Taxation Law Review Notes: I. Basic Principles of Taxation A. Taxation As An Inherent Power of The State

Taxation Law Review
TAXATION LAW REVIEW NOTES
I. BASIC PRINCIPLES OF TAXATION
A. TAXATION AS AN INHERENT POWER OF THE STATE
Power to tax is inherent in sovereignty

 the moment the State exists, the power to tax automatically exists
 enforceable even without any delegation by the Constitution or legislation from Congress
 LGUs have no inherent power to tax; but expressly granted by the Constitution or legislation
Lifeblood Theory (CIR v Algue)

 Tax is necessary to meet the expenses of government without which the latter cannot
operate
 Every person must contribute his share in the running of the government
B. PHASES AND SCOPE OF TAXATION
Levy – where Congress enacts a statute to impose taxes

Collection
Subject Matter – refers to persons, things, transaction, privilege, etc.
C. INHERENT LIMITATIONS
1. Taxation should be for public use

a. Public welfare should be the penultimate objective.
b. Taxation may be used to implement the State’s police power.
2. Taxation is inherently legislative.
3. The Government is self-explanatory.
a. LGUs are expressly prohibited from levying tax from the NG
b. Ng may tax GOCCs, agencies and instrumentalities
4. Territoriality
a. Taxing authority cannot impose taxes on subjects beyond its territorial jurisdiction.
b. It may determine the tax situs.
D. CONSTITUTIONAL LIMITATIONS
Constitution is not the source of the taxing power. It simply defines and delimits the power.
1. Due Process Clause (Section 1, Art. III)

 Enforced contribution from the people cannot be made without a law authorizing the same
Substantive Due Process

 Requires that the tax statute must be within the constitutional authority of Congress and that
it must be fair, just and reasonable.
Procedural Due Process

 Requires notice and hearing, or at least an opportunity to be heard.
2. Equal Protection Clause (Section 1, Art. III)
Prepared by: Michael Gines Munsayac

Taxation Law Review
 Means that taxpayers of the same footing should be treated alike, both as to privileges
conferred as well as on obligations imposed.
Violations (Villegas v Hsiu Chiong Tsai Poi)

 When classification is made where there should be none
 When no classification is called for
Valid Classification (Pp v Cayat)

 There must be substantial distinctions that make real differences.
 These must be germane and relevant to the purpose of law.
 The distinction must not only be applicable to present but also to future conditions.
 The distinction must apply to persons, things and transactions belonging to the same class.
3. Freedom of Religion (Section 5, Art. III)
Non Establishment Clause

 Covers the prohibition to establish a national or official religion since in that case, there will
be an appropriation from taxes paid by the people.
Free Exercise Clause

 This is the basis of tax-exemption granted to religious institutions.
4. Non-Impairment of Contracts (Section 10, Art. III)
Applications
 People’s right and freedom to contract
 Sanctity of contracts
 Does not apply to franchises
 Not applicable to police power and eminent domain
5. Non-imprisonment for Non-Payment of Tax (Section 20, Art. III)
Poll tax – tax imposed on persons without any qualification (e.g. CTC); payment is not
mandatory (merely permissive)
E. DOCTRINE OF EQUITABLE RECOUPMENT VS. DOCTRINE OF SET-OFF
Doctrine of Equitable Recoupment

 Refers to a case where the taxpayer has a claim for refund but he was not able to file a
written claim due to the lapse of the prescription period within which to make a refund.
 The taxpayer is allowed to credit such refund to his existing tax liability.
 Allowed only in common law countries, not in the Philippines
Doctrine of Set-off or Compensation

 Applies when the government and taxpayer are mutually debtors and creditors of each other.
 Also not allowed in the Philippines since taxes are not in the nature of contracts between
parties.
 Taxes grow out of duty to, and are the positive acts of the government to the making and
enforcing of which, the personal consent of the individual taxpayer is not required. (Republic
v. Mabulao)
F. DOUBLE TAXATION

