TRAIN LAW LECTURE (Atty Virginia Lim)

- TRAIN tried its best to adjust inequities in taxation.

Government needs funds for its BUILD BUILD BUILD program, and the TRAIN law will provide for that.

TRAIN law has 87 sections. 3 sections totally removed in the NIRC. 73 sections AMENDED, added 8
subsections.

VAT law – 48 exemptions scattered are NOW TAXABLE.

SALIENT FEATURES:

Atty Lim: Vendors in the Palengke feel that TRAIN law only added to their expenses.

Cosmetic Procedures are now taxed, like breast lift procedures and whatnot.

TRAIN taxed gasoline products, even if it is already under VAT.

4 business tax today: VAT, PT, EXT, and DST. INDIRECT taxes that are advanced to the businessman but
passed on to consumers. When passed to consumers, it becomes part of the purchase price.

P250k/year salary = exempt from income tax. Also exempt from withholding tax.

5 kinds of WHT:

1. Creditable Withholding Tax – today you received money, because of its size, it will be applied
income tax.
a. CLCL technique (fruit of C apital, fruit of L abor – income tax applied) (Fruit of C apital
and L abor combined – income tax applied)
b. Sum of money acquired through CLCL – income tax payable next year (april 15 2019)
BUT if government employee, government CANNOT wait, government withholds
amount. A portion of the income is ADVANCED as WHT, ratio is LIFEBLOOD DOCTRINE.
c. Withholding tax is an advancement of payment of tax to be paid next year.
d. REMEMBER: no income tax, no withholding tax.
e. IF salary greater than P250k/year – follow the TRAIN tax rates. 20-25-30-32-35 percent
as rates. Good only for 2022. 2023 – 15-20-25-30-35 (lower in effect)

BUSINESSMAN/PROFESSIONALS

Compensation income earner – NO MORE personal exemption of P50k in the previous NIRC.

NO MORE additional exemption of P25k x 4 kids.

NO MORE health and hospitalization premium allowances P2.4k

In effect, the taxes you pay are higher.

BUSINESS/PROFESSIONAL
If Sole Proprietor – own business, own firm, own law firm (own law firm – selling business) Pay business
taxes in addition to income taxes.

IF higher than P3M sold services for the whole year = 12% VAT

If lower than P3M = 3% PT

IF there was no income/profit, income tax may not be paid BUT NOT business taxes. Business tax and
income tax are not the same.

Taxes enumerated under the NIRC are INTERNAL REVENUE. Self-assessing taxes are self-computed
taxes. Must be computed in an official Tax Return document. TRAIN = 4 copies of tax return as amended.

Tax Return Document is a sensitive document. Any errors incurred can be sanctioned by BIR. Nothing
prohibits a taxpayer to have his taxes computed by bookkeepers, but relationship is that of agency. Due
diligence dictates that the bookkeeper explain his methods to the taxpayer so that the TP can explain to
the BIR his taxes as need be.

TAX REMEDIES – can be done within 3 years. TR can be amended within 3 years provided there is no
investigation by BIR yet. Once investigation is done by BIR, TR cannot be modified anymore. SC said TRs
are self-serving docs. Government is NOT BOUND by TRs. CIR is authorized to prepare a TR on behalf of
the TP if such is required, or even amend a TR for a TP.

BEST EVIDENCE OBTAINABLE RULE – whatever data placed in the TR must be supported by valid legal
and acceptable documents and cannot be based on mere hearsay. Only used when amending/preparing
TR.

SC said in a recent case: submitting a TR to BIR will subject the TR to assessment within 3 years by the
BIR. Within 3 years, no Notice of Assessment filed to TP – TP is SAFE. BIR slept on its right once
prescriptive period has expired.

TP received assessment from BIR within 3 years. TP asked for postponement, BIR accepted even if
multiple extensions. IF assessment is NOT contested on time, assessment becomes UNCONTESTED
ASSESSMENT, in effect it ripens into a COLLECTION CASE. Validity cannot be assailed and only the
collection can be assailed.

After dilatory tactics of TP was terminated by BIR, BIR now filed judicial claim of collection. TP did not
answer, filed MD contending government’s right to collect has PRESCRIBED. SC held that TP was
CORRECT. When TP is not cooperating, BIR should have filed a TR on his behalf and not entertain
dilatory tactics. Best evidence obtainable rule should have been applied.

Lifeblood Doctrine vs Prescriptive period – SC held Prescriptive Period PREVAILS when government uses
LD to collect taxes beyond the prescriptive period.

TR – BIR finds it difficult to file perjury cases against TP. New requirement: TR must be filed with SMR
(Statement of Management Responsibility) SMR – sworn document by TP himself stating that all data
filed are true and correct. Only TP signs such personally. If violated, TP can be imprisoned. If corporate,
President and Finance Officer should sign.

