of a capital interest in mineral in place to make a taxfree recovery of that depleting capital asset (Consolidated Mines, Inc. v. Court of Tax Appeals, G.R. Nos. L- 18843 & L-18844, August 29, 1974, citing Mertens, Law of Federal Income Taxation, Revision of Volume 4 (1966), Chapter 24, pp. 67). 2. Depletion Method: The total of the accumulated exploration and development expenses is divided: by the number of recoverable units to arrive at a per unit depletion cost (similar to units-of-production- method of depreciation). 3. Tax Treatment of Intangible Exploration and Development Drilling Costs: (NIRC, Sec. 34(G)) Intangible costs in Petroleum Operations. ‘Any cost incurred in petroleum operations which in itself has no salvage value and which is tal to and necessary for the driling of ion of wells for the production jrred_ for non-producing wells nines: Outright expense deductible ear incurred red for non-producing wells Al amount deductible shail not exceed ive percent (25%) of net income from ig operation. The excess shall be carried foward to the succeeding year until fully deducted, ‘The election to deduct’ the exploration and development expenditures is irrevocable and shall be binding in succeeding taxable years. Exploration expenditures - _- means ‘expenditures paid or incurred for the purpose of ascertaining the existence, location, extent or ‘quality of any deposit of ore or other mineral, and Paid or incurred before the beginning of the development stage of ‘the mine or deposit (NIRC, Sec. 34(G)(2). Development expenditures - means expenditures paid or incurred during the development stage of the mine or other natural deposits. The development stage of a mine or other natural deposit shall begin at the time: ‘when deposits of ore or other minerals are shown to exist in sufficient commercial quantity 2018 SAN BEDA CENTRALIZED BAR OPERATIONS | 107INCOME TAX DA MEMO Le and quality and shall end upon commencement of actual commercial extraction (NIRC, Sec. 34(G)(2). 4, Who are entitled to depletion allowance Annual depletion is allowed only to mining entities which own an economic interest in mineral deposits. Mere economic or pecuniary advantage to be derived by production by one who has no capital investment in the mineral deposit does not amount to economic interest. 5. Depletion v. Depreci Depletion Assets subject to| Assets subject. to depletion could not be| depreciation may be | replaced. Natural resources H. Charitable and Other Requisites for Deductibility 1. It must be given to organiz law: The contribition or git must Itmust be Made within the taal It must be evidenced by Adedt records (substantiation rule 34(H); RLR. No, 13-98). aon Noto: respective ofthe accounting by the donor, donation ie, recog ‘ot in the year the deed of donation wasp ‘The deductibility of donation is not govern ordinary rules on deductibilty of the expense Donation must be BOTH perfected ahd consummated before it can be allowed as a deduction (Philippine Stock Exchange v. ‘Commissioner of internal Revenue, CTA Case No. 5995, October 15, 2002). Notes: 1. Kinds of Contributions (NIRC, Sec. 34(H); RR. No.13-98) 2, Ordinary/Partially Deductible Contributions — those which are subject to — limitation as to the amount deductible from ‘gross income, Recipient is: (GAN) i. The Government of the Philippines or any of its agencies or political subdivisions exclusively for public purposes 108 | 2018 SAN BEDA CENTRALIZED BAR OPERATIONS SAN BEDA COLLEGE OF LA il, Accredited domestic corporations or associations organized and operated exclusively for: (ReCS-YERCS) 1). Religious; 2) Charitable; 3). Scientific 4) Youth & sports development 5) Educational; 8) Rehabilitation of veterans: 7) Guttural; or 8) Social welfare. ii, Non-government organizations (Gs) Limitations of Amount Deductible: 1. Corporate taxpayer ~ 5% of taxable income before contributions, 2. Individual taxpayer ~ 10% of the taxable income before contributions. aT PSovernment of the Philipines or ot te agencies "or poltical including tullowned ndertaking priority activities in: (HEY- iecs) 1" Health; Education; Youth & Sports Development; Human Settiements: Economic Development; Gutture; or Science The above activities must conform to the development plan according to NEDA. in Consultation with the appropriate government agencies. ‘Any donation not in accordance with said priority plan shall be subject to the 5% or 10% limitation, ii. Eoreign institutions or international organizations pursuant to agreements, treaties or commitments by ~ the Philippine government and such institutions. or in pursuance of special laws; or Accredited NGOs.INCOME TAX N BEDA MEMORY AID 2018 Requisites: (NIPU-AD) ¥. National Museum, Library, and Archives 1, NGO is a Non-profit domestic (P.O. No, 373); corporation; vi, University of the Philippines and other 2. No part of its net income Inures to the State Colleges and Universities; benefit of any private stockholder or vii. Philippine Rural Reconstruction individual, Movement, 3. Itis organized and operated exclusively viii, Cultural Center of the Philippines: fx following Purposes: (SEC-CHR ix. Trustees of the Press Foundation of Asia; x Humanitarian Science Foundation; a. Scientific; xi, Artesian Well Fund (R.A. No. 1977); - b. Educational, xil. International Rice Research Institute; ©. Cultural, xii, National Science Development Board 6. Charitable; (now the DOST) and its agencies and to e. Health: public or recognized non-profit, non-stock Research; ‘educational institutions (RA. No. 358 9. Social welfare; or and h. Character building and youth and Donations of prizes and awards to sports development; athletes (RA. No. 7549). 4. Contributions are" Utilized (to accomplish one of its purposes, to Requisites: acquire asset, or to set aside for specific 1, Granted to athletes in local and project) directly not later than, international tournaments and day of the 3% moith:{iinless ‘cgmpatitions held in the Philippines. alter the close of the erable Yearly ery a. road; and which contributions are 5, Annual Administrative’ total expenses; and 6. Upon Dissolution, its a distributed to another N the State for public pur distributed by a court on as in the judgment of best accomplish the general which the dissolved orga organized Su ‘Any donation not in compliance withthe foregoing requirements shall be subject *6 the 5% oF 10% limitation Note: Whether deductible in full or subject to limitation, the recipient NGO must be accredited by the Philippine Council for NGO Accreditation (E.0. No. 720, April 11, 2008), - Contributions Deductible in Full under Special Laws. i. Integrated Bar of the Philippines (P.D. No. 181); Development Academy of the Philippines (PD. No. 208): ‘Aquaculture Department of the Southeast Asian Fisheries and Development Center (SEAFDEC) (P.D. No. 292); jw, National Social Action Council (P.D. No. 204); LAE OF LAW “hist be jnaments: and competitions sanctioned by their pective national __-_ sports, Essociations (R.A. No. 7549, Sec. rion: The amount of any charitable fbution of property other than money shall based on the acquisition cost of the property (NIRC, Sec. 34(H)(3)).. Irrespective of the accounting method used by the donor, donation is recognized as a deduction only when it was actually paid or made, not in the year the deed of donation was perfected. The deductibility of donation is not governed by the ordinary rules on deductibility of the expense. Donation must be both perfected and consummated before it can be allowed: as a deduction (Philippine ‘Stock Exchange v. Commissioner of internal Revenue, CTA Case No. 5995, October 15, 2002). ‘Substantiation Requirement Donors claiming donations and contributions. to accredited —non-stock, non-profit corporationINGO as deductions must submit Certificate of Donation/s issued by such entities indicating therein the following: 2018 SAN BEDA CENTRALIZED BAR OPERATIONS 1109INCOME TAX MEMORY AIO 201 Actual receipt by the said entities of the donation or contribution and the date of receipt; and Amount of the charitable donation or contribution, if in cash; if property, real or personal, the acquisition cost of the said property (RR. No, 13-98, Sec. (a) Note: If the donation is more than ®4 million, Notice of donation must be submitted to the BIR (RR. No. 13-98, Sec. 6). |. Research and Development (R&D) Concept: All costs incident to the development of ‘an experimental or pilot model, a plant process, a product, a formula or invention, of Similar property, {and the improvement of already existing property of the type mentioned (U.S. IRS Reg., Sec. 1.174- 20N(1) Research — original and planned inv« undertaken by the taxpaye gaining new scientific or tect Understanding, Development — it is the applicatift of findings or other knowledge to a the production of new or subst materials, devices, products, pro or services before the start production or use. Notes: 1. RED expenses may be for: a. Acquisition or b. 2. Treatment of R&D Expense ‘The taxpayer has the option to: Claim the expense as deduction in the year incurred; or Treat it as deferred expenses which are charged as capital account and amortize the same over sixty (60) months beginning with the month in which the taxpayer first realizes benefits from such expenditures (NIRC; Sec. 34(). b. The option to amortize and the period of amortization shall be irrevocable and changing to a different method may be allowed only with the authorization of the CIR. The election shall not apply to any expenditure paid or incurred during any taxable year prior to the taxable year for which the taxpayer makes the election (NIRC, Sec. 24(1) TO | 2018 SAN BEDA CENTRALIZED BAR OPERATIONS Deduct apply to: a. Any expenditure for the acquisition or improvement of land or for the improvement of property to be used in connection with research and development subject to depreciation and depletion; and ‘Any expenditure paid or incurred for the purpose of ascertaining the existence, location, extent or quality of any deposit of ‘ore of other mineral including oil or gas (NIRC, Sec. 34(1)(3)) ity of R&D expenditures shall not Pre-operating Expenses ~ expenses paid or incurred in connection with creating or investigating the creation or acquisition of an active trade or business entered into by the taxpayer. These are expenses paid or incurred before, and in anticipation of the business in an activity for profit or the tion of income’ = eesti rt Bice months. rin which the business begins. poration is considered to begin press when commences the Ivities for which it was organized and Galory expenses and start-up costs, Son loan obtained to purchase tand and ME incidental costs, and project development ‘of real alte ‘developers, cannot be Bnekdered as part of the pre-opersting SS expenses J. Pension Trust Contribution Requistes for Deductibiity: (PRECA) Employer must have established a Pension or retirement pian for the payment of reasonable pension tots employees; Pension plan is Reasonable and actuarially sound; It i funded by the Employer (employer contributes cash); ‘Amount contributed must no longer be subject to the Gontrol of the employer; Payment has not been Allowed before as duction; and ‘The amount is apportioned in equal parts over 2 period of 10 consecutive years beginning with the year in which the transfer or payment is made. (1 DE LEON, NIRC Annotated, supra at 491).INCOME TAX SAN GEDA MEMORY AID 2018 Nature: Applicable only to the employer on account of its contribution to a BIR-qualified reasonable private pension plan for the benefit of its employees (see discussion below). is purely business in character. Deductible Payments to Pension Trust a. Employer's current liability or present service cost — amount of contribution to the trust during the taxable year; and b. Employers liability for past services (past service cost requires lump sum to the pension fund) — one tenth (1/10) of the not be applied to increase the benefits of any employee; and i. Trust ~ the fund must be administered by A trust (R.R. No. 01-68, Sec. 2) Note: Before the employer can deduct its Contributions to the trust, it must secure first ‘a certification from the BIR to the effect that the plan is qualified (R.R. No. 01-68, Sec. 6). Contributions to non-qualified retirement plan are deductible only in the year paid to employees and not at the time the contributions were made. Feasonable amount paid by the employer ‘Il. OPTIONAL STANDARD DEDUCTION (OSD) ‘to cover pension liability applicable to prior Concept: A fixed percentage deduction without ten (10) years. regard to any actual expenditure, in lieu of the itemized deductions. itis merely a privilege that may be enjoyed by certain taxpayers. (NIRC, Soc. 34(L)) 3. Requisites of a Reasonable Retirement Benofit Plan: (WriP-C*IN"FoT) a. Written program — it must be a definite ‘written program setting forth all essential for qualific at b. Bermanency ~ it m omOBRN BED AS aAY Continuing program; ©. Coverage — i Percentage Basis —Yt\mustfet least seventy perce officials and employ provides eligibility reqdirems at least seventy percedh 4704 officials and employ least eighty percent ‘aligible must be covered: li. Classification basis — does not wish to cover drei of his employees, he may limit the coverage of employees it certain classification provided that. not discriminatory; 6. Gontribution — the employer, or officials ‘and employees, or both, shall contribute to the fund; e. Impossibility of diversion ~ the corpus or income of the trust fund must at no time bbe used for, or diverted to, any purpose other than the exclusive benefit of the said officials and employees; 1. Non-discriminatory — there must be no discrimination in favor of officials and employees who are _ officers, shareholders, supervisors or highly ‘compensated: g. Non-forfeiture rights — it must provide that upon the termination of the plan, the rights of each official or employee are non- forfeitable; h. Forfeiture’ — the plan must expressly provide that forfeiture for any reason must Bg, except non-resident alien: sf accrual basis ~ Not exceeding percent (40%) based on gross eipts (R.R. No. 16-08, Sec. 3). ‘The cost of sales (Individual seller @éods), or the cost of service (individual Hlér of services), is not allowed to be jucted for purposes of determining the is of the OSD (id). * Corporation: Not exceeding forty percent (40%) based on gross income of DC and RFC (RR. No. 16-08, Sec. 4). 2. Some important rules: Unless the taxpayer signifies in his income tax return his ‘intention to elect ‘OSD, he Is considered as having availed of the itemized deductions. ‘The taxpayer is not allowed to use a hybrid method of claiming _its/his deduction for one taxable year (R:R. No. 16-08, Sec. 7). b. Such election to avail of the OSD, when made by the qualified taxpayer, is irrevocable for the year in which the return ig made, However, he can change to itemized deductions in the succeeding years (id). 2018 SAN BEDA CENTRALIZED BAR OPERATIONS I ItINCOME TAX SAN BEDA MEMORY ©. Proof of actual expenses is not required, but the taxpayer should keep records pertaining to his gross sales/receipts or income (NIRC, Sec. 34(L)) 4. Corporations who avail of the OSD should still submit financial statements when it files its annual income tax return and keep such records pertaining to its gross 3. OSD of GPP and Individual Partners A GPP may avail of the OSD of forty percent (40%) ofits gross income in computing its net income, since Sec. 26 of the NIRC provides that “for purposes of computing the distributive share of the partners, the net income of the GPP shall be computed in the same manner as a corporation.” a. Ifthe GPP uses the OSD in computing its net income distributable to the partners, Res ery NRA-ETB, | Not Allowed NRA-NETB; individual | Not Allowed employees ‘subject to | Reason: They are taxed preferential income | on gross income tax rate of 15% on their gross, ‘compensation income under NIRC, Sec. 25 oc Allowed RFC Allowed NRFG Not Ailowod Reason: They are taxed | ‘on gross income the ‘computing taxable inco for both the items of ded the GPP and its partners. b. If the GPP uses the ite in computing its net incorael may only avail of the 2 deductions -which are in claimed by the GPP. The pi claim the OSD against their $} items of deductions claimed by b GPP and its partners (R.R. No. 02-20%6, Sec. 2). In fine, it may be implied from R.R. No. 02-2010" that the partners of a GPP could never avail of the OSD against their share in the net income of, the GPP, regardless of the deductions availed of by the GPP. The only time they may avail of the OSD Js if they also eam other business or professional income, in which case the OSD shall only be computed and deducted against ‘such other business or professional income. 4. Summary of Allowance of OSD eed Companies — whether domestic or j-sfoing business in the Philippines, are }40 deduct, in addition to the itemized ions, the following additions, required by law to be made hin the year to reserve funds; and tums other than dividends paid within the ‘Year on policy and annuity contracts (IRC, Sec. 37(A)). > Mutual Marine Insurance Companies (MMIC) ~ MMICs shall include in their gross income the gross premiums collected and received by thom less: 1. Amounts repaid to policy holders on account of premiums previously paid by them; and 2. Interest paid upon those amounts between the ascertainment and payment thereof (NIRC, Sec. 37(C)). D. Mutual Insurance Companies (MICs) — case of mutual fire and mutual employer's liability and mutual workmen's compensation and mutual casualty insurance: companies requiring members to make premium deposits to provide for losses and expenses, said companies shall not return as income any portion of the premium deposits returned to their policyholders, but shall return as taxable income all income received by them from all other sources plus such portion of theINCOME TAX SAN A MEMORY AID 2018 premium deposits as are retained by the ‘Compensation Paid to Senior Citizens Companies for purposes other than the Private establishments employing senior Payment of losses and expenses and citizens are entitied to additional deduction of reinsurance reserves (NIRC, Sec. 37(6)). fifteen percent (15%) of the amount paid as, salaries and wages to senior citizen, subject to . Assessment Insurance Companies. — may the general requisites for expenses and the deduct from their gross income the actual following additional conditions: deposit of sums with the officers of the 4. Employment shall have to continue for a Government of the Philippines pursuant to period of at least six (6) months; and law, aS additions to guarantee or reserve 2. Annual taxable income of the senior citizen funds (NRC, Sec. 37(0)). does not exceed the poverty level as may be determined by the NEDA thru the National Establishments granting sales discounts Statistical Coordination Board (NSCB). The to or employing senior citizens senior citizen must submit a sworn Certification that his annual taxable income ‘Senior Citizen's Discount does not exceed the poverty level (RR. No. 07-2010, Implementing RA. No. S904) IV. PREMIUM PAYMENTS ON HEALTH AND All establishments providing the prescribed HOSPITALIZATION INSURANCE (PPHHI) discounts to Senior Citizens may claim the same ‘as a tax deduction based on the cost of goods Alia rye ‘of PPHHI as deduction: 50ld or services rendered to, Senior ey an individual taxpayer, and Siuea iets caste naan se of married taxpayers, only the spouse 4. Only portion of gross 8 7 additional "exemption for consumed or enjoyed bi shall be eligible for the; discounts; 2. Gross selling price and sal be separately indicated in t sf ‘Deductibility: LiaaES st have scaly been taken: Pe asin see on i etic oe ted Be ae anny aes bee mes 2c. 34(M)) for the sale of goods o: senior citizen; twenty percent (20%), which@v based on the gross. selling deducted from the gross incom), 4, The seller must record its sales iiciSSiv83of the discount granted: oS 5. The discount can only be allowed as deduction from gross income for the same FeSonat Exemptions (NIRC, Sec. 35(A)) “Theoretical personal, living and family expenses of an individual taxpayer regardless of status which are year that the discount was granted allowed to be deducted from the gross or net income 6. The business establishment giving sales of an individual taxpayer. These are arbitrary siscounts to qualified senior citizens is amounts which have been calculated by our required to keep a separate and accurate lawmakers to be roughly equivalent to the minimum Fecord of sales, which shall include the of subsistence, taking into account the personal ‘name of the Senior Citizen, OSCAID. aross status. and additional qualified dependents of the sales/ receipts, ‘sales discount granted, taxpayer (Pansacola v. Commissioner of Internal Gates-of transactions anid invoice numbers ovenuo, GR. No. 159007, November 16, 2000), for every sale transaction to Senior Citizen; 7. Only selected establishments mentioned in Taxpayers _who are Allowed Personal and RR. No. 07-2010 (Le, those supplying Additional Exemptions: medicine, giving professional, dental or 1. RC; medical services, etc.) may claim the said 2. NRC; discount as deduction; and 3. RA: and 8, The seller must not claim the OSD during 4. NRA-ETB subject tothe following conditions: the taxable year ‘a. Exemption allowed is equal to that allowed in the income tax law in the country of which NNRA-ETB is a subject or citizen, to citizens 2OI8 SAN BEDA CENTRALIZED BAR OPERATIONS | 113,INCOME TAX SAN BEDA MEMORY AID 2 of the Philippines not residing in such country (reciprocity); b. The amount of the personal exemption should not exceed the amount fixed under the NIRC as the exemption for citizens or residents of the Philippines; and c. NRA-ETB must file a true and accurate relurn of the total income received by him from all sources in the Philippines. 