Taxation Law Review
Double Taxation
 The imposition of the same taxing body of two taxes on what is essentially the same thing
 The imposition of two taxes on the same property during the same period and for the same
taxing purpose
 Allowed in the Philippines because there is no prohibition in the Constitution or any statute
When not allowed? Elements:

 The taxes are levied by the same taxing authority
 Same subject matter
 Same taxing period
 Same purpose
International Juridical Double Taxation

 The imposition of comparable taxes in 2 or more States on the same taxpayer in respect of
the same subject matter and for identical periods.
 Can be eliminated by 2 contracting States.
 Should be eliminated in order to encourage foreign investors to invest in the Philippines
Most Favored Nation Clause

 Grants the contracting party terms and condition not less favorable than those granted to the
“most favored” among the other contracting parties.
 Intended to establish the principle of equality of international treatment by providing the
citizens of the contracting parties privileges accorded by either party to those of the MFN
Methods to minimize burden

 By granting tax exemptions
 By giving tax credits
 By reducing the rate of tax
G. EXEMPTION FROM REAL ESTATE TAX
Note: The properties must be ACTUALLY, DIRECTLY and EXCLUSIVELY used for religious,
educational and charitable purposes to be exempt from taxation. (Section 28[3], Art. VI).
II. INCOME TAXATION (RA 8242 Tax Reform Act of 1997)
A. INDIVIDUALS
Classification of taxpayers
1. Resident Citizen (RC)
a. Citizen of the Philippines residing therein
b. Citizen residing outside the Philippines without the intention of residing thereat
permanently
c. Citizen who did not manifest to the total satisfaction of the Commissioner the fact of
his physical presence abroad with a definite intention to reside therein perm.
2. Non-Resident Citizen (NRC)
a. Citizen who established to the satisfaction of the Commissioner the fact of his
physical presence abroad with a definite intention to reside therein.

Taxation Law Review
b. Citizen who leaves the Philippines during the taxable year to reside abroad as
immigrants.
3. Overseas Contract Worker (OCW)
a. Covers only those individuals with a working contract abroad
b. TNTs are not considered OCWs but are usually classified as RCs
4. Resident Alien (RA)
a. An individual residing in the Philippines who is not a citizen thereof
b. Intention to reside in the Philippines is not necessary
5. Non-resident Alien Engaged in Trade or Business in the Philippines (NRA ETB)
a. Engaged in retail trade or business
b. Engaged in the exercise of profession therein
c. Staying for an aggregate period of more than 180 days for the calendar year
6. Non-resident Alien Not Engaged in Trade of Business in the Phils. (NRA NETB)
a. NRAs not engaged in business but deriving income in the country
7. Aliens Employed in MNCs, OBUs, & Petroleum Service Contractors
B. CORPORATIONS
Definition: NIRC defines a corporation as including partnerships, no matter how created or

organized, joint stock companies, joint accounts, associations, insurance companies but does not
include general professional partnerships and JV formed for the purpose of undertaking construction
projects or engaging in petroleum, coal, geothermal and other energy operations pursuant to an
agreement under a service contract with the government.
Classification of Corporations
1. Domestic Corporations
2. Resident Foreign Corporations ETB
3. Non-Resident Foreign Corporations NETB
III. KINDS OF INCOME TAXES
Net Income Tax; Gross Income Tax; Final Income Tax; MCIT, IAET; Optional Corporate Income Tax
A. NET INCOME TAX
Taxable Income: Gross Income

Less: Deductions (Personal & Additional)
Net Income
Multiplied by: Tax Rate
Net Income Tax Payable
Less: Tax Credits
Net Income Tax Due
Note: This kind of income tax allows deduction, personal as well as additional exemptions
& tax credits.
The determination of actual gain or loss is material since the tax shall be based on NET
The rate of this tax is 32% for individual & 35% for corporate taxpayers.