Income Tax, Business Tax (National and Local)

If sari-sari store and sales never exceeded P250k – no income and BIR tax, but there is BUSINESS tax.

Higher than P250k, lesser than P3M – sales for a year – choose between 2 formulas (alternative taxation
– TP is allowed to choose)

1. 8% flat rate – Gross Sales (GS) and Gross Receipts (GR) – P2.5M example – less P250k since first
P250k is exempt from tax – P2.25M x 8% = whatever amount is subject to income tax, exempt
from percentage tax.
a. Expenses here CANNOT be deducted, some businessmen might not like this.
2. Compute GS/GR, Remove first P250k, deduct expenses, then whatever amount, use TRAIN rate
(20-35%). If less P3M, 3% percentage tax multiplied to GS/GR amount.
a. If higher than P3M, 12% VAT applied to GS/GR amount.

MIXED INCOME EARNERS

Business/Profession/Compensation Income (combination of 3) (no first P250k exempt, only available to

sole proprietors and professionals who are on their own)

2 formulas:

1. Higher than P250k, Lesser than P3M, use 8% flat rate and compute separately to C and B/P.
2. Get the total amount of B/P/C income, deduct expenses, then apply TRAIN schedule.

If you win prizes, if amount is greater than P10k and won within PH, prize is subject to 20% FWT.

Once FWT applies, NO INCOME TAX applied.

Two exemptions: If won within Lotto/sweepstakes, EXEMPT from TAXES.

Under TRAIN: Taxable now as long as amount is more than P10k, even if sweepstakes/lotto.

What if US won lotto/sweepstakes? NO, FWT is applied only to PH.

US won lotto/sweepstakes, Filipino? Subject to Income Tax.

PAGCOR winnings = not subject to TRAIN tax, only lotto/sweepstakes. PAGCOR winnings still exempt
under PAGCOR law.

Are GOCCs taxable? GOCCs – Government in Business. GOCCs are TAXABLE. The only time they are
exempt is when the law creating them provides for their exemption. Tax exemption is NOT PRESUMED.
It must be clearly stated.

Under NIRC, GSIS, SSS, PAGCOR, Phil Sweepstakes, PHIC are exempt.

PAGCOR is now subject to Income Tax but continues exemption towards all other IR taxes. (2009)

PCSO is now an ordinary TP.

All Local Water Districts are now exempt from taxes under TRAIN.
If you are caught paying taxes that is computed wrong, missing amount is called DEFICIENCY TAX.

If no payment at all, DELINQUENCY TAX.

Penalties are SURCHARGE, Other penalties, and imprisonment since violation of tax code is a criminal
offense.

BIR will be computing interest. TRAIN law now has new interest, TWICE the legal interest, 12%. Only
applies if you are caught this year. Previous years still have 20% interest.

BIR computes interest, when is reckoning point? SC – if it is a deficiency tax, RP will be FROM DEMAND.
If delinquent tax, RP is from DUE DATE. Interest is computed either from payment or from due date,
whichever is later under TRAIN.

Under TRAIN law, deficiency interest and delinquency interest CANNOT BE IMPOSED at the same time.

TRANSFER TAXES

Corporate Income Tax Return (CITR) – 1-3, 4-6, 7-9, 10-12

Final Accounting Return

What if there was OVERPAYMENT?

*Partial Payments NOT SUBJECT to TAX REFUND.

Corrections can be made during the quarterly return

The 2-year period commences to run during the date the FAR was submitted.

3 exemptees traditional:

R E C (Religious, Educational, Charitable) – tax exemption by tradition. Exemption even enshrined in

Consti.

REC exempt from Property Tax (the property is exempt, not church nor priest)

a. They must own it

b. Must be used in line with their objectives (A, D, E)

REC exempt from Income Tax

 Government exercises GOVERNMENTAL FUNCTION – delivery of basic services to PPL (Principal

of Equity as legal basis)
o Earns Money – EXEMPT FROM TAX
  Government exercises PROPRIETARY FUNCTION
o Earns Money – TAXABLE
o When government BUYS or LEASES - TAXABLE

RELIGIOUS ORG earning money (tax exempt: DOCTRINE OF INCIDENTAL TAX EXEMPTION as legal basis)

Money came from various sources. Money is pumped back to RELIGIOUS ORG. TAX EXEMPT? NO!
Taxable since money DID NOT COME FROM RELIGIOUS ACTIVITY. Section 30 NIRC. YMCA case, Lung
Center case.

EDUCATION AND HOSPITAL must be Public School/Non Profit/Non Stock/Sect to be TAX EXEMPT.
Private School TAXABLE.