5. Estates and trusts which are treated for purposes of personal exemptions as individuals. Whether or not NRA-ETB is allowed. both personal and additional exemption: First view: NRA-ETB is entitled to personal exemptions only by way of reciprocity, but not to additional exemptions (VITUG & ACOSTA, supra at 148; DIMAAMPAO, supra at 40), Second view: The NIRC merely provides for personal exemption” without qualifcat Sec. 35 of the NIRC, as amentigd by R.A. (Minimum Wage Earner Law): the title of Sec. 35, the term pet son refers to both basic personal. ana exemptions for dependents. (2: supra at 773). If the intention Wao deduction only for “basic personal exept Sec. 35 (A), then the word “basic” s ETB may under certain circumstance both basic personal and additional e» Basic Personal Exemption ‘Married individuals (husband and wife) who are! earning are allowed a basic personal exemptio 150,000 each on their respective income; otherwise, only the earning spouse is entitled to the exemption. ‘The law treats husband and wife as separate taxable units. Additional Exemptions ‘Amount allowed: "25,000 for each qualified dependent, but not exceeding four (4) (R.R. No. 10- 2008, Sec. 3). Dependent means: 1. Alegitimate, illegitimate or legally adopted child of the taxpayer; 2. Chiefly dependent upon and living with the taxpayer; 3. Heis: ‘a. Not more than twenty-one (21) years of age; b. Unmarried: and ©. Not gainfully employed; or 114 | 2018 SAN BEDA CENTRALIZED BAR OPERATIONS . by Wirt al oannGh Sha oO 4. If such dependent, regardless of age, is incapable of self-support because of mental or physical defect (IRC, Sec. 35(B)). Chiefly dependent — means principal or main Suppor. It means more than one half of the support required by the dependent (2-8 DOMONDON, supra at 778). Living with the taxpayer — does not necessarily mean actual and physical dwelling together at all times and under all circumstances. The additional ‘exemption applies even if a child or other dependent is away at school or on a visit (ic). Who claims the addi General Rul claimant, nal exemptions The husband shall be the proper Exception: The wife shall automatically be entitled to claim full additional exemptions when: 4. The wife is employed in the Philippines and the id is unemployed; jsband js a non-resident citizen deriving ign sources; or Féxplicily waived his right in the Fexemption certificate for all E(R-R. No, 10-2008, Sec. 3). B ot“Wdsaiy separated. spouses, it shall be ori the spouse who has custody ofthe smptions that may be claimed by both Heéd four (4). -end-of;the-year Rule As'the status of the taxpayer at the end of jar year shall be used for purposes of ing his personal and additional exemptions. the taxpayer should die during the taxable SS year, his estate may claim the corresponding ‘exemptions as if he died at the close of such year. 2. Ifthe spouse or any dependent should die or any dependent should marry or become twenty-one (21) years old during the year, or should become. gainfully employed, the taxpayer may claim the ‘exemptions as if the spouse or dependent died or as if such dependent married, became twenty-one (21) years old or became gainfully ‘employed at the close of such year. 3. Ifthe taxpayer marries or should have additional dependents during the taxable year, he may claim the corresponding exemptions ‘in full for ‘such year (NIRC, Sec. 35(C)). Senior Citizens A benefactor of a Senior Citizen shall be entitled to claim the basic personal exemption of 50,000, Which is the amount of basic personal exemption allowed under the NIRC for all taxpayers required toINCOME TAX SAN BEDA MEM@RY AID 2018 file ITRs. The entitlement to claim the additional personal exemption per dependent is allowable only to individual taxpayers with a qualified dependent child or children (R.R. No. 07-2010, Sec. 11). ‘Summary of allowance of personal exemptions Pe Taxpayer "Exemptions Exemptions [Re ‘Allowed ‘Allowed NRE ‘Allowed ‘Alowed ———* Ra ‘Alowed ‘Alowed NRAETS | Alowed Fast view Not (reiprocty) | alowed | eee | tower (reciprocity) Personal, Living or Family em are personal expenses and conduct of trade or busines: 36(4)(1)). Reason: These items are not {gross income because they did not income (2-B DOMONDON, supra 8% 2. Capital Expenditures Amount paid out for_new buildings permanent improvements, oF betterment ms to increase the value of any property or estate. ‘These are added to the cost of the property and the periodic depreciation is the amount that is considered as deductible expense (NIRC, Sec. 36(A)(2). 3. Amount expended in restoring property or in ‘making good the exhaustion thereof for which an + allowance has been made (NIRC, Sec. 36(A)(3)) 4. Premiums paid on any life insurance policy covering the life of any officer or employee, or of any person financially interested én any trade or business carried on by the taxpayer, individual or corporate, when the taxpayer is ‘directly or indirectly a beneficiary under such policy (NIRC, Sec, 36(A)(4)). ‘A person is said to be “financially interested” in the taxpayer's business, if he is a stockholder >d ae thereof or he is to receive as his compensation a share of the profits of the business. 5. Losses from Sales or Exchanges of Property between Related Taxpayers (NIRC, Sec. 36(8)): Reason: To prevent avoidance on income tax by means of a simulated sale or exchange Note: The provision between related parties applies to the following items of deductions: 1. Losses; 2. Interests; and 3. Bad Debis. 6. Political Campaign Expenses General Rule: These are not deductible either ‘as business expense or as contribution (Felix Montenegro, inc. v. Commissioner of Internal CTA Case No. 695, April 30, 1969). ‘or exchange of property when there ind actual transfer of ownership of the kféther as would divest the transferor of Prules apply to the sale or exchange of and capital assets inary Assets: (SOUR) ‘Stock in trade of tho taxpayer or other properties of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year (eg, supplies on hand, merchandise inventory): 2. ‘Property held by the taxpayer primarily for sale to customers in the Ordinary course of business (e.g., subdivision lots by @ real estate developer, groceries by @ retail store): 3. Personal property Used in trade or business subject to depreciation (e.g., delivery truck, store and office equipment); and 4. Real property used in trade or business (e.9,, warehouse, factory, office building) (NIC, Sec. 39(4)(1)) Note: The above-mentioned list is exclusive. 2018 SAN BEDA CENTRALIZED BAR OPERATIONS | 1S_ INCOME TAX enORy ait e018 Treatment of Ordinary Gains and Losses: 1. Ordinary gains are included in the gross income; and 2. Ordinary losses are deductible from gross income, B. Capital Assets All other properties not classified as ordinary asset, Examples: ‘Accounts receivable; Investment in stocks; Goodwill; Real Property not used in trade or business; Personal Property not used in trade or business, Guidelines in Determining whether Real Property is Capital or Ordinary Asset (R.R. No. Treated as Ordinary Asset junki following instances: a. Failure to operate a real esta b. Changing business from non-real estate; 7 c. Abandoned and idle propértiig,in estate business; d. Property purchased for future be business (although thwaff circumstances beyond the taxp control); 2. Transfer of real properties clasiied oe capital or ordinary asset in the hands of the selleritransferor: i. Tax free exchange by taxpayer not engaged in real estate business to a taxpayer who is engaged in real estate business OR although not engaged in real estate business will use in business the property received in the exchange. 2, Treated as Capital Asset under the following instances: a. Real property used by an exempt Corporation in its exempt operations: b. Transfer of real properties classified as capital or ordinary asset in the hands of the seller/transferor: i. If transferred through succession or donation to the heir or donee who is UG | 2018 SAN BEDA CENTRALIZED BAR OPERATIONS not engaged in the real estate business and who does not subsequently use such property in trade or business; li, If received as dividend by the stockholders who are not engaged in the real estate business and who do not subsequently use such real property in trade or business (even if the cotporation which declared the real property dividend is engaged in real estate business). Note: Involuntary transfer has no effect on the classification of real property in the hands of the involuntary seer. ‘Change of Purpose When a taxpayer purchases a property for one purpose and subsequently change his purpase for holding the property, the determining factor in gg the asset held (ie., whether ordinary or pose at the time of sale. ice an ordinary asset, aways an erties classified as ordinary assets “in business by taxpayer engaged in than real estate business are icalif-converted into capital assets upon B thine same have not been used in “fhore than two (2) years prior to the of the taxable transactions involving (RR. No. 07-2003, Sec. 3(e)) Commissioner of internal Revenue, 226284, October 8, 1986; BIR Ruling No. ‘May 4, 2011) “the following are considered as sale or exchange of capital asset: 1. Retirement of bonds (NIRC, Sec. 39(E)); 2. Short sales of property (NIRC, Sec. 39(F)(1)) ~ any sale of a security which the seller does not ‘own or any sale which is consummated by the delivery of a security borrowed by, or for the account of the seller; 3. Failure to exercise privilege or option to buy or sell property (NIRC, Sec. 39(F)(2); 4. Securities becoming worthless (NIRC, ‘Sec. 34(0)(4)(b)): 5. Distribution in liquidation of corporations (R.R. No. 06-2008, Sec. 8): 6. Readjustment of interest in professional partnership: 7. Dacion en pago (Fiinvest Credit Corp. v. Philippine Acetylene, Co., Inc., GR. No. L- 50449, January 30, 1982); 8. Conveyance of property in consideration of the transferee's assumption of accrued taxes for a generalINCOME TAX - BEDA MEMO which the transferor was personally liable, as a compromise of tax liability on other realty; and 9. Forced sale and foreclosure sales, In condemnation proceedings, the sale occurs at the time of the taking of the property rather than receipt of proceeds of the judgment. Capital Gain v.,Ordinary Gain Cer Cea recy Derived from property | Derived from. property not used in trade orjused in trade or business. business. rape un |'Gan be agusted by the holding period deducted from certain may BeNdeduEteg types of capital gains. | ordinary dain: Net Capital Gain v. Net Capital Le Net capital gain means the excess from “such sales or exchanges’ 39(4)(2)) Net capita loss means the excess of i sales or exchanges of capital assets ow from such sales or exchanges (NI 39(A)(3) ‘Treatment of Capital Gains and Losses Capital gains and losses on transactions involving capital assets are subject either to: 1. Capital Gains Tax (CGI a, Sale of shares of stocks of a domestic Corporation not listed and not traded through ‘stock exchange; and b. Sale of real property in the Philippines held ‘as capital asset. Capital gains and losses subject to CGT will no longer be considered in computing the gross income subject to regular income tax rates. 2, Regular Income Tax Rates The capital gains and losses other than those subject to CGT will be considered in the determination of gross income, subject to the following rules: a. Holding period (NIRC, Sec. 39(6)); b. Loss Limitation Rule (NIRC, Sec. 39(C)); and c. Net Capital Loss Carry-Over (NELCO) Rule (NIRC, Sec. 39(0)) Determination of the Amount of Tax A. Sale of Shares of Stock Subject to CGT (NIRC, Sec. 24(C); Sec. 25(A)(3) and (B); Sec. 27(D)(2); Soc. 28(A)(7)(c) and (B)(1)) CGT Rate: 1. 5% for the 1* 100,000 and 2. 10% for the amount in excess of 100,000 Tax Base: Net capital gains (gross selling price oF consideration less cost or adjusted basis) on a per transaction basis. Persons Liable: 1. Individuals ~ citizen or alien (RC, NRC, RA, NRA-ETB, NRA-NETB); ptporation — domestic or foreign (DC, *C, NRF); and 1er tagbyers such as estate, trust, trust ler in securities. stock are traded in the local stock 6” and not where the actual sale (Del Rosario v. Commissioner of Xcluded from the Coverage: Sale of shares of stock in a foreign corporation = the gain on which will be subject to regular income tax rates; 2. Sale made by a dealer in securities — the gain on which will be subject to regular income tax rates; and 3. Stock traded in the stock exchange other than the sale by a dealer in securities ~ which will be subject to stock transaction tax of % of 1% (0.5%) on its gross selling price (NIRC, Sec. 127) B. Sale or Other Disposition of Real Property Subject to CGT by a Non-Dealer (NIRC, Sec. 24{D)(1), Sec. 25(A)(3) and (B)): Sec. 27(D)(5)) CGT Rate and Tax Base: General Rule: 6% on the Gross Selling Price or Zonal Value or the FMV as shown in the Schedule of values of the provincial and city assessors, whichever is the highest. 2018 SAN BEDA CENTRALIZED BAR OPERATIONS | 17INCOME TAX SAN BEDA MEMORY AID 20 Persons Liable: 1. Individuals ~ citizen or alien (RC, NRC, RA, NRA-ETB, NRA-NETB); 2. Corporation ~ domestic corporation (DC); co Difference between the 3, Other taxpayers such as estate and trust. smo ie ol he eee Gain which assumes as having been realized by the seller from sale, exchange or other disposition of real rope. coverage: Sale, exchange or other dspostion — L___ Geetuding pact do ro sales end aN xctudod fom the Coverage: 1" Sale made by 2 dealer in roal estate orf the 1 Real property with respect to ind e iy i ieee! te. aoe real property is an ordinary asset — the tanpayore,extate ond trust nd aera one nat an Tesuting gain which shal bo stole t rogulr Inoome taerates domestic corporations; Ct fos! Estate osler- any pasen engaged in “ Racmapton” (Len expajurta foreeosurs real properties ons own account os a principal Sato of copa soso iioted by banks, and holding himseff out as a ful oF parttime gaa coptt ant ad tk, Se iy es va ne Sas fight must not have been exercised, slopers, and/or lessors) (R.R. No. 07-2003, expiration ofthe period redeem (0) se o3 SAN BEDAoter reggie wth te Houg and ond Exceptions: COLLEGE OF UseiRest ‘Board (HLURB) or Housing and in case of sale of princioy? b lopment Coordinating Council a real estate dealer or developer Fauticient for a taxpayer to be separate discussion on this); 2 if the buyer of real pr government or any of (7 estate business through the ent of substantial relevant evidence uch; consummation during the preceding ‘yeat, at least six (6) taxable real estate Heiesss reoucioss 4 ancian ogate abitually engaged in real estate business the LGU or BIR, ete) (RR. No. 07-2003, bec. 3). the option to subject the capital gains td regular income tax rates; and XQ)n. 3. Incase of sale subject owe redemption, the CGT shal be based of bid price of the highest bidder (bid). 