Taxation Law Review
B. GROSS INCOME TAX
Unlike the net income tax, the gross income tax does not allow deductions, hence he formula is:
Gross Income X Tax Rate = Tax Due
Notes: The application of this tax BARS the application of the income tax.
The gross income tax is always subject to the Final WHT.
C. FINAL INCOME TAX
This is the only income tax applicable to all types of taxpayers without distinctions. The formula is:
Gross Income X Tax Rate = Tax Due
Notes: Under final income tax, the rate is multiplied to each income individually as each income may
have a different rate.
This tax does not allow deductions.
The determination of gain or loss is immaterial since the basis of taxation is the GROSS,
Hence actual gain or loss does not matter.
An income which is subject to final income tax is no longer subject to net income tax!
Withholding agent is responsible in filing the income tax returns.
Applicable only to passive income and income from sources within the Phils.
If the taxpayer fails to pay, the withholding agent shall be liable!!!
D. MINIMUM CORPORATE INCOME TAX – 2% on Gross Income
The 2% MCIT on gross income is imposed on corporations beginning the 4th year of the corporation.
The formula is:
Gross Income X 2% = MCIT
Pay the MCIT or the Net Income Tax, whichever is higher!

Rationale: To prevent corporations from claiming too many deductions.
E. IMPROPERLY ACCUMULATED EARNINGS TAX – 10% of Taxable Income
This tax is imposed on the improperly accumulated earnings by corporations.
Purpose: To discourage the practice of corporations of accumulating earnings

& profits in avoidance of the payment of taxes.
To avoid this: Distribute earnings among the shareholders.
F. OPTIONAL CORPORATE INCOME TAX – 15% on Gross Income
Corporations may opt to be taxed at 15% of their gross income in lieu of the Net Income Tax or the
MCIT. This may be imposed by the President upon the recommendation of the DOF.

Taxation Law Review
IV. SOURCES OF INCOME
What is the relevance in determining the sources?

Its relevance relates to the income tax liability of the taxpayers. RC and domestic corporations are
the only taxpayers liable for income derived from sources within and without the Philippines.
A. GROSS INCOME FROM SOURCES WITHIN THE PHILIPPINES. (Section 42[a])
1. Interest from sources within the Philippines

o Interests derived from sources within the Philippines
 Interest earned from domestic bank deposits
o Interests on bonds, notes or other interest-bearing obligations of residents, corporate
or otherwise.
 The determining factor is the residence of the obligor, whether individual or
corporation.
2. Dividends
o Any distribution made by a corporation to its shareholders out of its earnings or profits
and payable to its shareholders, whether in money or property.
o Dividends issued by foreign corporations are considered income from sources within
provided the 2 requisites are present:
 At Least 50% of its gross income is from sources within the Phils.
 Such gross income must be for the 3-year period ending with the close of the
taxable year.
3. Services
o This is the compensation for labor or personal services performed in the Phils.
o The determining factor is the place of performance. The place of payments is
IRRELEVANT!
4. Rentals and Royalties from property located in the Phils.

o Use of copyright, patent, design or model, plan, secret formula or process, goodwill,
trademark, trade brand or other like property or right in the Phils.
o Use of industrial, commercial or scientific equipment in the Phils.
o The supply of scientific, technical, industrial or commercial info.
o The supply of services by a non-resident person or his employee in connection with
the use of property or rights belonging to, or the installation or operation of any brand,
machinery or other apparatus purchased from such non-resident person.
o Technical advise, assistance or services rendered in connection with technical
management or administration of any scientific, industrial or commercial undertaking.
o The use or right to use motion picture films, films or video tapes for use or in
connection with TV, & tapes use in connection with radio broadcasting.
5. Sale of Real Property

o Gains, profits and income from sale of real property located in the Phils.
o Location of the property is the controlling factor to determine the source of the
income.
6. Sale of Personal Property

Taxation Law Review
B. GROSS INCOME FROM SOURCES WITHOUT THE PHILS.
Any income not falling under any of the 6 above is an income derived from sources outside the
Philippines.
C. INCOME FROM SOURCES PARTLY WITHIN & PARTLY WITHOUT THE PHILIPPINES
The taxable income is computed by first deducting the expenses, losses or other deductions
apportioned or allocated thereto and ratable part of any expense, loss or other deduction which
cannot definitely be allocated to some items or classes of gross income; and the portion of such
taxable income attributable to sources within the Phils.
Basic Formula: Gross Income Within

Gross Income World
= Rate X Expenses World
= Expenses to be allowed
To illustrate: Suppose the Gross Income Within is P10k; the Gross Income World is P100K; and the
Expenses-World is P50k, thus:
P10k_ = 10% X P50K = P5K.