School has a canteen that it rents out to a concessionaire. Parking fee also collected. Income from non-
educational services. Income NOT TAXABLE since consti provides ALL income of educational institution
even from non-educ is non-taxable.

St. Luke Case = one of the most expensive hospital in Asia. Non-profit, non-stock. Owned by Anglican
Church. BIR taxed, providing services independent of hospital services. SC said TAXABLE. All services are
PROFIT-ORIENTED.

PRIVATE SCHOOLS AND HOSPITALS, how taxed =

PS = should maintain books for tuition and allied services. If tuition income is higher than allied services,
tax at 10% only. If allied is bigger, taxed as normal corp.

PH = One book for Med Hosp, another for Allied Services. If Med Income is higher than AS, 10% tax. If AS
higher than Med INc, Normal Corp tax at 30%. PREDOMINANT TEST RULE.

TRAIN – changed Stock Transfer Tax.

Buying shares of stocks, investing money in a corp. No tax implication, only broker’s fee or finder’s fee
being paid.

2 stocks = Listed shares in the stock market, unlisted shares.

Listed shares = When stocks are sold, even if for a loss, tax is paid.

LISTED

BPI shares – Bought 2014, now 2018. Bought for 300,000 now at 520,000. Are the increases part of IR
taxes? NO. Gain of amount is mere paper gain, not used yet nor enjoyed.

Case of China Banking = CB kept on buying shares. BIR asked why shares that increased in value was not
declared. SC – mere increase in value of shares are mere PAPER gain. No benefit yet.

If shares was sold, profit of 220k – pay Stock Transfer Tax (0.5% of gross selling price). 0.5% of P220k is
P2600. STT due.
Even if there was a loss, still subject to STT. If sold for 180k, compute for its 0.5% STT.

UNLISTED

Family Corp.

Example: W Corp that is an FC. 2011 invested 800k on FC shares. 2018 asked for value on corp secretary.
2018 now is P1.2M. Profit of P400k if sold. Tax is 5% on the first 100k = P5000. 10% of 300k = P30000.
Total Tax = P35000.

Tax is on GAIN only.

TRAIN LAW Amended: Listed shares are now 0.6%, Unlisted shares are now 15% on a flat rate on the
gain amount.

ESTATE TAX

Tax Code – 5 8 11 15 20

TRAIN – 6% for this year only. But is this not violative since Consti prescribes a PROGRESSIVE system of
taxation? One rate only, should be multiple rates? SC said NO VIOLATION. Kapatiran ng Manggagawa
Case. SC rationated that CONGRESS should “EVOLVE” under the Consti. Evolve, meaning SUGGESTIVE
and not MANDATORY.

When IR taxes are not being paid, violation of the tax code is NOT a continuing offense. Separate per
year, there is a computation of penalties.

RPT not being paid. LG can padlock a store for non-payment of business permit. Can seize all goods and
can put in jail. BIR cannot padlock, EXCEPT violation of VAT law (non-issuance of receipts).

Tax was not paid for the last 10 years to the LGU – Maximum 72% interest. BIR has no limit. The right of
the BIR to assess and collect tax only is subject to prescription only upon the filing of a TR! No TR, BIR
can still assess and collect indefinitely even after 50 years.

No estate tax payment, no partition!

Payment of ET under TRAIN = within 1 year from death.

What if NO MONEY LEFT or is NOT ENOUGH to pay ET? May ask for one year extension.

What justifies TAX COLLECTION? P P R I C (peace and order, protection, resources, conducive
environment)

Standard deduction now at P5M. IF decedent is non-resident, P500k.

Under TRAIN, Family Home now at P10M.

Funeral expenses, medical expenses are deductible under TC, and others. Expenses for probate
deductible under TC.
Under TRAIN, no deductible FE, ME, Probate Expenses.

Under TRAIN, you can withdraw any amount from decedent’s account as long as you pay 6% FWT on the
amount withdrawn.

Under TRAIN, if peso value that was left by decedent is less than P5M, tax-exempt.

Even if there is no tax payable, Estate Tax Return still must be filed. Annual Information Return. RETURN
IS MANDATORY!

Donor’s tax

TC – donation gift given one time is subject to DT provided value is more than P100k. DT has two rates,
2-15% for donating properties to relatives within 4 th civil degree. Another rate is for strangers.

Give gift to candidate, P150k , political candidates, DT-EXEMPT.

If politician received donation and amount was not used, unused campaign funds are subject to INCOME
TAX. No DT, but there is 5% WT.

TRAIN LAW – Donations are now subject to DST. DST is at 6% now.

Dowry deduction removed in TRAIN.

BIR should send to TP an NIC (notice of informal conference). TRAIN made NIC mandatory.