2. Sale of Principal Residence (NIRC, Sec. 24(D)(2); RR. No. 13-99 as amended by RR. ‘No, 14-2000) Note: Gain or loss is immaterial, there being a conclusive presumption of gain. Actual Gain v. Presumed Gain Exempt from 6% CGT. ‘sold from the amount | realized poverco peter icr Principal Residence Itrefers to the dwelling house, including the land ‘on which itis situated, where the individual and members of his family reside, and whenever absent, the said individual intends to return. ‘Actual occupancy is not considered interrupted or abandoned by reason of temporary absence due to travel or Studies or work abroad or such | other similar circumstances (R.R. No. 14-2000, Sec. 2.1) As to cost of property sold ‘Computed by deducting | Does not consider the the cost or adjusted | cost of property sold basis of the property Ifthe land is leased, only the dwelling house can be treated as principal residence, However, where both the owner of the land and owner of UB | 2018 SAN BEDA CENTRALIZED BAR OPERATIONSINCOME TAX SAN BEDA the dwelling house actually reside in the said dwelling house, then both said land and the dwelling house shall be treated as their principal residence (MAMALATEO, Income, Supra at 326). if the principal residence is co-owned, the ‘exemption applies only to the extent of his proportionate share (2 DIZON, supra at 252) General Rule: The address shown in the income tax return is conclusively presumed as the principal residence, Exception: If the individual is not required to file a return, certification from Barangay Chairman (or Building Administrator -(for_condominium units) shall supra at 327). suffice (MAMALATEO, Income, within Thirty (30) days (oF disposition through a: among others, ofthe fllo a. CGT return; and B. Sworn statement ro Chairman that: = ic The taxpayer's print is located within the the Barangay; and ~ ‘The same has been’ as. of the date of disposition If the taxpayer's principal residence S6ld disposed of is a condominium unit, in lie the sald Barangay Chairman, the certification shall be issued by the Building ‘Administrator of the condominium building. ‘The proceeds of the sale or disposition thereof has, in fact, been Utlized in the acquisition ‘or construction of the seller transferor’s new principal residence within eighteen (18) calendar months from the date of the said sale or disposition. Notes: ‘a. The sale or disposition of a property refers to the date of notarization of the document evidencing the transfer of said property If the taxpayer constructed a_new residence and then sold his old house, the transaction does not fall under the exemption because the law is clear that MEMORY AID 2018 the proceeds should be used in acquiring and constructing a new principal residence. Therefore, the old residence should first be sold before acquiring or constructing the new residence and not vice-versa (DIZON, Q&A, supra at 82). If there is no full utilization, the portion of the gains presumed to have been realized shall be subject to CGT. ‘The historical Cost or adjusted basis of his ‘ld principal residence sold, exchanged or disposed of shall be carried over to the cost, basis of his new principal residence. The tax exemption granted may be availed of only once every Ten (10) years. Escrow agreement — the six percent (6%) CGT shall be deposited in cash or manager's check in interest bearing account with an Authorized Agent Bank (AAB) under shall only be released upon the taxpayer is entitled to Gvall of the exemption NRC, and RA are entitled to fiom payment of capital gains tax in pié of principal residence. (Gilat Assets Not Subject to COT fepse It involves sale or exchange or one eal property in the Philippines held as capital asset. ‘The sale or exchange of properly must be consummated and not just perfected. ‘Tax Treatment and Rate: Included in the gross income subject to the regular income tax rates ‘Tax Base: Net capital gains Formula: For sale of property Selling price (in terms of money) xx Less: Cost eon Net capital gain or loss x For exchange of property FMV of the property received in exchange xx Loss: Cost bo Net capital gain or loss 9 2018 SAN BEDA CENTRALIZED BAR OPERATIONS | 119,INCOME TAX Me Note: The property received in exchange must have a market value and essentially different from the property disposed of. Special Rules on Capital Gains or Losses Subject to Regular Income Tax Rates 1. Holding period — the percentages of gain or loss to be taken into account shall be the following a 100% ~ if the capital assets has been held for 12 months or less (short-term assets); and . - 50% — if the capital asset has been held for more than twelve (12) months (long-term assets). Note: The holding period applies only to individuals (NIRC, Sec. 39(8)) 2. Non-Deductibility of Net Capital Loss (Loss Limitation Rule) ~ capital losses are allowed only to the extent of capital gains. Hencg capital loss is not deductible, Reason: To ensure the against revenues consistent Wi only business expenses are gross income. Capital. loss is expense. Note: If the taxpayer is @ company incorporated under th Philippines, a substantial part of is the receipt of deposits, sale: debenture, note or certificate or oti evidgt of indebtedness issued by any) {including one issued by a govert poltical subdivision), capital gains ain Bre recognized tothe extent of 100% (8, Hor Subject to holding period); any loss shall netbe included.in determining the applicability of the limitation (NIRC, Sec. 39(C)). 3. Net Capital Loss Carry-Over (NELCO) - if an Individual taxpayer sustains in any taxable year a net capital loss; such loss (amount not ‘exceeding the net taxable income for such year) shall be treated in the succeeding taxable year {as a loss from the sale or exchange of a capital ‘asset held for not more than twelve (12) months. (i2., 100% deduction) Note: No carry-over is allowed for corporations (NIRG, Sec. 34(D)) 120 | 2018 SAN BEDA CENTRALIZED BAR OPERATIONS NELCO v. NOLCO Rate | Excess of capital gains | Excess over capital losses of allowable deductions over gross income Ge ukekemenes ‘Amount not to exceed | No such limitation the net taxable income for the year the loss was incurred Reon Can be carried-over in| Can be carried over for the succeeding taxable |the next three (3) consecutive taxable years immediately following the year of such loss Capital | 40,000 Capital Capital 52,000 Gain Long Term Capital 20,000 Loss. ‘The taxable income of Mr. Estoque before personal ‘exemptions for each year is computed as follows: 2015 Capital Assets Transactions: ‘Short Term Capital Loss P 18,000 100% P 18,000 ‘Short Term Capital Gain 10,000 100% 10,000 Net Capital Loss ‘8,000 Ordinary Taxable Income 7,000INCOME TAX N BEDA MEMORY AID 2018 Taxable Income Before Long Term Exemption" 7,000 Capital Gain 52,000 50% 26,000 Note: Observe that the net capital loss is not ae gd ae oe deductible from the ordinary gain (business income), NELCO 2015 7,000 hence, the Taxable Income Before Exemption remains the some. Net Long Term Capital Gain 9,000 2016 Capital Assets Transactions: Note: The Net Capital Loss to be carried over from 2015 to year 2016 should only be ®7,000 since the amount of capital loss should not exceed the ‘amount of the income before exemptions at the year Long Term when the loss was sustained (VALENCIA & ROXAS, Capital Loss 20,000 50% P 10,000 ee Summary Treatment Losses oF INDIVIDUAL VS CORPORATION an be deducted from capital gains EDINA rdinary incomé is not enough to absorb: ar rule; can be deducted income oF (he) capital on INDIVIDUAL 2 TAXPAYER OnDINARY LOSS | 4] Ie some as nd taxpayer corporate | carmtat || Nonolsingparod. Deductible rom TAXPAYER, toss Septal gain ony Not capital loss carry-over fs not ee a applicable. (VALENCIA & ROXAS, supra at 309) 2018 SAN BEDA CENTRALIZED BAR OPERATIONS | 121INCOME TAX SAN BEDA M RULES ON EXCHANGES OF PROPERTY Determination of the Amount of Gains and Loss 1. Gain ~ excess of the amount realized over the basis or adjusted basis 2. Loss — excess of the basis or adjusted basis ‘over the amount realized. 3. Amount Realized — sum of money received plus the fair market value of the property (other than money) received (INIRC, Sec. 40) Formula: \ Money received in the sale or disposition xx Add: FMV of the property received x Amount realized ox Less: Basis of the property sold disposed preceding owner by whom it was not acquired by. gift Except if such basis is greater than the fair market value of the property at the time of the .gift then, for the Purpose of determining loss, the basis shall be ‘such fair market value 4, Acquired for tess | The amount paid by the than an adequate| transferee for the consideration property Substituted Basis 5. Acquired in a previous tax-free exchange 122 | 2018 SAN BEDA CENTRALIZED BAR OPERATIONS, MORY AID 2018 Note: Nos.1-4 above are considered the original basis of property to be transferred. If the acquisition cost of the property is increased by the amount of improvements that materially add to the value of the propery or appreciably prolong its life less accumulated depreciation, the adjusted basis of the cost in Nos.1-4 shall be used as original basis. Substituted Basis Basis for determining gain or loss on a subsequent sale or disposition of property subject of the tax-free ‘exchange (NIRC, Sec. 40(C)(5)(a)) Please see discussion below on tax-free exchange 1. Substituted Basis of stocks or securities received by the transferor on a tax-free exchange Formul I basis of the stock or securities (0) (9) The property received as "boot" shall have as basis its fair market value. Boot — money and/or other property received in excess of the stock or securities received by the transferor on a tax-free exchange If the transferor receives several kinds of stocks or securities, the CIR is authorized to allocate the basis. among the several classes of stocks or securities (RR. No. 18-2001, Sec. 2). 2. Substituted Basis of the Property ‘Transferred in the Hands of the Transferee ‘a. Original basis in the hands of the transferor Please see previous discussion b. Plus: the amount of the gain recognized to the transferor on the transfer_ INCOME TAX A MEMORY A zo18 Requisites for recognition of gain or loss in an exchange of property: 1. The property received is essentially different from the property disposed of and 2. The property received has market value (R.R. No. 2, Sec. 140) 7 General Rule: Upon the sale or exchange of property, the entire amount of the gain or loss, as the case may be, shall be recognized (NIRG, Sec. 40(C)(1)). Exceptions: 1. Gain recognized but loss not recognized in transactions between related parties (NIRC, Sec. 36(B)) 2. Exchanges Solely in Kind/Tax-Free Exchanges Itis an exchange of property with property and no money is involved (e.g., shares of stock exchanged for shares ‘of stock) (2A DOMONDON, supra at 306). 3. Gain recognized but loss not recogni: the exchange is not sdiely, in kink ‘See.40(C)(3)). Please see previous discussio between related parties ‘Tax-Free Exchanges Taxcfree exchanges refer to those inst lumerated in Section 40(C)(2) of are not subject to Income Tax, Cap! as the case may be Tax-free exchanges of property 4. No gain or loss is recognize pursuance of a plan of merger or consuls . Acorporation which is a party to a me ‘consolidation, exchanges property solely. ‘stock in a corporation, which is a party to the merger or consolidation (Properly For Stock) b. A shareholder exchanges stock in a corporation, which is a party to the merger ‘or consolidation, solely for the stock of another corporation also a party to the merger or consolidation (Stock For Stock); or ©. security holder of a corporation, which is a party “to the merger or consolidation, exchanges his securities. in such corporation, solely for stock or securities in such corporation, a party to the merger or ‘consolidation (Security For Stock); and 2. If property is transferred to a corporation by @ person in exchange for stock or unit of Participation in such a corporation of which as a result of such exchange said person, alone or together with others, not exceeding 4, gains control of said corporation: Provided, thal stocks issued for services shall not be considered as issued in return for property (Estate Planning) (NIRC, Sec. 40(C\(2)(c)) Mlustration: Aand B assigned or conveyed to X Corporation real properties in payment of the stocks of X. After the exchange, and as a result of such exchange, A and B gained control of X. Accordingly, no gain or loss shall be recognized to both transferors (A and B) and the transferee (X) However, ifthe transferors later sell or exchange the ‘shares of stock acquired by them in exchange, they shall be subject to income tax on the gains derived from such sale or exchange (1 DE LEON, supra at 542) Note: Technically, there is no tax exemption even if 19@ is sdlely in kind. The exemption refers exchange. There is merely a acome tax. Thus, upon the disposition of the property a foe transferor to the transferee, the GF basis shall be used for purposes of @ gain or loss from the subsequent f (MAMALATEO, Income Tax, supra Je — bonds and debentures but not Of whatever class or duration or Consolidation — means the ordinary ‘er consolidation, or the acquisition by Qetie” corporation of all or substantially all the Sproperties of another corporation solely for stock. undertaken for a bona fide business purpose ‘and not solely for the purpose'of escaping the burden of taxation. In determining whether a bona fide business purpose exists, each and every step of the transaction shall be considered and the whole transaction or series of transactions shall be treated as a single unit: Provided, that in determining whether the property transferred constitutes a substantial portion of the property ‘of the transferor, the term “property” shall include the cash assets of the transferor. 3. Control - ownership of stocks in a corporation possessing at least fifty-one percent (51%) of the total voting power of all classes of stocks eniitied to vote (NIRC, Sec. 40(C)(6)). 2018 SAN BEDA CENTRALIZED BAR OPERATIONS | 123INCOME TAX 7 MOéRyY AlD e018 Reason for the exceptions Gain, if any, is recognized iri an amount not More often than not, exchanges involved in in excess of the sum of the money and fair corporate combinations do not result in substantial market value of such other property alteration in the interest of those who own the received business affected by the transaction before it was, b. Loss is not recognized (NIRC, Sec. reformed. When, therefore, the government imposes 40(C)(3)(a)) fa tax on the supposed gain or when it allows a deduction on the supposed loss, what the Note: In case of a shareholder, if the money government actually does is to tax “paper profits” and/or other property received has the effect of a and to allow deduction of “paper losses distribution of a taxable dividend, there shall be (Explanatory Note to H.B. No. 7235, enacted into taxed as dividend to the shareholder an amount of R.A, No. 1921 which inserted the exceptions) the gain recognized not in excess of his proportionate share of the undistributed earnings Rule on Upstream Merger and profits of the corporation. The remainder, if ‘An upstream merger between a parent company and any, of the gain recognized shall be treated as a its subsidiaries where the parent company will not be capital gain (NIRC, Sec. 40(C)(3)(a)). issuing any shares to the subsidiaries in exchange for the assets to be transferred as a result of the 2._If the transferor corporation receives not only ‘merger takes the nature of a donation made by the shares of stock but also money and/or other subsidiaries to their parent company and not a tax- property: free exchange transaction contemplated in Section a. If the corporation receiving such money 40(C)(2) of the NIRC (BIR Ruling No. Jor other property distributes it in November 9, 2012). the plan of merger or no gain to the corporation ‘ognized from the exchange. the gain, if any, shall be but in an amount not in excess Zum of such money and the fair Pvalue of such other property so Which is not distributed. The loss Corporation is not recognized (NIRC, #0(C)(3)(0)). yer receives stock or securities plus pwn of liabities: “ON BEDA Fi eRe OF bat lluatration: A Cor, a entered into a merger” with domestic subsidiaries, B Corp a isthe surviving corporation, Pursuaothy B Corp and C Corp wil transfer al Re lables to A Corp. However. since Corp are wholly-owned by A Ci merger, A Corp will no longer fue Stock in consideration of the assets transferred ts the merger betwoon Ax tnd C Corp considered @ taxes Section 40(C)(2) of the NIRC? ANS: NO. The intended re-organization Sal upstream merger between a parent company" <If the amount of the liabilities assumed plus the issuing any shares to the subsidiaries:in exchange amount of the fabilties to which-the property is for the assets to be transferred as a result of the subject exceed the total of the adjusted basis of merger. In effect, the transfer takes the nature of a the property transferred, then such excess shall donation made by the subsidiaries to their parent be considered as a gain from the sale or ‘company, contrary to what is contemplated in ‘exchange of a capital asset or of property which Section 40(C)(2) of the NIRC. In the same manner, Is not a capital asset, as the case may be (NIRC, the intended merger also has the effect of dissolving Sec. 40(C)(4)). land liquidating the subsidiaries without payment of corresponding taxes (BIR Ruling 614-12, November Other Instances when Gain is Recognized but 9, 2012). Loss is Not Recognized: (|- WAR) Megal transactions (R.R. No. 02-40, Sec. 96); Exchanges Not Solely in Kind 2. Woon ‘sales by nondcalers of secures and It involves an exchange of property not solely for ‘when not subject to the stock transaction tax; stocks (for shares of stock or securities plus money 9. Sales and exchanges that are not Arm's length; and/or other property including assumption of and liability) 4, Transactions between Related taxpayers 1. Ifthe individual, a shareholder, a security holder (NIRC, Sec. 36(8) or a corporation receives not only stock or securities but also money and/or property: 124 | 2016 SAN BEDA CENTRALIZED BAR OPERATIONSINCOME TAX. N BEDA MEMO STATES AND TRUSTS Estate It refers to the mass of properties and assets left behind by the deceased (2-A DOMONDON, supra at 74). ‘The status of the estate is determined by the status of the decedent immediately prior to his death; so an estate, as an income taxpayer can be a citizen or an alien (DIMAAMPAO, supra at 152). Trusts : An arrangement created by will or by an agreement under which the property is passed to another for conservation or investment with the income therefrom and ultimately the corpus (principal) to be distributed in accordance with the directions of the creator as expressed in the governing instrument (1 DE LEON, supra at 694) ‘The status of a trust depends grantor or trustor or creator of trust can also be a citizen or an all Taxability of Estates and Trusts = Estates and trusts are consider« taxable as separate taxpayer, © trusts, the income of which shall LEON, supra at 698). When Income of Estate and Trust 1 Estate Income received by estates oft persons during the period of adming settlement of the estate (NIRC, Sec. 60(AH) Termination of Judicial Settlement f the heirs contribute to the estate money, property, or industry with intention to divide the Profits Detween/among them, .an unregistered partnership is created and the estate becomes liable for the payment of corporate income tax (Evangelista v. Collector of Internal Revenue, GR. No, L-9996, October 15, 1957) Ifthe heirs, without contributing money, property Or industry to improve the estate, simply divide the fruits thereof between/ameng themselves, & co-ownership is created, and individual income tax is imposed on the income received by each of the heirs, payable in their separate and individual capacity (Pascual v. Commissioner of Internal Revenue, G.R. No. 78133, October 18, 1988) Per ae e018 For Estates Not under Judicial Settlement Pending the extrajudicial settlement, the income tax liability depends on whether’ or not an Unregistered partnership or co-ownership is created Trust a. Income accumulated in trust for the benefit ‘of unborn or unascertained person or persons with contingent interest and income accumulated or held for future distribution Under the terms of the will or trust; b. Income which is to be distributed currently by the fiduciary to the beneficiaries; Income collected by a guardian of an infant which is tobe held or distributed as the court may direct; or d. Income, which the fiductary may, at his discretion, either distribute or accumulate the income (NIRC, Sec. 60(A)). come of employees’ trusts is exempt from 1C, Sec. 60/8) fon on employees’ trusts 1@ - same as individuals hich is to be distributed currently by juciary t6 the beneficiaries. amount of the income collected by a fardian of an infant which is to be held or istributed as the court may direct. “The amount of the income of the estate or trust which is properly paid or credited to any legatee, heir or beneficiary (NIRC, Sec. 61) Where no such distribution to the heirs is made during the taxable year when the income is ‘earned, and such income is subjected to income tax payment by the estate, the subsequent distribution thereof is no longer taxable on the part of the recipient (BIR Ruling 233-86, November 7, 1986). 