P100k
In this illustration, only P5k should be allowed as deduction against the gross income derived in the
Phils.
D. SALE OF PERSONAL PROPERTY
Guidelines:
1. For those produced, in whole or in part, by the taxpayer within and sold without the
Philippines, or produced in whole or in part, by the taxpayer without and sold within the
Philippines – the income shall be treated as partly within and partly without from sources
within the Philippines and partly from sources without the Phils.
2. For those purchased within and sold without the Philippines, or for purchase of personal
property without and sold without – the gains, profits or income shall be treated as derived
entirely from sources within the country where the property is sold; EXCEPT – gains from the
sale of shares of stock in a domestic corporation shall be treated as derived entirely from
sources within the Phils., regardless of the place where the shares were sold.
V. CAPITAL GAINS AND LOSSES
What is a capital asset?
Capital assets are property held by the taxpayer, but does not include:
1. Stock in trade of the taxpayer / inventory on hand at the close of the taxable year
2. Property held primarily for sale to customers in the ordinary course of his business
3. Property used in the business, of a character which is subject to the allowance for
depreciation.

Taxation Law Review
4. Real property used in business of the taxpayer.
What is the relevance for the determination?

1. Holding period – percentage taken into account
2. Loss Limitation Rule – limitation on Capital Losses
3. Net Capital Loss Carry Over Rule
A. PERCENTAGE TAKEN INTO ACCOUNT
Holding period (percentage taken into account) is defined as the length of time or duration by which
an individual held the capital asset.
In sale of exchange of a capital asset, there are 2 percentages which should be taken into account
in recognizing the gain or loss from such sale or exchange:
1. 100% if the capital asset has been held for not more than 12 months (ST)
2. 50%, if held for more than 12 months (LT)
3. Capital Assets held by Corporation – not included
Sales not subject to the rule:

1. Sale or exchange of shares of stocks which is a capital asset.
2. Sale or exchange of real property held as a capital asset.
Notes: Capital gain is included in the gross income subject to net income tax.
A capital gain or loss is included in the gross income
B. LIMITATIONS ON CAPITAL LOSSES
Loss Limitation Rule provides that “losses from sales of exchanges of capital assets shall be allowed
only to the extent of the capital gains from such sale or exchange.”
A capital loss can only be deducted from capital gains but never from an ordinary gain, while an
ordinary loss may de deducted from both capital and ordinary gain. Applicable to individual and
corporations.
Rationale:
1. Ordinarily, a capital gain is included in the gross income. The items included in the gross
income are ordinary gains and losses – those related to the ordinary business.
2. With respect to capital losses, these are not related to the ordinary business of the taxpayer.
C. NET CAPITAL LOSS CARRY-OVER
A capital loss may only be deducted from a capital gain, if there is any. What then is the remedy of
the taxpayer where is capital loss but there is no capital gain?
Apply the NOLCO Rule.
NOLCO Rule:
 Any capital loss sustained by the taxpayer during a taxable year shall be treated in the
succeeding taxable year as a loss from sale or exchange of capital asset held for not more
than 12 months.
 Requisites