4. Exemptions a, Entitlement to personal exemption is limited only to 20,000 (IRC, Sec. 62); st view: R.A. No. 9504 amended the NIRC increasing the basic personal ‘exemption amounting to 50,000 for each individual taxpayer. Estates and trusts are considered in the NIRC as. individual taxpayers and therefore the exemption SAN BEDA CENTRALIZED BAR OPERATIONS [125INCOME TAX En ORY ‘allowed to them should also be increased ——2._In any person not having a substantial adverse from 20,000 to 50,000. interest in the disposition of such part of the ‘corpus or the income therefrom (NIRC, Sec. 63). Second view: Tax exemptions are strictly construed. Sec, 62 of the NIRC explicitly Note: For tax purposes, the trustor, not the trust provides that the exemption allowed to itself, s subject to the payment of income tax of a estates and trusts is 20,000. RA No. revocable trust. 9504 only amended Sections 22, 24, 34, 35, 51 and 79 as explicitly stated in the Title. Irrevocable Trusts. Itis irrevocable both as to corpus and as to income. b. No additional exemption is allowed. ‘The trust itself, through the trustee or fiduciary, is Income tax Exemption of Employees’ Trust liable for the payment of income tax. Employees’ trusts are not subject to income tax provided the following requisites are met Its taxed exactly in the same way as estates under 1. Employee's trust must be part of a pension, _judicial settlement and its status as an individual is. stock bonus or profit sharing plan of the that of the trustor. ‘employer for the benefit of some or all of his ‘employees; Income included in computing ‘the taxable 2. Contributions are made to the trust by such _income of the grantor ‘employer, or such employees, or both: Where any part of the income of a trust is, or in the 3. Such contributions are made for the of the grantor or of any person not having distributing to such employegs terest in the disposition of and principal of the fund trust; and hylated for future distribution to the Part of the trust corpus or inco or diverted to, purposes other t benefit of such employees. ae Tax exemption Is tkewise to be Sy income of the pension (ust, otherwise fo"'s distributed to beneficiaries, the those earnings would result in js shall fle the return and pay the tax, accumulated income and reduce whaidl incoes to be accumulated or held for future Beneficiaries would receive out of th iibghion, the trustee or beneficiary shall fle (Commissioner of Internal Revenue™ Appeals, GCL Retirement Plan, G.R. March 23, 1992), Exdebifion: in a revocable trust, the income of the GEt Shall be included in computing the taxable iacome of the grantor (NIRC, Sec. 63) ‘Since the final tax and the withholding thereof éré” ‘embraced within the title on "Income Tax’, it follows. that employees’ trusts are deemed exempt therefrom; otherwise, the exemption becomes meaningless (BIR Ruling No. 042-00, September _| For the benefit of the grantor | Grantor 15, 2000), ‘Any amount actually distributed to any employee or aa rust | Fiduciar distribute shall be taxable to him in the year in fee renee v Which so distributed to the extent that it exceeds the tbe wneficia Beneficia amount contributed by such employee or distributee ese esents aif (NIRG, Sec. 60(0(B)) Consolidation of Income of Two or More Trusts Revocable trust ‘Where two or more trusts are created by the same Revocable trusts exist when the power to revest in grantor, and the beneficiary in each instance is the the grantor title to any part of the corpus of the trust same person, the fiduciaries shall file a separate is vested return for, and pay the income tax of, each trust, but 4. Inthe grantor, either alone or in conjunction with the CIR shall cause the income tax to be computed any person not having a substantial adverse on the consolidated taxable income of the several interest in the disposition of such part of the trusts, allowing one exemption only of 20,000 corpus or the income therefrom; oF (NIRG, See. 60(C)) 126 | 2018 SAN BEDA CENTRALIZED BAR OPERATIONS,INCOME TAX SAN GEDA MEMORY AID The income tax computed on the consolidated taxable Income shall be allocated between the several trusts in. proportion to their respective taxable income (ibid). Taxable Estates v. ible Trusts os Taxable trust The taxable income shall be determined in the sameway as that of jee taxable ingividuals, but |income shall be | May etermined in the . 1 ial same way as that | "A. SPeral Determination | fipOraguals, but) any amount of oF Taxable | Yauco forany | ReIME, pa amount income pl , | credifea distibuted to the his Fist view. Tax | P50,000 Exemption | Second view: 20,000 The income tax rates for Iividuateapy | nevus There "isa apply. There & a Income Tax | creditable creditable Rate | wihneiing tax| wihholing tax on payment _to|on payment to the heir of 15% | the heir of 15% (RR. No. 02-98, | (RR. No. 02-98, Sec. 2.57.2(F)). | Sec. 2.57.2(F)). ‘The income tax ‘The income tax return shall. be | Me income tax fod It the gross |ratur, shall be income is Income Tax | 20,000 or more |same, IS Return | and. the. tax.is|P20.000, paid toe Me lis. paid by the cami rll °F | fiduciary (NIRC, administrator” | SUciay (NIRC, Sec. 65). 2016 SAN BEDA CENTRALIZED BAR OPERATIONS | 127INCOME TAX SAN BEDA MEMORY AID 2018 ‘Tax on Individual Taxpayers @ 1come Subject 10 Normal Income Tax (>| net cross income Taxable Net income | = Gross income Note: Only RC ave taxes on income Srp seser ne] turned both with and without, the NRC nR naar ee Fest are only rom within. Nnnaete Set ow ores | ood ‘a. (Compensation Income, Business ‘Allowable Deductions: ings sae enc cages j ‘and Personal income, Capital a. With Gross Incorpe er 4 Gains not subect to Fal Tax compensation income : Passive Income not subject to ‘from ERE relationship Cree Final ax Other Icom) on ba 11, Basie Personal and 2 sca b-caxRo-GRP Additional Exemptions 4 Pease see discussions on i q tncksions of Gross come SS 4 c. Fringe benefit given to pc practice of, ~ @ File Employees SAN v i COLLEGES che 4 Income Tax Due for the Year | | , a ‘due ever April 15 ofthe 4 eof following year ‘ : Note: it should net be confused] Exclusions from Gross income Not wth Credle wehhoing tax] = Kings of taxpayers, Inchduab hie winch are eallcted monthiy and] 3 or alens), estates and tests, 30 Femited every Apri 15 of the] Corporate (residents or non esi following year. These are. only ay anal of exclatns ex Collected in order to equal or INRANETO whose being tax on ero leas approximate te tox due from Income or 25% ana SAFE-I5% the pnree ftompayer) on the seid 2.ts6-crna Pease se cisions on (i tax due is greater than wr! Exiosions from Gros Income collected, there ably ctherwise, tax refund. by. the » ; stnhoaing agent) . Pease se dcusions on Fringe 4 Benefit ‘ «Fringe Benefits which are exempt 4 from income tax, regardless ofthe i ‘recipient whether Rank and Fle oF Supervisor and Managerial Employees Preose se scutsion on Fringe Benefits 4 128 | 2018 SAN BEDA CENTRALIZED BAR OPERATIONSINCOME TAX AN BEDA MEMORY AID 2018 @) Passive Income subject to Final withholding Tax or simply Final Tax (DRIPP) *Please see discussions especially the Table Summary Capital Gains and. Losses SS ee Capital Assets- capital gains and losses are subject to: 2. Capital Gains Tax Exceptions: stock not || @. Sale of Principal Residence lon ~Please see requisites for Bock Excha {1 sremtion SADRREB As the frst 1 «ruce). PCOLLEREDD Fok Mates Note: Only RC, NRC RA r are entitled to exemption b. Other capital assets not Subject to COT Example: Sale of Share of Stock Listed and Traded in the Stock exchange ~ subject to percentage tax © Ordinary Assets ‘2. (SOUR}-Please see discussions ‘on Consolidated Rules on Capital Gains and Losses **Note: these ate the i included in the Gross lt Gains from dealings in pr ‘mentioned in CARD-GRIP* b, Ordinary loses ae deduct from Gross Income (ExT LoBaD"-cRer) . Sale made ia desterin Real Estate orif the ceal propery ss anordinar asset ‘4. Capital Assets other than those subject to CGT; subject to rules -Holding Period -Loss Limitation rule -NELCO Corporation - domestic or foreign (DC, RFC.NRFC Other taxpayers such as ‘rust and estates 2018 SAN BEDA CENTRALIZED BAR OPERATIONS 1129)_ INCOME TAX Ory Alo 2c18 ACCOUNTING PERIODS AND MeErtHops Accounting Period General Rule: The accounting period of a taxpayer is a perlod of 12 months. Exception: A taxpayer may have a taxable period of less than twelve (12) months (short period) where: 1. Taxpayer, other than an individual, changes his, accounting period from fiscal year to calendar year, or from calendar year to fiscal year, or from ne fiséal year to another (NIRC, Sec. 47); Taxpayer dies; Corporation is newly organized; Corporation is dissolved; or Tax period is terminated by the Commissioner by authority of law (NIRC, Sec. 6(0)) He may be: Calendar year — ac January 1 to December 31, 2 Taxpayer is an individual 5 b. Taxpayer is a parinership: © Taxpayer's accounting per a fiscal year. 4. Taxpayer has no accounting e per ‘months ending on the last day other than December which is corporations (NIRC, Sec. 22 ( supari at 6). a 3. Short period — accounting petiod oF ISA Ih twelve (12) montis. Instances of short period c ‘a. Ih the case of death of an individual taxpayer, income shall be measured from the last calendar year up to the date of his death; b. If the corporate taxpayer changes the basis of computing net income (from fiscal year to calendar year or vice versa (F from-one fiscal year to another), its income prior to the change shall be measured from the close of its taxable year up to the date designated as the close of its new taxable year; and c. If a comporate taxpayer is’ dissolved, income shall be measured from the last taxable year up to the date of its dissolution (Recalde, supra at 6-7) Change of Accounting Period A corporation may change its accounting period wherein the net income shall, with the approval of 130 | 2018 SAN BEDA CENTRALIZED BAR OPERATIONS vis allow JN BI COLLEGE SPERM Dey the CIR, be computed on the basis of such new accounting period. A separate adjustment or final return shall be made for the period between the close of the original accounting period and the date designated as the close of the new accounting period (NIRC, Sec. 47). Notes: 4. The request for change of accounting period should be filed at any time not less than sixty (60) days prior to the beginning of the proposed ‘ew accounting period (R.R. No, 03-2011, Sec. 4). 2. The certification approving the adoption of anew accounting period must be released within thirty (30) working days from receipt of the complete documentary requirements (R.R. No, 03-2011, Sec. 6). Methods of Accounting There is no uniform method of accounting prescribed ayers. The law contemplates that each hall eqapt such forms and systems of his judgment best suited to his ‘supra at 1108). lar employed by the taxpayer must his income for the year piReviewer, supra at 321). Computation shall be made in such Lo Ff the opinion of CIR clearly reflects the 2> If the method of accounting employed does not Clearly reflect the income (NIRC, Sec. 43). ‘Methods Recognized by Law and Regulations: 1. Cash Basis Method — income is reported in the year payments are received while expenses are deducted in the year paid (DIZON, Vol. ll, supra at 1006). 2. Accrual Method ~ income is reported in the year it is earned while expense is deducted in the year itis incurred regardless of receipt or disbursement of cash (Ibid). AlLevents Test — under the accrual method, an expense is deductible for the taxable year in Which all the events had occurred which determined the fact of liability and the amount thereof can be determined with reasonable accuracy (MAMALATEO, Reviewer, supra at 323).Installment Method - appropriate when collections of the proceeds of sales and incomes extend over relatively long periods of time and there is strong possibilty that full collection will not be made (2 DIZON, supra at 1108). Income from deferred paymenit sales may be reported under this method in the following cases: ‘a. Installment sale by a dealer of personal property regularly selling on installment (NIRG, Sec. 49(A)): b. Casual sale or casual disposition on installment of personal property other than inventory where: i. The initial payments do not exceed twenty-five percent (25%) of the selling price; and ii The selling price. exceeds 1,000 (NIRG, Sec. 49(8)); or . Sale or other disposition of real property on installment where the initial payme Initia Payments ‘The paymont received in cash thon “donee "of veel purchaser during tho taxable peu Site or iver Gepention ema 49(B)). Notes: : 4. As customers make install OPER ‘Audit Procedures and Techniques Sadly 4 (Revision 2000), pp. 3-4). 2. ‘The income from instalment received determined in accordance withthe following formula stated in. Collector of Internat Revenue v, Binalbagan Estate, Inc. (G.R. No. L-12752, January 30, 1965) Total Gross Income for Profit Installment __ the year ———— x received for = subject to Total the year income tax Selling Price Percentage of Completion Method ~ in the case of a building, installation or construction contract covering a period in excess of one (1) year, the gross income derived from such Contract may be reported upon the basis of percentage of completion (NIRC, Sec. 46). INCOME TAX DA MEMORY A ) SAN BED. COLLEGE Pa ‘The return must be accompanied by a return certificate of architects or engineers showing the percentage of completion during the taxable year of the entire work performed under the contract (IRC, Sec. 48). Under this method, contract revenue is recognized as revenue in the income statement in the accounting periods in which the work is performed. Contract ‘costs are usually Fecognized as an. expense in the income statement in the accounting periods in which the ‘work they relate is performed. However, any expected excess of total contract costs over total contract revenue for the contract is recognized ‘as an expense immediately (/AS/PAS 11, Par. 26, effective January 1, 1995) 5. Crop Year Method - applicable only for farmers, engaged in the production of crops which take ‘more than a year from the time of planting to the 8 of gathering and disposal ofthe harvest; 9 incurred during the year are 1 gross income realized from BAY prone (RR. No. 02-40, Seo. 166) y oe re ‘URN AND PAYMENT during the taxable year, the jctions including exemptions, the net je, the income tax rate, the income tax {come tax withheld, i any, and the income paid or refundable. a Ee: ie are required to file income tax return (ITR): 1 Individual a. RC; and b. NRC, RA and NRA-ETB with respect to income from sources within the Philippines. Exceptions: (P*FE) a. Individual whose gross income does not exceed total Personal and additional ‘exemptions; Exception to the exception: Individuals engaged in business or practice of profession within the Philippines b. Individual with respect to Pure ‘compensation income derived from sources within the Philippines, the income tax on which has been correctly withheld (please see later discussion on substituted filing of ITR); 2018 SAN BEDA CENTRALIZED BAR OPERATIONS | 131_INCOME TAX mORyY AID 2018 Exception to the exception: An individuat deriving compensation concurrently from two or more employers at any time during the taxable year ©. Individual whose sole income has been subjected to Final withholding income tax; and 4d. Individual who is Exempt from income tax (IIRC, Sec. 51(A)(2)) Special Rules: 1. Return of Husband and Wife File one return for the taxable year if the following requisites are complied with: a. They are married; and b. They do not derive income purely from compensation (NIRC, Sec. 51(D)) If it is impracticable to file one return, each ‘spouse shall file a separate return of income. the BIR for the purpose"of werificati year (NIRC, Séc. 51(D))-"\ 2. Unmarried Minor coule Income of unmarried mince te property received from the livi 3 be included in the return of the paved ‘a. When donor's tax has be property; or b. When transfer of such Ps ty is 3. Persons under Disability If a taxpayer is unable to make his thin it may be made by his: q Duly authorized agents; SS Representative: < Guardian; or Other person charged with the care of his Person or property who will assume the esponsibility of making the return and incurring penalties provided for ‘erroneous, false or fraudulent return (NIRG, See. 51(F). 2. Taxable Estate and Trust The fiduciary shall fle a return if gross income is at least P20,000 (NIRC, Sec. 65). 3. General Professional Partnership Every GPP shall file, in duplicate, a return of its income, except income exempt under Section 32(8) of the Tax Code, setting forth the items of ‘gross income and of deductions allowed, and the names, TIN, addresses and shares of each of the partners (NIRC, Sec. 55) 122 | 2018 SAN BEDA CENTRALIZ 4, Corporation Every corporation subject to tax shall render a return which shall be filed by the president, vice- president or other principal officer, and shall be sworn to by such officer and by the treasurer or assistant treasurer (NIRC, Sec. 52). What returns to file: 4. Quarterly and Annual Income Tax Return (ITR); and 2. Capital Gains Tax Return. When returns are file: 4._ Individual and Cor, ioe Cea Filing) What to File oie} Individual | 1 return April 15 of deriving purely same year trade, business | sina (Q2 return ‘August 15° of same year 3 return November 15 of same year ‘Annualreturn | April 15 of the following year (NIRG, Sec. 74) 1 return 60. days after the close _ of Q2 return each of the first Q3 return cee the taxable year ‘Annualreturn | On or before the 15” day of the 4" month following the taxable year (UAMALATEO, Reviewer, Supra at 260-267; NIC, Sec. 75) 2, CGT Returns from sale or exchange of shares of stock not traded thru local stock exchange: Within thirty (30) days after each transaction and a final consolidated return on or before April 15 of each year covering all stock transactions of the preceding taxable year (IRC, Sec. §1(0)). 3. CGT Returns from sale or disposition of real property under Section 24(D)): Within thirty (30) days following each sale or other disposition (ibid).INCOME TAX | SAN BEDA Extension of Time to File Return: The CIR may, on meritorious cases, grant a reasonable extension of time for fling income tax return (NIRC, Sec. 53) Where returns be filed The income tax retum shall be filed with an authorized agent bank, Revenue District Officer (RDO), collecting agent or duly authorized treasurer of the municipality or city in which the taxpayer has his legal residence or principal place of business. If there is no legal residence or principal place of business, it shall be filed with the Office of the Commissioner (NIRC, Sec. 51(B)). How returns are to be filed Generally, ITR shall be filed personally by the person required to file returns or his representative as the case may be. Nevertheless, a person (i¢., employer) may be required to file income tax return on behalf {ie., employee) when covered) by the substituted fling Xn ‘Substituted Filing Mode of filing when the emibity information return of _withholdirg inasmuch as the information pro ‘would exactly be the same informati the employes aneua eration Requisites: (POESRI) WY 1. Employee receives Purely com income (regardless of amount); ‘The income is only from One employer; = Amount of tax due from the employes Equais the amount of tax withheld by the employer; Employee's Spouse also complies with all 3 conditions stated above; Employer files the annual information Return (BIR Form No. 1604-CF); and Employer Issues BIR Form No. 2316 (Certificate of Compensation Payment/Tax Withheld) to each employee. 2 9 8 ON Note: In cases covered by substituted filing, the ‘employer shall submit to the BIR the duplicate copy of BIR Form No. 2316 not later than February 28 following the close of the calendar year, otherwise, it will be subjected to prescribed penalties (R.R. No. 11-2013, Soc. 2) Individuals Not Qualified for Substituted Filing {stil required to file ITR) 1. Individuals deriving compensation from two (2) or more employers concurrently or successively; p SAN BI SY, COLLEGE Rbvtg , Employees deriving compensation income, the income tax of which has not been withheld correctly: 3. Employees whose monthly gross compensation income does not exceed 5,000 or the statutory minimum wage, whichever is higher, and opted for non-withholding of tax on said income; 4. Individuals deriving other non-business, non- profession-related income in addition to ‘compensation income not otherwise subject to final tax; 5. Individuals receiving purely _compensation income from a single employer although the income tax of which has been correctly withheld, ‘but whose spouse falls under 1 to 4 above; and 6. NRA-ETB deriving purely _ compensation income, or compensation income and other non- business, non-profession-related income. Manner of Payment Rule: Pay-as-you-file System — incorie tax shown yn should be paid at the time the return is os iduals may pay in twa equal iiyhe income tax Cue on the annual 000, a8 follows: fit — at the time the return is filed. jliment — on or before July 15, close of the calendar year (NIRC, Sec ling and Payment System (EFPS) ~ system developed and maintained by lectronically fling tax returns, including if any, and paying taxes due thereon, 1. Large Taxpayer — shall e-file their final adjustment income tax returns for the calefdar/fiscal year and shall e-pay their taxes, (Please see who are Large Taxpayers under Tax Administration and Enforcement) (F-R. No. 09-2001, Sec. 2) 2. Non-Large Taxpayer — generally, are_not required to file returns thru EFPS, except for the following ‘a. The volunteering 200 or more Non-Large ‘Taxpayers previously identified by the BIR to have availed of the option to file their returns under EFPS and received notification letter duly signed by CIR to file their returns and pay their taxes thru EFPS: and b. The top 20,000. private corporations (taxpayers duly identified and notified by the 2018 SAN BEDA CENTRALIZED BAR OPERATIONS | 133,_ INCOME TAX LN BEDA MEMORY AID 2018 CIR as included in such group under R.R. No, 17-2003, as amended) (RR. No, 05- 2004, Sec. 3). 2. Joint Venture or Consortium Formed for the Purpose of Undertaking Construction Projects All licensed local contractors are hereby required to enroll themselves to the Bureau of Internal Revenue’s Electronic Filing and Payment System (EFPS). The enrollment should be done at the Revenue District Office (RDO) where the local contractors are registered as taxpayers (R.R. No. 10-2012, Sec. 4). 3, Other Taxpayers: a. Corporations with paid-up capital stock of BA0M and above, b. Corporations with complete computerized system; ©. Taxpayers joining public bidding E.0. No. 398 as implar 03-2005; : 4. Top 20,000 private Notified by the BIR; fe. Top 5,000 individual taxps by the BIR; within Special Economic bas 9. Government offices, in s0 far: concerned h. Taxpayer Account Managem (TAMP) taxpayers; and i. Accredited importer and 6 importer rogue 10 secure the No tO2007 See BRR No P20 No. 10-2014, Sec. 3) Reportorial Requirements Submission of Financial Statements (FS) is mandatory even if there is no income. 1. FS shall be composed of the balance sheet, income statement, statement of | retained earnings, statement in changes in’ financial postion, and- schedules attached to the ‘aforementioned statements. 2. FS filed with accompanying auditor's certificate shall show the comparative figures of the current year and the previous year. 3. Taxpayers are mandated to maintain books and records that would reflect the reconciling items. between FS figures andjor data with those reflectedipresented in the filed ITR (R.R. No. 21- 2002). 134 | 2018 SAN BEDA CENTRALIZED BAR OPE! Statement of Management Responsibility 1. All taxpayers required to file annual ITR under the NIRC, as amended, shall be required to submit. a Statement’ of Management's Responsibility. 2. Aside from individual taxpayer, President and Managing Partner, the CEO and the CFO or any officer performing similar functions regardless of their designation are also required to affix their signatures in the said Statement. 3. Inthe case of a foreign corporation with branch office in the Philippines, the Statement shall be signed by its local manager who is in charge of its operations (R.R. No. 03-2010). Returns of Corporations Contemplating Dissolution or Reorganization Every corporation shall, within thirty (30) days after the adoption by the corporation of a resolution or plan for its dissolution, or for the liquidation of the ‘whole or any part of its capital stock, including a Which has been notified’ of possible dissglution by the Securities and recommendation. of the shall, by rules and regulations, IC, See. 52(C)). j Tax System 10d or prescribed are to be deducted and ersons for the former to pay the same directly to the BIR (2-B DOMONDON, supra at 1058). It is a method of collecting income tax in advance from the taxable income of the recipient of income Thus, the taxes are collected practically at the time the transaction is made or when the taxable act ‘occurs (taxation at source), ‘The payee is the taxpayer, the person on whom the tax is imposed, while the payor, a separate entity, acts no more than an agent of the government for the collection of the tax in order to ensure its payment (DE LEON, supra at 656). Earmarking NOT the same as withholding Amounts earmarked do not form part of gross receipts because they are by law or regulation reserved for some person other than the taxpayer, although delivered or received. On the contrary, amounts withheld form “part of gross receiptsINCOME TAX ory 41 because they are in constructive possession and not subject (0 any reservation, the. withholding agent being merely a conduit in the collection process (2- B DOMONDON, supra at 1058). When to withhold At the time an income payment is paid or payable or accrued or recorded as an expense or asset, whichever is applicable in the payor’s books, whichever comes first (RR. No. 02-98, Sec. 2.57.4 as amended by R.R. No. 12-2001). ‘The term “payable” refers to the date the obligation becomes due, demandable or legally enforceable (RR. No. 02-98, Sec. 2.57.4 as amended by RR. No. 12-2001), How withheld and remitted Its withheld by withholding agents and covered by a return and paid to (except in cases where the CIR Note: If the withholding agent is the Government or any of its agencies, political subdivisions or instrumentalties, or "a government-owned or controlled corporation, the employee thereof responsible for the withholding and remittance of the tax shall be personally liable for the deficiency taxes, (NIRC, Sec. 247()). Character of withholding agent In the operation of the withholding tax system, the withholding agent is not the payor but a separate entity acting no more than an agent of the ‘government for the collection of the tax in order to ensure its payment. The payor of the tax is the taxpayer as he is the person subject to the tax imposed by law, and the payee is the taxing authority (2B DOMONDON, supra at 1059) In regard to the filing of the necessary income tax return and the payment to the government, he is the otherwise permits) an authorized agent bank, RDO, jent of the taxpayer. With respect to the collection collection agent, or duly authorized treasuy holding of the tax, he is the government's city or municipality where the Wit ing agent is the constituted his legal residence or principal pi where the withholding agent is a the principal office is located. The taxes deducted and withheld by-4 agent shall be held as a special fund government until paid to the col (IRC, Sec. 58(A)). = Reason: ~ 1. To provide the taxpayer a conver meet his probable income tax labl 2. To-ensure the collection of the inca could otherwise be lost or substanti through the failure to file the corre returns; 3. To improve the government's cash flow; ma 4. To minimize tax evasion, thus resulting in a more efficient tax collection system (2-8 DOMONDON, supra at 1059). Withholding Agents The withholding taxes shall be withheld by the person having control over the payment and who at the same time claims the expenses. The following persons are constituted ae winoling agents: ‘Juridical person, whether or not engaged in trade or business; 2. Individuals, with respect to payments made in connection with his trade or business; 3. Individual buyers, whether or not engaged in rade or business insofar as taxable sale, exchange or transfer of real ‘property is concerned; and 4, All government offices including GOCCs as well ‘as provincial, city and municipal governments land barangay (R.R. No. 02-98, Sec. 2.57.3). Kfeht to monitor its compliance with the bid. They include: ission to the payee, in respect of his, féceipts during the calendar quarter or yyL-At a writen statement showing the ube or other payments made by the folding agent during such quarter or year id the amount of tax deducted and withheld therefrom; and ‘The filing with the BIR of a reconciliation statement of quarterly payments and a list of payoes and income payments. The codal provisions ‘on withholding tax are mandatory and must be complied with by the withholding agént (Far East Bank and Trust Company v. Court of Appeals, .G.R. No. 129130, December 9, 2006). Note: A taxpayer cannot be compelied:to answer for the non-performance by the withholding agent ofits legal duty to withhold unless there is collusion or bad ‘faith, Further, the taxpayer could not be deemed to, have evaded taxes had the withholding agent performed its duty (iba). Liabilities of the Withholding Agent 1. For failure to collect and remit taxes - Any Person required to withhold, account for, and Femit any tax imposed by this Code or who willfuly fails to withhold such tax, or account SAN BEDA CENTRALIZED BAR OPERATIONS 1135INCOME TAX AN BEDA MEMORY for and remit such tax, or aids or abets in any ‘manner to evade any such tax or the payment thereof be liable a. To the criminal penalties of fine and imprisonment provided under Sec. 255 of the NIRC; and b. To apenalty equal to the amount of tax ‘not withheld, or not accounted for and remitted (INIRC, Sec. 251). 2. For failure to refund excess withholding tax - Any employeriwithholding agent who fails or reluses to refund excess withholding tax shall be liable: ‘a. To the criminal penaities of fine and imprisonment provided under Sec. 255 of the NIRC; and b. To the total amount of refunds which was not refunded to the employee resulting from any excess of the amount withheld over the tax actually due on their return (NIRC, Sec. 252). Note: The withholding age aes personally table under he NRG. 7 no condition for the persof withholding agent to attach. TH ‘compel the withholding agent t under any and all circu DOMONDON, supra at 1063-1 Withholding of tax shall not a payment to the followir 1. National government and its i including provincial, city, governments, as well as GOCCs;\ 2. Persons enjoying income tax exer 3. Exempt organizations under Sec. of he: NIRC, except income derived from¥ personal property, or from any conducted for profit, Consequences for Failure to Withhol 1. Liable for surcharges and penalties; 2. Liable upon conviction to a penalty equal to the total amount of the tax not withheld, or not ‘accounted for and remitted (NIRC, Sec. 251); and 3. Any income payment which is otherwise ‘deductible from the payor’s gross income will not be allowed as a deduction if it is shown that the income tax required to be withheld is not paid to the BIR (R.R. No, 18-2013, Sec. 2). Basis of Tax: Gross amount of income payment Kinds of Withholding Tax: 1. Final withholding tax (IIRC, Sec. 57(A)): 2. Creditable withholding tax al source (NIRC, Sec. 978): a. Withholding tax on compensation; b. Withholding VAT; and 36 | 2018 SAN BEDA CENTRALIZED BAR OPERATIONS, ©. Expanded — Withholding tax (2-8 DOMONDON, supra at 1065). A. Final Withholding Tax Examples of income payments subject to final withholding tax: 1. Interest income on currency bank deposits; 2. Passive royalty income; and 3. Prizes and winnings which exceeds 10,000. Please see discussion on Gross Income. Effects of Final Withholding Tax: 1. "Final tax is constituted as a full and final Payment of the income tax due from the payee; 2. The income subjected to final tax is no longer subject to income tax; 3. The final taxis limited only to the payee’s income tax liability and does not extend to other taxes that may be imposed on said income; for the payment of the tax rests primarily [payor as withholding agent; and oo 9g (pent (not the payee) files the ‘on his return shall be refunded to him, Subject to Sec. 204 of the NIRC (abatement refundl/eredt taxes), Return on Creditable (Expanded) Withholding Tax ‘The income payor who withheld a creditable income tax should file a return and pay the tax withheld. Requisites: (E-FLAR) 1. An Expense is paid or payable by the taxpayer, which is income to the recipient thereof subject to income tex; 2, The income Is Eixed or determinable atthe time of payment; 3. The income is one of the income payments Listed in the regulations (R.R. No. 02-8) that is subject to withholding tax; 4, The payor-withholding Agent is a resident of the Philippines: and 5, The income Recipient is @ resident of the Philippines liable to. income tax (MAMALATEO, Reviewer, supra at 266).INCOME TAX ORY A Gross Additional Payments to Bia When to File Annual Information Return for pir bai hegre bap aa) nicotene Wikhisala: Tyce ea Re en Final Withholding Taxes ~ On or before January 31 Sesieeabeesy of the succeeding year peiUlpaeie sada ‘Commissions of Independent and tea Creditable Withholding Taxes ~ Not later than March 11of the following year for which the annual report is being submitted (NIRC, Sec. 58(c)) ores Carer: Seats ieee tt eee 4 reer ree aa ees EO eee ene) oS ac ‘Summary of Expanded Withholding Tax Rat ecu) for Services Rendered by Individual Fk cus RC eae) {f gross income for current year exceeds | 15% Eel inert 720,000 or professional does not file ‘Sworn Declaration of Gross Income for first semester of the year with BIR, regardless of gross income Cae rd Income Payments to Certain ono If gross income for current year does not | 10% exceed P720,000 eR a ao Cera eke Re en eeu) Ce ae If gross income for current yar exc 720,000 If gross income for current year does! exceed P720,000 Coenen! EAR Final withholding Tax _Creditable Withholding Real properties maa Ser peony Amount of Tax Collected” . ites as afl Lisal payment ofthe resme cue from the Davee on” the” said Jincome (RR. No. ‘02: 98, Sec. 2.57(a)) Personal properties Poles, satellites and transmission: Intended to, equal or at| facilities least approximate the tax due from the payee on the | said income. Billboards 5% Peete cee To GC ce errr EINE ous Liability rests primarily | Liability rests upon the fon the withholding | taxpayer. agent. Te rea If gross income for current year exceeds | 15% 720,000 Perea [if gross income for current year does not | 10% ‘exceed P720,000 Payee is not required to| Income recipient is. stil file an income tax return | required to fle an income for the particular | tax return and/or pay the income, difference between the tax withheld and the tax | If gross income for current year exceeds | 15% ql due on the income. 720,000 Se ed aeciionid I gross income for current year does not | 10% | exceed P720,000 LL ft 2018 SAN BEDA CENTRALIZED BAR OPERATIONS | 137INCOME TAX SAN BEDA M end 2018 ee aces ecu) Cee anu) bd ee) ‘All income | Those income payments | subject to final | covered by the | taxes (e.g. | expanded _ withholding | passive, gross | tax (R.R. No.02-98) income’ of NRA-NETB): Fringe benef; and. Informer's reward persons instrumental in the discovery of violations of the NIRC and the discovery and seizure of ‘smuggled goods, to Withholding Tax on Compens It applies to all employed ind citizens 2:78) Exception: Minimum Wage Earner under Sec. 22(HH) of the DOMONDON, supra at 1100). Bo person liable to pay the income tax, yet 46 Improve the collection of compensation incok of employees, the State requires the employer to withhold the tax upon payment of the compensation income. Requisites: 1. Employer-employee relationship; and 2. Payment of compensation or wages for services rendered. Compensation Subject to Withholding Ta: (SBC-FAT) 1. Salaries and wages; Bonuses; ‘Commissions; Fringe benefits of rank and file employees; Allowances; and 2 3 a 5 6. Tips (RR. No. 02.98, Sec. 2.78.1(A)) 138 | 2O1G SAN EEDA CENTRALIZED BAR OPERATIONS ‘Compensation Exempted from Withholding Tax: (R-LEST-ABCD?E) 1. Amount received by the insured as Return of premium; Life insurance; Compensation for Injuries and sickness; Remunerations received as an Incident of ‘employment, Compensation for Services of a citizen, resident of the Philippines, for a foreign government or an. international organization; Income exempt under Treaty; Remunerations paid for Agriculture/labor; Thirteenth (13) month pay and other Benefits in an amount not exceeding 82,000; GSIS, SSS, Philhealth and other Contributions; Remunerations paid for Domestic services; Damages; and Remunerations for casual not in the course of an Employer's trade or business (R.R. No, 02-98, Sec. 2.78.1(B)). alue-Added Tax chapter.TRANSFER TAX SAN BEDA MEMORY AID Zoi ASIC PRINCIPLES Transfer Tax Tax imposed upon the privilege of passing ownership of property without any valuable | consideration (3 DOMONDON, Taxation (2014), p. | 1) [hereinafter 3 DOMONDON). } Ss 1200,000 and below Ces ‘Cumulative donations for 1 calendar year made in favor of persons not a stranger, | fo the extent of | 100,000 error Kinds of Transfer Tai 1. Estate tax; and 2. Donors tax. Yes, but only the amount of _ gift on | account of ‘marriage under Sec. 101, up to Distinctions between Estate 10,000 Parra Peers Pee ae Tax on privilege to | Tax on privilege. ‘All transiers by gift except those which, under Sec. 101 of the | NIRC, are exempt from tax (NIRG, Sec. 103) transfer property upon | transfer pegpert ino, one's death | one’s tifetinhes Pees Imposed on donations | Imposed. on“dtk Shee | mortis causa inter vivos. ae SU) ‘gross estate 3 Ce °C, Sec. 90) amen ‘Within 6 months from | Within 30 days after the death (NIRC, Sec. | date the gift is made 90/8) (IRC, Sec. 103(6)) For donations made favor of persons not a stranger, tax rate range | from 2% to 15%. If itis | made in favor of a stranger, the tax rate is | fixed at 30% Tax rates range within 5%-20% Raed exerts EXECUTIVE COMMITTEE SUBJECT COMMATTEE— MEMBERS. ADVISERS KATES JASTIN E. AGUILAR JAMES PHILIPPE MAC Subject ABDULJALIL JUSTICE JAPAR 8. Overall” ‘auperon, Chere SITTIE NATAHLA| ABDULHALIM, CHARMANE DIMAAMPAO, ‘ATTY. CHRISTINE Pp, MONDERIN AZIS" Assent Subject Chair, G. AGUILAR, JAMES LEE N, ANTHONY A. DY, ATTY. Chairperson _for "Academics, ~ DIVINAG. VELASCO Elecroni®’ AVENDARO, GERARD DANTEO. DELA CRUZ, ATTY. GHESKAARLA C AGRUPIS Dota Prcesing, JOHN CALEB CEASAR —"S.BAGUIO, NICASIO” 0. CABANEIRO, Cheirperon for Hotel CLANDAL General Principle, BRANDON 'L, BERAD, ATTY. DANTE R_ ERAVO, Operttons, MARA CLARA M. IVAN PAULO. SALANGUIT JOHNROM HOMER -M. ATTY. EFREN VINCENT M ESTRELLA "Vice Chair for Income Tax JENICA A. BUENO, GRACE ANNE B. DE DIZON ‘Operations MARY CYRIELL © AQUINO "Transfer Tas, VEYRA, ADRIAN JARED M SUMANQUI Vice Chair for ORLAND —JERICO —-M.GAFFUD, ANDREW M Secretariat, ARTLYN GEM G. CORDERO Value Added Tax, LEONARDO, FASAH SERORAN “Vice Chair for ALEXANDER ABRAHAM P. MACABUAT, JEFFERSON Finance, ZAIRE XANDRA M. COLINA Tax Administration & MADRID, SHIELA MARIE Mt REYES Vie Chair for Audit, Enforcement RAH L JARETA MARASIGAN, MICHELLE B ASMENAH. M, Remedies SALVADOR’ 'S. PADAYAO, FEDERICO C- BARAMBANGAN Vice Chair FULGENCIO II Real Property & SORIANO for Electronic Data Procesing, Local Tax. JOHN RALEIGH D, MARTIN ALEC N. BAUTISTA LEE Tani & Customs, CHRIST Vice Chair for” Logistics, DENN A MAGNO Court of Tax MARVIE 1. Appeals PAGCALIWANGAN Vice Chair for MembershipTRANSFER TAX AN BE A MEMORY AID 20 as ce Not exceeding 30 | No extension is allowed days, in meritorious cases (NIRC, Sec. | 90(C)) Cee ‘At the time the return | At the time the return is is filed (Pay-as-you | filed (Pay-as-you-file) file) (NIRC, Sec. | (NIRC, Sec. 103(8)) 94 er ‘Allowed i payment on the due date would | impose Undue | hardship upon the estate or hels, except inccases of negligence, Undue disregard of rules and regulations. and fraud (NIRC, Sec 916) Time for Payment Not allowed Theories regarding the Purpo8d’s Taxes: (BEARS) 1" Benefit-Received Theory ~ the: for the protection and services State in the accumilation x transfered gratuitously, resulting received by the estate and the rece donee) 2. Equitable Recoupment Theory4 imposes transfer taxes to future anticipated reduction of gov income tax collection. 