Taxation Law Review
o Amount of loss should not exceed net income for the taxable year when the loss was
incurred.
o There should be capital gain from which the carried over loss can be deducted
o Can only be availed by individuals!
D. GAINS AND LOSSES FROM SHORT SALES
Short Sale is defined as a sale where the seller is selling a property without distinction of what kind
of property he is selling, whether a share of stock or not. The seller is selling property which he is not
in his possession.
Any gains or losses are considered as capital gains or losses.
E. CAPITAL TO ORDINARY ASSET, VICE VERSA
Calasanz V CIR
 A conversion from capital to ordinary asset is allowed provided that it is:
o In furtherance of the taxpayer’s business
o Substantially improved or very actively sold or both.
RR 7-2003
 Properties classified as ordinary assets are automatically converted into capital assets upon
showing of proof that the same have not been used in business for more than 2 years prior to
the consummation of the taxable transactions involving said properties.
VI. TAX ON INDIVIDUALS
The RC is the only individual taxpayer who is liable for income derived from all sources, within and
without the Philippines.
A. RESIDENT CITIZEN, NON-RESIDENT CITIZEN, OCW AND SEAMEN AND RESIDENT ALIEN
1. Net Income Tax

a. Defined as the pertinent items of gross income less deductions and/or personal and
additional exemptions.
b. This is the only kind of income tax which admits of deductions, personal and
additional exemptions.
c. Married individuals shall compute separately their individual income tax. However,
this is applicable only for individuals earning purely compensation income.
d. Married individuals who do not derive income purely from compensation, shall file a
consolidated return to include income of both spouses, except where it is
impracticable.
e. RA 9504 exempts minimum wage earners from the payment of net income tax.
2. Final Income Tax ( for Passive income)

a. Interest, Royalties, Prizes and other Winning
i. Applicable tax is 20%
ii. Passive income should be derived from sources within the Philippines

Taxation Law Review
iii. FCDU deposits – apply 7.5%

iv. Long Term deposits or investments – exempt from final tax
 4 to < 5 years – 5%
 3 to < 4 years – 12%
 < 3 years – 20%
For prizes, before tax is imposed:

 Must be derived from sources within the Phils.
 Must be >P10k
 Must be pursuant to a promotion or contest
Prizes exempted from tax:

 Received primarily in recognition of religious, charitable, scientific, educational,
artistic, literary, or civic achievement
 The recipient was selected without any action on his part to enter the contest or
proceeding
 The recipient is not required to render substantial future services as a condition to
receiving the prize or award.
Winnings are subject to FWHT of 20% including winnings pursuant to gambling (except
PCSO).
b. Cash and/or Property Dividends

i. Only cash and property dividends are subject to 10% final income tax
ii. Stock dividends are not taxable since such dividends are only a transfer of the
surplus profit from the retained earnings to the authorized capital stock.
iii. Share of an individual in the distributable net income after tax of a partnership
of which he is a partner is subject to final income tax
c. Capital Gains from Sale of Shares of Stock not Traded in the Stock Exchange
i. The net capital gains from sale, barter, exchange or other disposition of
shares of stock in a domestic corporation not listed and traded is subject to a
final tax rate of 5% for the first P100k of the net capital gain; and 10% of the
net capital gain of any amount in > P100k.
ii. Elements required
1. Shares must be shares in a domestic corporation.
2. Shares are capital assets.
3. The shares are not listed and traded in the local bourse.
iii. For listed shares, the gains are not subject to income tax but subject to a
business tax (percentage tax) at the rate of ½ of 1% of the gross selling price.
d. Capital Gains from Sale of Real Property

i. A final income tax of 6% based on the gross selling price or FMV, whichever is
higher shall be imposed on CG provided:
1. the property sold is real property
2. located in the Philippines
3. classified as a capital asset
ii. Sale of a natural person’s principal residence maybe exempted from payment
of the 6% CGT when the proceeds of the sale are fully utilized in acquiring or
constructing a new principal residence within 18 months from the date of
notarization of the Deed of Sale.