3. Abllity-to-Pay Theory - the tax is based on the ‘act that the receipt of inheritance and gifts creates an ability to pay and thus contribute to ‘governmental income. 4. Redistribution-of-Wealth Theory — properties given for free contributes to unequal distribution ‘of wealth and earnings because the recipient (heir or donee) has not actually worked for it ‘Thus, the imposition of transfer taxes helps the equitable distribution of wealth to attain social progress and stability 5, State-Partnership Theory — the tax is in the share of the State as a passive and silent partner in the accumulation of property (VALENCIA & ROXAS, Transfer Taxes and Basic Succession (2015), | p.42-43) [hereinafter VALENCIA & ROXAS}, 140 | 2018 SAN D/A CENTRALIZED BAR OPERATIONS Estate Tax Estate Tax An excise tax imposed on the privilege of transferring a property upon the death of the owner (CABANEIRO, From Living to Leaving (2018) .127) [hereinafter CABANEIRO). Nature of Estate Tax 1. Itis a privilege or excise tax; 2. Itis not a property tax because their imposition does not rest upon general ownership but rather they are imposed on the act of passing owner- ship of property (3 DOMONDON, supra at 1); and 3. It is different from inheritance tax (Lorenzo v. Posadas, G.R. No. L-43082, June 18, 1937). Inheritance Tax ~ a tax imposed on the legal, right or privilege to succeed to, receive or take gaiy by or under awill intestacy law, or deed, for equal distribution of wealth; igtfle most appropriate and effective method for Sd the privilege which the decedent enjoys in me the second transfer from the heb [nga ne second decedent) to his nels. Note tat andithe oreny 1, Death ~ the present decedent di years from the receipt ofthe property decedent or doner 2. Identity ~ the property sought to be the one received from a prior decedent 3. Breviously determined and pad ~ the dons a (on the gift or estate tax on the prior succession was finally determined and paid 4. Inclusion ~ the property must have formed part of the gross estate situated in the Philippines of the prior decedent, or the total amount ofthe gifts of the donor, and 5. No previous deduction ~ no vanishing deduction ‘on the property was allowed to the estate of the prior decedent (REYES, Philippine Transfer and Business Taxes (2008), p. 52 [hereinafter REYES, Transfer Taxes] Notes: 1. The deduction allowed is only the amount finally determined as the value of such property in etermining the value of the gift, or the gross estate of such prior decedent; 2. The deduction allowed is only to the extent that the value of such property is included in the decedent's gross estate; erty previously taxed, there ere cA sete involving the same property. The first a me 3. Where a deduction was allowed of any mortgage oF lien in determining the gift tax, or the estate tax of the prior decedent, which were paid in whole Or in part prior to the decedent's death, then the deduction allowable for property previously taxed shall be reduced by the amount so paid; 4, Such deduction allowable shall be reduced by an amount which bears the same ratio to the amounts allowable as deductions for expenses, losses, indebtedness, taxes, and transfers for public use as the amount otherwise deductible for property previously taxed bears to the value of the decedent's estate; and 5. Where the property referred to consists of two or ‘more items, the aggregate value of such items shall be used for the purpose of computing the deduction (INIRC, Sec. 86(4)(2). Formula for Computing Vanishing Deduction (vo): smputation of initial basis: the property subject to VD" 00x Je paid on that property wx 76 of donation or death of the prior Evalue at the time of death of the nt, whichever is lower. The deduction basis on Valyp of the GE x eur deduction (Cféters to ELIT and Transfers for public “This is done to prevent double taxation (INGLES, supra at 244). ‘Step 3: Computation of final basis: Initial basis ox Less: 2° deduction 20% Final basis 00 ‘Step 4: Computation of vanishing deduction: Percentage Final provided under Vanishing Basis ‘Sec. 86(A)(2) deduction of NIRC, (018 SAN BEDA CENTRALIZED BAR OPERATIONS 1143TRANSFER TAX AN BEDA MEMORY AID 2018 pra Fee ei al a hue eer Cierra Pee ny decedent ‘Within the year prior to the death of, et ‘More than 2 years but less than 3 | 60% ‘More than 3 years but less than 4 More than 4 years but less than 5 | 20% Mlustration: A died leaving his house and lot and van to B, his only son, The estate tax corresponding to the transmission of these properties were paid. ‘Within the year after A's death, B died. His gross estate including the house and lot and vs dectared at P9.6M while dedi losses, indebtedness, taxes, Public purpose) amounted to P- are relevant data: The FMV of the. B also paid 210,000 of mortgage 42 Solution/Computation: x 4.Value of property x (2,400,000+210,000) Less: Mortgage debt paid Initial basis: 2.2.400,000.00 x 'P1,800,000 '®'9,600,000 3.tnitial basis Less: 2"! deduction Final basis 'P7,950,000 4.Final basis 11,950,000 “Multiply by rate 400%" Vanishing deduction P7,950,000 “The rate year after 100% because B died within the 's death, C. TRANSFERS FOR PUBLIC USE The amount deductible shall be the entire amount of all bequests, legacies, devises or transfers to or for the use of the Government of the Republic of the Philippines or any poitical subdivision thereof, exclusively for public purpose (NIRC, Sec. 86(A)(3)): 1. The disposition is in a Last will and testament; 2. Totake effect After death; 1S0 | 2018 SAN BEDA CENTRALIZED BAR OPERATIONS 3. In favor of the Government of the Philippines or any political subdivision thereof; and 4. Exclusively for public purpose (REYES, Transfor Taxes, supra at 51) D. NET SHARE OF THE SURVIVING SPOUSE IN ‘THE CONJUGALICOMMUNITY PROPERTY ‘Tie net share of the surviving spouse in the conjugal Partnership property as diminished by the ‘obligations properly chargeable’ to such “property shall, for the purpose of this Section, be deducted from’ the net estate of the decedent (NIRC, Sec. 86(C)). ‘After deducting the allowable deductions appertaining to the conjugal or community properties included in the gross estate (ie., ordinary deductions), the share of the surviving spouse must be removed to ensure that only the decedent's interest in the estate is taxed (R.R. No. 2-2003 Sec. 6(H). surviving spouse from the fy onsdored as 8 deduct fom Pot an exclusion from the gross jains to the exclusive or capital the "gross estate” of the decedent the net share of the surviving 18 conjugal property. This finds jermining the amount of gross estate ftfie filing of notice of death and estate er Secs. 89 and 80 of NIRC. DUCTIONS reside, as certified by the Barangay Captain “oltho locally (R.A. No. 22008, Sec. 6(0)) Requistes for Deductitty: The family home must be the actual residential home of decedent and his family at the time of his death, as certified by the Barangay Captain of the locality where the same is situated; 2. The total value of the family home: must be included as part of the gross estate of the decedent (owned by one or both of ‘the spouses); and 3. Allowable deduction must be in an amount ‘equivalent to the LOWEST of: a. The current fair market value of the decedent's family home; b. The extent of the decedent's interest (whether conjugal/community or exclusive property): oF ©. P1,000,000 (Id.; NIRC, Sec. 86(A)(4))TRANSFER TAX EDA MEMORY AID 2018 If the family home is a conjugal or community property, the amount to be deducted is equivalent to % of the fair market value, but shall not exceed 1,000,000 (INGLES, supra at 245) Notes: 1. The family home is deemed constituted on the house and lot from the time its actually occupied as a family residence and is considered as such for as long as any of its beneficiaries actually reside therein; 2. Actual occupancy of the house or house and lot as the family residence shall not be considered interrupted or abandoned in such cases as the tetnporary absence from the constituted family home due to travel or studies or work abroad, etc. 3. The family home is generally characterized by permanency, which is the place to which whenever absent for business or pleasure, one Still intends to return: expenses incurred prior to,the one-year period from date of death be allowed to be deducted from the ‘gross estate as “claim against the estate” (R.R. No. 2-203 Sec. 6(F)). Nlustrations on how to determine the amount of allowable medical expenses: 1. If the actual amount of medical expenses incurred is 250,000 then only 250,000 shall be allowed as deduction dnd not to the extent of the 500,000 threshold amount; and 2. If the actual amount of medical expenses incurred within the year prior to decedent's death is 600,000, only the maximum amount of 500,000 shall be allowed as deduction. If in case the excess of 100,000 is stil unpaid, such ‘amount shall not be allowed to be deducted from the gross estate as ‘claims against the estate (a). 4.The family home may be constitute (An Act Providing that Retirement unmarried head of 8 familyson his. or Employees of Private Firms shall not property, Tp x Whatsoever) Por purposes of svaling Gouucion to the event alowed ensttute ony on fly hore 6. Husband and ie. shall refer ic thosp maried men and woman (A Net 22a 6 6(0)). ia B. STANDARD DEDUCTION A deduction in the amount of 1,009,000 allowed as an additional deduction without substantiation. The full amount of 1,000,000 be allowed as deductiog for the benifit) of decedent (NIRC, Sec. 86(A)(5): R.R. NOS Sec. 6(E)). C. MEDICAL EXPENSES, Requistes for Deductibility (1ST): "The expenses must fave been incurred (whether paid or unpaid) within 4 year prior to death of decedent: 2, Must be Substantiated with official receipts for services rendered by the decedent’ attending physicians, invoices, statement of accounts duly Certified by the hospital, and such other documents in support thereof; and 3. The Total amount thereof, ‘whether paid or unpaid, shall inno case exceed 500,000 (MIRC, Sec. 86(A)(6); RR. No. 2-2003, Sec. oF) Note: Any amount of medical expenses incurred in ‘excess of 500,000 shall no longer be allowed as deduction as "medical expenses.” Neither can any Unpaid amount thereof in excess of the P500,000 threshold nor any unpaid amount for medical yloyer as a consequence of the death ployee in accordance with R.A. 1ed.as deduction from gross estate, mount. of separation benefit. ofthe gross estate of the decedent Boe BO(A)7); AA. No. 2-2008, Sec: 66). Hed by the employer: ig employee has been in the Service of the fémployer for at least 10 years and is not than 50 years of age at the time of his “retirement; “NS The amount must have been received by the Heirs of decedent-employee as a consequence of the latter's death; and 4, The amount is Included in the gross estate of the decedent (1 DE LEON, supra at 777). EXCLUSIONS FROM GROSS ESTATE EXCLUSIONS FROM GROSS ESTATE 1. The capital (exclusive property) of the surviving spouse (NIRC, Sec. 85(H)). Note: The share of the surviving spouse in the absolute community/conjugal partnership is considered as a deduction (NIRC, Sec. 86(C)) 2. Other items which are excluded from the gross estate are the following: 2016 SAN BEDA CENTRALIZED BAR OPERATIONS {151TRANSFER TAX SAN BEDA MEMORY A GSIS proceeds/benefits; Accruals from SSS" ©. Proceeds of life insurance where the beneficiary is irrevocably appointed; J. Proceeds of life insurance under a group insurance taken by employer (not taken out tupon his life); War damage payments; ‘Transfer by way of bona fide sales; Properties held in trust by the decedent; and Acquisition and/or transfer expressly declared as not taxable. EXEMPTIONS FROM GROSS ESTATE eee from Gross Estate (BUFF): ‘Al Bequests, devises, logeties or ensfers to focal wotlwe, cultual apd. cha inatutions, no part of the net income} inures tothe benef of anyagyi hhowever, that not more thay Coquest, davies, egecies 6 used by such institutions f purposes (NIRC, Sec. 87(D)); Note: The bequest, devises.] transfets do not include the ‘educational institutions. 2. The merger of Unutuct nan naked title (NIRC, Sec. 87(A)); Atustration: Me, ded on June 2 re ened at sain at DES wa teeeepery Sie tiene o Sitonny 6 ded anne Cannan ee pope toe Predecessor Current Docedent A ——+ B + (sutructuary) (Owner of ‘Naked Tile) The transfer from usufructuary B to the real ‘owner C upon B’s death does not constitute a donation mortis causa as it is a mere return of the property to the real owner. Hence, it is excluded from gross estate (BANGGAWAN, Business & Transfer Taxation (2017), p.391) [hereinafter BANGGAWAN], 3. Fideicommissary substitution (NIRC, Sec. 8718): Mlustration: Mr. A died leaving an inheritance consisting of real estates to his grandson C. 2 | 2018 SAN BED: NTRALIZED BAR OPERATIONS, Because C was a minor, Mr. A appointed B as fiduciary of the inheritance. Before transferring the property to C, B died. Predecessor Current Docedeont ee (Fiduciary Heir) (Fideicommissary) ‘The delivery of the inheritance upon the death of, B (fiduciary heir), to C (fideicommissary) shall not be included in the gross estate of B because the transfer does not involve a transfer of ‘ownership from B to C. B is merely a trustee. The delivery is a mere return of property to the real owner, C (BANGGAWAN, supra at 392) 4. The transmission from the First heir, legatee or donee in favor of another beneficiary, in accordance with the desire of the predecessor (NIRC, Sec. 87(C)). tion: Ip his will, Mr. A devised a piece of Jando B as (HB first heir and thereafter to C as ei. B subsequently died (igfer from B to C is, merely an implementation (SHE ransfer which was originally mandated by Dpiédecessor A (BANGGAWAN, supra at 392). ESTATE TAX CREDIT Estate Tax Credit The estate tax imposed under the NIRC shall be credited with the amounts of any estate tax imposed by the authority of a foreign country (NIRC, Sec 86(E)) Limitations: 1. Per Country Basis — The amount of the credit with respect to the tax paid to any country shall not exceed the same proportion of the tax against which such credit is taken, which the decedent's net estate situated within’ such country taxable under the NIRC bears tohis entire net estate; and 2. Overall Basis ~ The total amount of the credit shall not exceed the same proportion of the tax ‘against which such credit is taken, which the decedent's net estate situated outside the Philippines taxable under the NIRC bears to his,TRANSFER TAX SAN BEDA MEMORY AID 2018 entire net estate (Id). STEP ion B (Overall Basis) Mlustration: Mr. B, acitizen of the Philippines, died residing in the Net Estate of all Philippine Limitation Philippines, leaving a net estate of 1,050,000 in the Foreign Country X Estate 5 Philippines’ and 300,000 in foreign country Y and World Net Estate Tax 150,000 in foreign country Z. The net estate in country Y paid an estate tax of 25,000 to that country, The net estate in country Z paid P8,000. ‘The estate tax due, after credit would have been 'P68,000, computed as follows: Net Estate, Philippines (PH) 1,050,000 Net Estate, Y '300,000 Net Estate, 2 __ 150,000 Net Estate, World 1,500,000 PH estate tax on P1.5M Less: Estate tax Credit (See Figure A) Estate tax stil di "To compute estate tax due di COLLEGE Net Estate Foreign Country x Net Estate world Estate Tax STEP_2: Compare Limitation A wi payment in the foreign country. Whic! between the two shall be the amount al credit. Allowed for Y is 19,000 determined as follows: 300,000 x 19,000 7,500,000- 95,000 Compare 19,000 with 25,000 paid. 19,000 is lower. Allowed for Z is 8,000 determined as follows: 150,000 7,500,000 x 95,000 = P9,500 ‘Compare P9,500 with 8,000 paid. P8,000 is lower. STEP Aad all amounts allowed per country. Country ¥. P 19,000 Country Z (000, “Total for Limitation A ~___P27,000 Lece CERRO Compare R with total actual taxes paid in foreign ‘country. Whichever is lower shall be limitation B. 450,000 X 95,000 = 28,500 7,500,000 ‘Total amount paid is 33,000 (P25,000 + 8,000), which is higher than R. Then’ 28,500 shall be limitation B. STEP 5: ‘Compare Limitation A and 8. Amount creditable shall be lower between the two. 27,000 28,500 » [x ‘Multiply by: % Taxrate i Estate Tax = Due Less: Tax ® Greditifany | x) tate Tax oe il due, if any *The exclusive properties included in the gross estate are only those exclusive properties of the decedent. Note: Only ordinary deductions are deducted from the conjugal or community property from which as diminished shall be taken the % net share of the surviving spouse (1 DE LEON, supra at 778). Thus, 2018 SAN BEDA CENTRALIZED BAR OPERATIONS 1153TRANSFER TAX. SAN BEOA MEMORY AID 2 special deductions are deducted from the gross ‘estate pertaining only to the decedent ESTATE TAX SETTLEMENT ‘A. FILING OF NOTICE OF DEATH (NIRC, Sec. 89) 1, When Notice of Death shall be Filed: a. When the transfer is subject to tax; or b. Although exempt from tax, the gross value of the estate exceeds 20,000. 2, Period of Filing: The notice of death must be filed by the executor, administrator or any of the legal heirs, as the case may be, with the Commissioner within 2 months after the decedent's death or within a like period after qualifying as executor or administrator. |. FILING OF ESTATE TAX RETURN ( When ETR shall be Filed: a. Inall cases of transfers 20 b. Where, though exempt ‘fre gross value of the estate e . Where, regardiess of the 3 estate consists of register, 14 Property such as real property ata Shares of stocks or other sim which a clearance from BIR Be prerequisite forthe transfer of name of the transferee (NIRC, Note: When the gross estate exceeds ETR shall be supported by a statement by a CPA containing the following: a Itemized assets of the decedent corresponding gross value at the tinie of, death, or in the case of NRA, of that part of his. gross estate situated in the Philippines; b. Itemized deductions from gross ’ estate allowed in Section 86; and : The amount of tax due, whether paid or still due and outstanding (1d.). “There is also an additicnal requirement of registering the estate and getting a separate TIN (NIRC, Sec. 236(). 2. Period of Filing: General Rule: ETR must be filed within 6 months from the decedent's death (NIRC, Sec. 90(6)). Exception: In meritorious cases, the Commissioner may grant reasonable extension not exceeding 30 days (NIRC, Sec. 90(C). 154 | 2018 SAN BEDA CENTRALIZED BAR OPERATIONS 3. Where to File the ETR and Pay the Estate Tax Due (R.R. No. 2-2003, Sec. (C)) a. Resident decedent - the executor or administrator shall register the estate of the decedent and secure a new TIN from the RDO where the decedent was domiciled at the time of his death and shall file the ETR and pay the corresponding estate tax with: i. Authorized Agent Bank (AB): Revenue District Officer (RDO); Collection Officer; oF Duly authorized Treasurer of the city or the municipality where the decedent was domiciled at the time of his death, whichever is applicable. b. Non-resident decedent with executor or administrator in the Philippines — the ETR shall be filed with and the TIN for the estate shall be secured from the RDO where such executor ‘or administrator is registered. If the executor or trator is not registered, the ETR shall be th andthe TIN of the estate shall be iministrator's logal residence. instanding the foregoing, the 6r of Internal Revenue may continue to Rule: “Pay-as-yourfile” system — the 'ax shall be paid at the time the return is filed the executor, aeministrator or the hers (NIFC, Exception: When the Commissioner finds that the payment on the due date of the estate tax or any part thereof would impose undue hardship upon the estate or any of the heirs, he may extend the time for payment thereof (NIRC, Sec. 91/8). Exception to the exception: When Extension for Payment is Not Allowed: Whore the taxes are assessed by reason of: a. Nogligence; b. Intentional disregard of rules and regulations; . Fraud, on the part of the taxpayer (Id). Roquisites for Extension of Time: (RABU-5) ‘a. The application for extension of time to fle the rolun and extension of time to pay the estateTRANSFER TAX SRY Alp 2018 tax must be filed with the RDO where the estate 's required to secure its TIN and file the ETR; b. The Commissioner or his duly authorized representative shall Approve the application: The request must be filed Before the expiration of the original period to pay which is within 6 months from death; 4. There must be a finding by the Commissioner that the payment of the estate tax or any part thereof would impose Undue hardship upon the estate or any of the heirs; and fe. The extension must be for a period not exceeding § years if the estate is settled through the courts Gudicially), or 2 years if settled extrajudicially (R.R. No. 2-2003, Sec. 96). Effects when the Extension is Granted: ‘2. The amount in respect of which the extension is granted shall be paid on or before the date of the expiration of the period of extension; b. Any amount paid after the statutory 4. The Commissioner or his q representative may requice the necessary, conditioned upon the! the said tax in accordance with tee extension (i). Payment of Estate Tax by Installment ~ sufficient to pay its total estate tax lability, the estate may be allowed to pay the tax by installment and a clearance shall be released only with respect to the property which has been paid (R.R. No. 2-2003, Sec. 9(F). If the payment of the tax after the due date is approved by -the Commissioner or his duly authorized representative, ‘the imposable penalty thereon shall only be the interest (id.) Persons Liable to Pay: ‘a. The estate tax shall be paid by the executor or administrator (primarily liable) before delivery to any beneficiary of his distributive share of the estate; and b. When there are two or more executors or administrators, all of them shall be severally liable for the payment of the tax (RR. No. 2- 2003, See. 9(6)). Note: The beneficiary shall be subsidiarly liable for the payment of that portion of the estate which his distributive share bears to the value of the total net estate. The extent of his liability, however, shall in no case exceed the value of his share in the inheritance (id). Restitution of Tax Paid In order that a taxpayer may claim the benefits of Section 96, it necessary for him to show the following: 1. The obligations of the deceased not known at or before the time of the payment of the tax; 2. These obligations have been judicially recognized as proper claim against the estate of, the deceased; 3. The court ordered them paid; and 4. They have been actually paid (1 DE LEON, ‘supra at 797). Duties of Certain Officers or Debtors: for or administrator must: ensure that jade of the amount of which he fhe shall be discharged from “Deeds shall not register in the A Property any document transferring B¥ety “or real rights therein without [oh from the Commissioner that the tax js causa, legacy or inheritance, shall have ‘the duty of funishing the Commissioner, Regional Director, Revenue District Officer oF Revenue Collection Officer of such documents (ia), 5. A debtor of the deceased shall not pay his debts to the heirs, legate, executor or administrator of his creditor, unless the certification of the ‘Commissioner that the estate tax imposed by NIRC has been paid is shown, but he may pay the executor or judicial administrator without sata cettifcation if the credit is included in the inventory of the estate of the deceased (/d.). 6. A corporation will not transfer to new owners of shares, bonds, obligation or rights without certification from the Commissioner that the tax actually due thereon had been paid (NIRC, Sec. 97. 7. When a bank has knowledge’ of the death of @ person who maintained ajoint account, it shall not allow any withdrawal by the surviving depositor without the above certification (NIRC, Id.) 2018 SAN BEDA CENTRALIZED BAR OPERATIONS 1155TRANSFER TAX SAN BEDA MEMO RY AID 20 ‘The administrator of the estate or any one of the heirs of the decedent may, upon authorization by the ‘Commissioner, withdraw an amount not exceeding 20,000 without the said certification (NIRC, Sec. 97). Note: Ina survivorship agreement, the bank deposit does not form part of the gross estate of the deceased. The contract imposed a mere obligation with a term, the term being death. Such agreement is permitted by the Civil Code under Article 2010 which provides “By an aleatory contract, one of the Parties or both reciprocally bind themseives to give €or todo something in consideration of what the other shall give or do upon the happening of an event which is uncertain, or which is to occur at an indeterminate time" (Vitug v. CA, G.R. No. 62027, March 29, 1990). The Commissioner is authorized to inquire into the bank deposits of a decedent to determine his gross estate Notwithstanding any contrary 1405 or Secrecy of Banks Depa general or special laws, the ‘authorized to inquire into the bank 1. A decedent to determine his g 2. Any taxpayer who has filed ar AC (a) With Family Home of More Than P%0t (A)(2) of this Code by reason of financial incapacity to pay his tax liabilty (RA, No, 8424, Sec. 6(F)). lustration: D dies in 2013 leaving a bank deposit fof 2,000,000 under joint account with his associates in a law office. Learning of D's death from the newspapers, the Commissioner of Internal Revenue wrote to every bank in the country asking them to disclose to him the amount of deposits that might be outstanding in his name or jointly owned with others at the date of his death. May the bank holding the deposit refuse to comply on the ground of the Secrecy of Bank Deposit Law? Explain, ANS: No, because the NIRC of 1997 has ‘empowered the Commissioner, as an exception to the Secrecy of Bank Deposit Law, to inquire into the deposits of a decedent depositor for the purpose of determining the gross estate. at it is @ joint account is an exception to ity because withdrawals from such joint ith the deceased depositor is allowed only from the Commissioner that all the Ve been paid, An inquiry into the sary to determine the taxes due in ‘the same and issue the clearance (3 “Supra at 155). FT FUNERAL EXPENSES, IEDICAL EXPENSES. “ESTATE ‘Real and personal properties P 5,000,000 Family Home 2,000,000 Grosé Estate 7,000,000 Less: Deductions Ordinary Deductions : Funeral Expenses ® 200,000 Other Deductions 41,300,000 P 1,500,000 Special Deductions Family Home 1,000,000 ‘Standard Deduction 1,000,000 Medical Expenses" '500,000 __ 2,500,000 Total Deductions P_4,000,000 NET TAXABLE ESTATE P3.000,000 Note: Although the family home Is valued at P2 million, the maximum allowable deduction for the family home is Ptmilion only. 156 | 2018 SAN BEDA CENTRALIZED BAR OPERATIONS a 4 Histiacs: staTRANSFER TAX SAN BEDA MEMORY Al (b) With Family Home of Less Than P1,000,000 Real and personal properties 5,000,000 Family Home ‘200,000 Gross Estate P 5,800,000 Less: Deductions Ordinary Deductions Funeral Expenses ® 200,000 Other Deductions, 1,300,000 P 1,500,000 Special Deductions Family Home P 800,000 Standard Deduction 1,000,000 Medical Expenses '500,000 __ 2,300,000 Total Deductions 3,800,000 NET TAXABLE ESTATE P.2.000,000 Note: Deduction for family home is allowed for 800,000 only which is the declared value of the family home, (2) DECEDENT IS A MARRIED MAN WITH SURVIVING SPOUSE: {2} The family home is hidiexclusive S Te (i, COLLEG® Ofd.eoV Conjugal Properties: Real Properties Exclusive Properties: Family Home Other Exclusive properties Gross Estate Less: Deductions Ordinary Deductions Conjugal Deductions Funeral Expenses Other Deductions Total Conjugal Deductions Net Conjugal Estate Special Deductions Family Home: anopee (1,000,000) ‘Standard Deduction A (_ 1,000,000) Medical Expenses '500,000) Total Deductions {© 4,000,000) Net Estate 5,500,000 Less: % Share of Surviving Spouse ‘Conjugal Property 5,000,000 Conjugal Deduction (1,500,000) Net Conjugal Estate 3,500,000 (3,500,000 /2) 4,750,0¢ NET TAXABLE ESTATE ‘3,750,000 (b) Family home is a conjugal or community property: Exclusive Conjugal Total Conjugal Properties: Family Home 2,000,000 Other Real Properties 5,000,000 7,000,000 Exclusive Properties .2,000,000 2,000,000. Gross Estate 2,000,000 ® 7,000,000 9,000,000 Less: Deductions Ordinary Deductions 2018 SAN BEDA CENTRALIZED BAR OPERATIONS | IS7_TRANSFER TAX AN BEDA MEMORY AID Conjugal Deductions Funeral Expenses (P 200,000) ( 200,000) Other Deductions 41,300,000) (_1,300:000) Total Conjugal Deductions 1,500,000) (P 1,500,000) Net Conjugal Estate 8,500,000 Special Deductions Family Home (1,000,000) Standard Deduction (1,000,000) Medical Expenses 500,000) Total Deductions (P 4,000,000 Not Estate ® 5,000,000 Less: % Share of Surviving Spouse Conjugal Property 7,000,000 Conjugal Deduction (4,500,000) Net Conjugal Estate 5,500,000 (5,500,000 / 2) 2,750,000) NET TAXABLE ESTATE ‘2,250,000 (c) Same facts as in (b) except that the family home has a FMVizonal cclusive jugal lue of only 1,500,000: Conjugal Properties: Family Home Other Real Properties. © Exclusive Properties Gross Estate Less: Deductions Ordinary Deductions Conjugal Deductions Funeral Expenses Other Deductions Total Conjugal Deductions Net Conjugal Estate Special Deductions Family Home Standard Deduction Medical Expenses Total Deductions Net Estate Less: % Share of Surviving Spouse Conjugal Property 6,500,000 Conjugal Deduction (1,500,000) Net Conjugal Estate 15,000,000 (5,000,000 / 2) 2,500,000) NET TAXABLE ESTATE ‘P2.250,000 Note: Since the FMV/zonal value of the conjugal family home in the above example is 1,500,000, the family home deduction corresponding to %4 of such fair market valuelzonal value is P750,000 only. (@) Family home Is conjugal property, but lot on which it stands Is exclusive property: Conjugal Total Conjugal Properties Other Properties ® 3,000,000 Family Home 4,000,000 4,000,000 Exclusive Properties Other Properties Family lot —_ 2,400,000 Gross Estate 4,000,000 ® 6,400,000 Less: Deductions 5B | 2018 SAN GEDA CENTRALIZED BAR OPERATIONS_TRANSFER TAX EEDA MEMORY AID 2018 Ordinary Deductions Conjugal Deductions Funeral Expenses (P 200,000) ( 200,000) Other Deductions 4,300,000) __ 1,300,000) Total Conjugal Deductions (1.500.000) (F1,500,000) Net Conjugal Estate P 2'500,000 Special Deductions Family Home Exclusive Lot 400,000 Conjugal Home (P7,000,000/2) 500,000 (900,000) Standard Deduction (1,000,000) Medical Expenses ( 500,000) Total Deductions {P 3,900,000) Not Estate '® 2,500,000 Less : % Sharo of Surviving Spouse Conjugal Property 4,000,000 Conjugal Deduction (1,500,000) Net Conjugal Estate 2,500,000 (2,500,000 /2) 4,250,000 NET TAXABLE ESTATE 1,250,000 g SAN BEDA COLLEGE OF LAW 2018 SAN BEDA CENTRALIZED BAR OPERATIONS 1159)_TRANSFER TAX AN BEOA MEMOR RY AID 2018 Donor’s Tax : ‘An excise tax imposed on the privilege to transfer property by way of gift inter vivos based on a pure act of ‘liberality without any or less than adequate consideration and without any legal compulsion to give (3 DOMONDON, supra at 156) Nature of Donor's Tax 1. Itis an excise tax on the privilege of the donor to give or on the transfer of property by way of gift inter vivos.; and 2. Itis not a property tax (R.R. No. 2-2003, Sec. 11) Purposes or Objects of Donor's Tax: 1. Donors tax supplements the estate tax by preventing the avoidance of the latter through the device of donating the property during the lifetime, of the deceased; and It also prevents the avoidahieg since a gratuitous transfer is gross income under Sec. 32 LEON, supra at 800). Requisites ofa Taxable (Vali) Do ‘Capacity of donor ~ All persons and. dispose of their” property 4 donation (CIVIL CODE, Art. 733} [he\dones capacity shall be determined as oft making of the donation (CIVIL CODE Donative intent — Donative intent mi 2 direct gift of property in order that tRé or tax'can be assessed and collected intent is not, however, required in tra property for less than adequate and consideration (MAMALATEO, supra at 387). Delivery, whether actual or constructive ~ There is delivery ifthe subject matter is within the dominion and control of the done (See RR. No. 2-2003, Sec. 11), Acceptance by the donee — Acceptance must be made during the lifetime of the donor and of the donee (CIVIL CODE, Art. 746). If the donor dies before he learns of the acceptance, the donation does not take effect (CIVIL CODE, Art. 1323). orm prescribed by law .) Donation of immovable property — it must, be made in a public document specifying therein the property donated. The acceptance may be made in the same Deod of Donation or in a separate public document, but it shall not take effect unless it is done during the lifetime of the donor. If the acceptance is made in a separate instrument, the donor shall be notified thereof in an authentic form, and this step shall be noted 160 | 2018 SAN BEDA CENTRALIZED BAR OPERATIONS in both instruments (CIVIL CODE, Art. 749; RR. No. 2-2003, Sec. 11). b.) Donation of personal property ~ if the value exceeds 500,000, the donation and the acceptance shall be made in writing; otherwise, the donation shall be void (CIVIL CODE, Art. 748) Badges of Donation Inter Vivos: 1. Made out of love and affection; 2. Reservation of usufruct in favor of the donor (i.e., the naked ownership has been transferred to the donee); Donor reserved certain properties for himself; and The donee accepted the donation (no need for acceptance if donation mortis causa) (INGLES, ‘supra at 264), Law that Governs the Imposition of Donor's Tax “The law in force at the time of the completion of the R. No. 2-2003, Sec. 11) ty by gift is perfected from the {Spr knows of the acceptance of the ted by delivery, either actually or ot the donated property to the donee 2803, Sec: 11). Q¥s tax applies shall not apply unless and until there at renounces the power; or to exercise the reserved power ceases Sortingency oF the hment of some Condon, “> other than because of the donor's death (R.R. No. 2-2003, Sec. 11) Note: The term “transfer of property in trust or ‘otherwise, direct or indirect” is used in the most ‘comprehensive sense. It includes not only the transfer or any right or interest in property, but less than title. A transfer becomes complete and taxable only when the donor has divested himself of all beneficial interest in himself or his estate. The law contemplates the passage of ‘control over the economic benefits of the property rather than mere technical changes in the tile (Estate of Sanford v. Commissioner of Internal Revenue, 308 U.S. 39). Coverage of Donor's Tax 1. Gifts of real property and personal property wherever situated belonging to the donor who is either a resident or citizen at the time of the donation; andTRANSFER TAX SAN BEDA MEMORY AID 2 18 2. Gifts of real and tangible personal property situated inthe Philippines, and intangible personal property with a situs in the Philippines unless ‘exempted on the basis of reciprocity, belonging to the donor who is a non-resident alien at the time of the donation (1 DE LEON, supra at 801) Classification of Donors: 1. Resident and citizens; 2. Non-resident alien; 3. Domestic corporation; and 4. Foreign corporation. Note: A corpofation, whether domestic or foreign, is included since it is capable of entering into a contract of donation, through a Board Resolution (CORPORATION CODE, Sec. 36). Importance of Knowing the Classification of Donors ‘The classification of donors determines the manner in which they are subject to donor's taxes. Di real properties, tangible and | intabgble properties wherever located. 2. Non-resident Alien Donor ~ Gr real properties, tangible and intangh located in the Philippines (REYES Taxes, supra at 133-134) < Note: if the donor is a non-resident, intangible properties belonging to him situal& the Philippines shall be subject to rules reciprocity (NIRC, Sec. 104). Properties Considered Situated in the Philippine: a, Real, intangible and tangible _personal properties, or mixed, located in the Philippines ‘and outside of the Philippines, depending on the kind of donor; b. Franchise which must be exercised in the Philippines: . Shares, obligations or bonds issued by any corporation or partnership, organized in the Philippines in accordance with our laws; 4. Shares, obligations or bonds issued ‘by any foreign corporations, 85% of which is located in the Philippines; fe, Shares, obligations or bonds issued by any Toreign corporation if such shares, obligations or bonds have acquired a business situs in the Philippines; and =< 1. Shares or rights in any partnership, business or industry established in the Philippines (Id.). Situs of Donor's Taxation The situs of donor's taxation is where the transfer took place. This is so because donor's taxes are in the nature of taxes imposed upon the privilege to do something, which in this case is to transfer property (3 DOMONDON, supra at 171) VALUATION OF GIFTS 1. Real property ~ it shall be valued at the FMV of the property at the time of the gift. The appraised FMV of the property shall be whichever is higher between the FMV ‘a.) As determined by the Commissioner (zonal value); oF b.) As shown in the schedule of values fixed by Provincial and City Assessors (IRC, Sec. 102; Sec. 88(B) 2. All other property — it shall be valued at the FMV. roperty at the time of the gift (NIRC, Sec. ¥en Spouses fons mortis causa; and Mociefet6 gifts which the spouses may give lach other on the occasion of any family i) vat, if it was. already paid, taxpayer only "2 years from the date of payment to ask or je for a claim for refund, regardless of any Sp supervening event. 2. Donations by One of the Spouses Husband and wife are considered separate and distinct taxpayers for purposes of donor's tax (RR. No. 2-2003, Sec. 12) If what was donated is a conjugal or community property and only the husband signed the deed of. donation, there is only one donor for donor's tax purposes, without prejudice to the right of the wife to question the validity of the donation without her consent (1d) 3. Donations to Conceived and Unborn Child Such donations may be accepted by those persons who would legally represent them if they were already born (CIVIL CODE, Art. 742) 2016 SAN BEDA CENTRALIZED BAR OPERATIONS | 161TRANSFER TAX SAN BED MEMORY AID 2018 4, Contribution for Election Campaign Any contribution in cash or in kind to any candidate, political party or coalition of parties for campaign’ purposes shall be governed by the Election Code, as amended (NIRC, Sec. 99(C)) R.A. No. 7166 (An Act Providing for Synchronized National and Local Elections) provides that “any provision of law to the contrary notwithstanding, any contribution in cash or kind to any candidate, oF political party or coalition of parties for campaign purposes, duly reported to the Commission, shail not be subject to the payment of any gift tax, Every corporation incorporated under the ‘Corporation Code has the power and capacity to make reasonable donations, including those for public welfare or for hospital, charitable, cultural, scientific, civic, or similar purposes: Provided, that no corporation, domestic or foreign, shall ‘give donations in aid of any political party or candidate or, for, purposes of partisan politic (CORPORATION CODE, S8a3 that are prohibited from contributions amend or repeal by Section 95 of the OEC. Neither hia ‘an implied amendment or oak Given effect insofar as the CCP provide prohibition on all corporations making Contributions, while the OEC imposes prohibition on all natural or juridical percons @ Under specie categories. The SEC explained that Section 95 of the OFC should be appreciated as an amplification of the absolute prohibtion Contained inthe CCP and is actualy ilustrative of Some specific circumstances ofthe evil sought to be avoided in both laws (SEC Opinion No. 15-08). 5. Renunciation of Share of Surviving Spouse Renunciation by the surviving spouse of his/her share in the conjugal partnership or absolute community after the dissolution of the marriage in favor of the heirs of the deceased spouse or any ‘other person is subject to donor's tax (R.R. No. 2- 2003, Sec. 11). Illustration: In the settlement of the estate of Mr. Barbera who died intestate, his wife renounced hor inheritance and her share of the conjugal property in favor of their children, The BIR. determined that there was a taxable gift and thus, 162 | 2018 SAN BEDA CENTRALIZED BAR OPERATIONS, assessed Mrs. Barbera as a donor. Was the BIR correct? ANS: The BIR is correct that there was a taxable gift but only insofar as. the renunciation of the share of the wife in the conjugal property is, concerned. This is a transfer of property without consideration, which takes effect during the lifetime of the transferociwife, and it thus qualifies, as a taxable gift (R.R. No. 2-2003). But the renunciation of the wife's share in the inheritance from her deceased husband is not a taxable gift, considering that the property is automatically transferred to the other heirs. by ‘operation of law due to her repudiation of her inheritance (BIR Ruling No. DA-333-07; MAMALATEO, supra at 389). Renunciation of Inheritance to aCo-Heir ‘A general renunciation of inheritance in favor of a not a donation for the purposes of specifically and categorically fed heir/s to the exclusion or the other co-heirs in the le. The same becomes the ‘co-heir and treated as an additional R. No. 2-2003, Sec. 11). ot a Co-Heir ange in the distribution of the estate $-2-2003, Sec. 11), the sum received by the heir from the insurer, but in the total amount of premiums that have been Paid by the insured, provided th ‘a. All the benefits of which are payable to beneficiaries other than the insured's estate and the insured retains no power to change the beneficiaries; and b. Insured relinquishes his assignment, by designation of a new beneficiary, or ‘otherwise, every power retained by him in a previously issue policy. In this case, an additional gift results every time a premium is paid by the insurer. Remuneratory Donations ‘Aremuneratory donation is one where the donee gives something to reward past or future services. or because of future charges or burdens, when the value of said services, burdens or charges is less. than the value of the donation (De Luna v. Abrigo, GR. No, L-67455, January 18, 1990).TRANSFER TAX A MEMORY AID 2018 Remuneratory donations shall be governed by the provisions on donation as regards that portion Which exceeds the value of the burden imposed (CIVIL CODE, Art. 782). Requisites: (TMD) 4. Apperson gives another a Thing or right; 2. On account of the latter's Merits or of services rendered by him to the donor; and 3. The giving does not constitute a Demandable debt, or when the gift imposes upon the donee a burden which is less than the value of the thing given (CIVIL CODE, Art. 726). 10. Gratuitous Donations to Associations Gifts, donations, and other contributions received by Homeowners’ Associations are subject to the payment of donor's tax considering that gifts to Associations are not qualified for exemption under Section 101 (A) (3) of the NIRC (R.M.C. No. 53- 2013). ‘Onerous Donations. “Jy Itis one which is subject to BUN future services equal (or moreF4 of the thing donated (De Luna v= 1-87455, January 18, 1990). Donations with an onerous governed by the rules on remuneratory donations as regar which exceeds the value of the but (CIVIL CODE, Art. 733). Donation with onerous cause 's SAK ee tere entrecs, Teckel the cont sey eter erie ater to amounts ere nthe concent of fee pric ip exchange for tho’ porormonce oka service, use of properties or delivery of an object (R.M.C. No. 53-2013). Onerous Donation, or Donation in Exchange for Goods or Services, or Use or Lease of Properties, is not subject to Donor's Tax Contributions to associations In exchange for goods, services and use of properties constitute ‘3s. other assessments/charges from activity In exchange for the performance of a service, use of properties or delivery of an object. AS such, these fees are income on the part of the associations that are subject to income tax as well as to VAT (6). llustration: ABC Homeowner's Association is collecting association dues and other charges from its members. Likewise, it is accepting donations from non-members in exchange for stickers for the right of way in their subdivision toad or toll fees for the maintenance of the road. In this case, association dues, membership fees and other assessments/charges collected from the members and the donations from non- members are subject to income tax, and VAT or percentage tax, as the case may be. Transfers Which May Be Considered As Donation 1. Transfer for Less than Adequate and Full Consideration General Rule: If the property transferred is for less than adequate and full consideration in money or money's worth, the amount by which the FMV exceeds the consideration shall be deemed ‘a gift and be included in computing the amount of gifts made during the year (NIRC, Sec. 100), Reason: The NIRC considers the fransfer as a since what motivated the transferor in ing the property is his generosity. In por intended a donation but opted fie property for inadequate ing donor's tax. sideration is fictitious, the entire E wiere property transferred is real property Jed jp the Philippines considered as capital t, tHE donor's tax is not applicable but the ital Gains Tax of six percent (6%) of the gift value or gross seling price, whichever ASABABAN, supra at 154), jveness of Indebtedness ‘f'the creditor condones the indebtedness of the ~> debtor the following rules will apply: a. On account of debtor's services to the creditor, the same is taxable income to the debtor, b. If no services were rendered but the creditor simply condones the debt, itis taxable gift and. not the taxable income; and c. If a corporation forgives a stockholder’s debt, the transaction has the effect of the payment of dividend (1 DE LEON, supra at 804). Mlustration: Creditors A, B and C condoned the debt ‘of Company X pursuant to a court approved restructuring. Are the creditors liable for donor's tax? NO. The transaction is not subject to donor's tax ssince the condonation was not implemented with a donative intent but only for business consideration The restructuring was not a result of the mutual agreement of the debtors and creditors. It was through court action that the debt rehabilitation plan 2018 SAN BEDA CENTRALIZED BAR OPERATIONS | 163,TRANSFER TAX SAN BEDA MEMORY AID 2018 was approved and implemented (BIR Ruling No. DA Note: Consequently, donations made by 028-2005, January 24, 2005). . corporations and other juridical entities are donations to strangers. Hence, itis subject to 30% Net Gifts EXEMPT DONATIONS ‘The net economic benefit from the transfer that accrues to the donee (R.R. No. 2-2003, Sec. 11) A. Gifts Made by a Resident: (NIRC, Sec. 101(4)) Dowries Accordingly, if a mortgaged property is transferred as ‘a gift, but imposing upon the donee the obligation to Requisites: pay the mortgage liability, then the net gift is 2. The gift was made on account of marriage; ‘measured by deducting from the FMV of the property b. Made before, during, or within one year after the amount of morigage assumed (Id). the celebration of marriage; c. By parents to each of their legitimate, SCHEDULE OF DONOR’S TAX RATE recognized natural, or adopted children; and 1. Graduated rates ~ In case of donation made to a 4. To the extent of the first 10,000 for each donee who is NOT a stranger, if the total net gifts donor spouse. . made during the calendar year is: i Each spouse is considered a donor of his ie property and therefore, each claim a separate exemption in ny Of the Cremer En ee ae Ty (100,000, is, G.R. No. L-6949, November 19, [100,000 [200,000 C '200,000 {500.000 {500,000 |t milion | {million [3 milion 3 million [5 milion 5 million [10 million raufisnt or any Entity Created by any of [Aaepcos which ts Not Conducted for “40 any Political Subdivision of the 70 milion 7,904.00 15% Ut pea ‘nment re eceeay #8 ym aa (NIRE, Seo. 99(A : v (Re, “ ie fable, Religious, Cultural or -Social fare Corporation, institution, Accredited 2. Fixed Rate - If the donee is a stranger the tax . payable by the donor shall be 30% of na Government’ Organization —_or (NIC, See. 99/6) * fhilanthropic Organization or Research SS Institution 2 Apes Requisites: (ANT-D-PAN) ‘8. A person’ who is not a brother or sister (whether fequisites: (ANT-D- by whole or half-blood), spouse, ancestor, and ‘Not more than 30% of the said gift should be lineal descendants; and sed for Administrative purpos: ». A person who is not a relative by consanguinity b. The donee must be a Non-stock, non-profit in the collateral line within the fourth degree of ‘organization or institution; relationship (1). cc. The donee organization or institution should be governed by Trustees who do not receive Note: A logally adopted child is entitled to all the any compensation; rights and obligations provided by law to legitimate 46. The said donee should not be authorized to children. Hence, donation to him is not considered receive Dividends; 2s donation made to stranger (RR. No. 2-2003, @. Said donee devotes all of its income to the Sec. 10(6)) accomplishment and promotion of | its Purposes enumerated in its Articles of jonation is considered m: ranger Incorporation; clay oel arias edd ae {. The NGO must be Accredited by Philippine 1 Between business organizations; or Council for NGO Certification; and 2. Between an individual and’ a business 4. The donor engaged in business. shall give ‘organization (Id). [Notice of donation on every donation worth at least 50,000 to the RDO which has 164 | 2016 SAN BEDA CENTRALIZED BAR OPERATIONS,TRANSFER TAX N BEDA MEM jurisdiction over his place of business within |. Philippine Investors Commission (R.A. No. thirty (30) days after receipt of the qualified 3850), donee's institution's duly issued Certificate of 'm. Philippine Normal University (R.A. No. 9647); Donation (RR, No, 2-2003, Sec. 13(C)) 1. Philippine Red Cross (R.A. No. 10072); ©. Philippine-American Cultural Foundation (PD. Note: Donation of ordinary assets to charitable 3062): institutions is exempt from donor's tax provided p. Ramon Magsaysay Award Foundation (R.A. the abovementioned requisites are complied with 3676); (BIR Ruling No. 97-2013, March 20, 2013) 4. Rural Farm School (R.A. No. 10678). , Task Force on Human Settlements (E.O. 419): If the donor is VAT-registered person and the s. Tubbataha Reefs Natural Park (RA. No. donation involves ordinary assets, the donation is 10067): and subject to VAT, the same being a transaction t. University of the Philippines (R.A. No. 9500). deemed sale (Id) B. Gifts Made by Non-Residents Allens: (NIRC, Athlete's Prizes and Award Sec. 101(8) 1 Gits made to oF for the use of the National Requisites: Government or any enity created by any of Is a. In tocal and international sports tournaments lxgoncies which is not conducted for profit orto any and competitions Doltical subdivision ofthe said Government: and b. Held in the Phiippines or abroad; and 2. Git in favor of an educational andlor charitable, ©. “Sanctioned, by thet respective J, cultural or social welfare corporation, Sports associations (FAN. 7549) foundation, trust. or phitanthrople Not! "National Sper Restor tion. apetesearch institution of organ those duly accredted by the pote BED ion, proviig however, that not mare than 30% Committee (RA. No. 7549, Sek GE OF sae jits?’shall be used by such donee for Encumbrances on the Prop. Assumed by the Donee mortgage. The value of the mor hy Y is exempted from donors deducted from the FMV of the-prof at the net gift subject to donor's tax Donations made to the following ‘exempted under special laws: - : : ee = se Aquacuture. Department of the Southadst& Cumulative Method — when the donor makes tw: ‘6F more donations within the same calendar year, it eee aeeeen eeeee create cans ae i required tha the Said donations be included inthe b. Aurora Pacific Economic Zone and Freeport am liR lc eatin ‘Authority (R.A. No. 10083); . Development Academy of the Philip (PD. 208); Note: This is applicable only if the donation is made in favor of persons who are not strangers to the 4. Girl Scouts of the Philippines (RA. No. SOF 10073); Mlustration: €e. Integrated Bar of the Philippines (PD. 181); Dinaraaineie as f lntrnatonal Rlee Researen Insttute (PO. Tso" 2g02"” 2,000,000 March 30, 2002 = 1,000,000 9: National Commission for Cure and ne Arts RO og = "500'000 h. National Social Action Council (PD. 294); i. National Water Quality Management Fund (RA. No. 9275); People's Survival Fund (R.A. No. 10174); People's Television Network, Incorporated ‘Solution/Computation: Coe Cee i eC aed een tax (RA. No. 10390): January 30, 2002 12,000,000 | 124,000" "44,000 + (P1,000,0000 x 8%) 6 SAN BEDA CENTRALIZED BAR OPERATIONS | 165,TRANSFER TAX AN BEDA MEMORY AID 2018 Ronny Pee ren erator panied reeks March 30, 2002 I ‘Add: January 30, 7 T ae 000,000 | 2002 _ Ja — Total 3,000,000 | 204,000 Less: Tax duel paid 1 ‘on January 124,000 donation a | ‘Tax DuePayable on the ata | March Donation "=P44,000 + (P2,000,000 x 8%) Rey Peers | August 15, 2002 ‘Less: Tax duefpaid | on January and j March donation : Tax Due/Payable on the q August Donation 8 ==59204,000 +(P 500,000 x 10%) (RR. No. 2-2003, Sec. 12) Will it not amount to double taxatia donor's tax? yy NO. There is no double taxation. “Uk cumulative method, the tax paid for the-P¥eldOy methods will be considered as tax credit ‘succeeding donations. B. Splitting Method — Since the computation of the donor's tax is on a cumulative basis over a period of fone: calendar year (R.R. No. 2-2003, Sec. 12), spreading the donation or gift over numerous calendar years allows an availment of the exemption from donor's taxes or lower dono’s taxes (3 DOMONDON, supra at 183). Mlustration: Donor A wants to donate 200,000 to his son B on December 2013. Instead of donating the whole 200,000 on December 2013, A can opt to donate 100,000 on December 2013 and another 100,000 on January 2014 to avoid paying donor's. tax which would be in the amount of 2,000. This is, so because donor's tax is computed on'the basis of the total net gifts made during the calendar year. 16812 1B SAN BEDA CENTRALIZED BAR OPERATIONS DONOR’S TAX CREDIT Donor's Tax Credit ‘The donor's tax imposed upon a citizen or resident at the time of the donation shall be credited with the amount of any donor's tax, of any character and description, imposed by the authority of a foreign country (NIRC, See. 101(C)(1)). Limitations to the Tax Credit: 1, Per Country Basis - The amount of credit shall ot exceed the same proportion of the tax against such credit is taken, which the net gifts situated within such country taxable under donor's tax bears to entire net gifts; and : 2. Overall Basis - The amount of the tax credit shall ot exceed the same proportion of the tax against such credit is taken, which the donor's net gifts situated outside the Philippines taxable under 's tax bears tohis entire net gifts (NIRC, Sec. tis allowed only for residents and filppines forthe donor's taxes they sountry (NIRC, Sec. 101). following were donations made by ® 300,000 200,000 'P7,000,000 | Foreign donor's tax paid: ‘To Foreign Country A. P_ 10,600) ‘To Foreign Country B 140,000 Total ® 20,600 ‘Computation of Donor's Tax in the Philippines: Tax on 1,000,000 44,000 Less: Tax credits — allowed 19,400 Donor's tax stil due P_ 24,600 Computation of Allowable Tax Credit: Limit 4: Per Country Basis [Country A: (44,000 x P300,000/P 1,000,000) P13,200 ‘Actual 10,600 ‘Choose tower amount 10,600 Country B: (44,000 x ®200,000/1,000,000) P 8,800 ‘Actual 10,000, Choose lower amount _—_— 8,800