Taxation Law Review
iii. Sale of mortgaged property – taxable only if the buyer is other than a financial
institution.
B. NON RESIDENT ALIEN ENGAGED IN TRADE OF BUSINESS IN THE PHILIPPINES
1. Net Income Tax

 An NRA ETB is subject to the net income tax.
 Liable only for income derived from sources within the Phils.
2. Final Income Tax

a. Cash and/or property dividends or share in the distributable net income of a
partnership (not general partnership), Interests, Royalties and Other winnings.
 20% final income tax levied on letter a.
 For prizes less than P10k, the applicable tax is the net income tax.
Prizes from PCSO and Lotto are exempt from income tax.
 Royalties for literary work – subject to tax rate of only 10%.
 Interest income from LT deposits and investments are exempt fro
final income tax.
b. Capital Gains
 Same as RA ETB in the Phils.
C. NON RESIDENT ALIENS NOT ENGAGED IN TRADE OR BUSINESS IN THE PHILS.
1. Net Income Tax

 NRA NETB shall be liable for the entire income he received from all sources
within the Philippines by way of the gross income tax.
 Tax rate is 25% on gross income
2. Final Income Tax

 Sale of shares of stock or sale of real property which are capital assets, use tax
rate in the next section which is 15% final income tax.
D. ALIENS EMPLOYED BY MNCS, OBUS AND PETREOLEUM SERVICE CONTRACTORS
1. Income Tax Liability for Salaries and Compensation

 These alien individuals are liable for final income tax at a rate of 15% on their
gross income
 Same tax treatment is applicable to Filipinos employed and occupying the same
position as the aliens employed therein.
 The 15% final income tax does not apply R&F employees – both aliens and
Filipinos.
2. Income Tax Liability for Other Income

 Depends upon the taxpayer’s classification or status.
VII. TAX ON CORPORATIONS
A. DOMESTIC CORPORATIONS

Taxation Law Review
1. In General
a. A domestic corporation is generally liable for net income tax because the
NIRC says:”taxable income.”
b. The net income tax is imposed at a rate of 35% on all income derived from
sources within and without the Phils.
2. Optional Corporate Income Tax

a. The tax rate is 15%
b. Immaterial since the President has not yet implemented this option.
3. Proprietary Educational Institutions and Hospitals

 Liable for net income tax at a rate of only 10% provided:
a. It must a stock and non-profit institutions
b. It must be a private educations institution or hospital
c. Their gross income from unrelated activity does not exceed 50%.
d. Must have been issued a permit to operate from the government.
Note: Non-stock and non-profit educational institution is exempt from income tax
4. GOCCs, Agencies or Instrumentalities

 The 35% net income tax rate is applicable to all GOCCs except the following:
a. SSS
b. Philhealth
c. PCSO
d. GSIS
5. Final Income Tax

 Interest from deposits and yield from deposit substitutes and from trust funds and
similar arrangements, and royalties from sources within the Philippines are subject to
20% final income tax.
 If these are derived from sources without , these shall be subject to the net income
tax and not the final income tax.
6. Capital Gains from the Sale of Shares of Stock Not Traded in the Stock Exchange
 Apply rules on individuals
7. Tax on Income Derived under the Expanded Foreign Currency Deposit System
 The depository bank is the income earner and is subject to the net income tax of 35%
 However, when the depository bank under the system transacts with the following, its
income is exempt from net income tax:
a. Non-residents
b. OBUs
c. Local commercial banks
d. bBranches of foreign banks authorized by the BSP
e. Other depository banks under the system
 With regard to FX loans, income derived therefrom shall be subject to a final tax
at the rate of 10%
8. Inter-corporate Dividends
 The domestic corporation is the stockholder of another domestic corporation.
Being a stockholder, it is entitled to dividends. The dividends received by it shall
not be subject to tax, in other words, exempt.

Taxation Law Review
9. Capital Gains Realized from the Sale, Exchange or Disposition of Lands and/or Buildings
 Apply final income tax rate of 6% is imposed on the gain presumed to have been
realized
B. RESIDENT FOREIGN CORPORATIONS
1. In General
 Like a domestic corporation, a resident foreign corporation is subject to the net
income tax at a rate of 35%.
 However, unlike a domestic corporation, a resident foreign corporation is only
liable for income derive by it from sources within the Philippines.
2. Optional Corporate Income Tax of 15%

 Tax rate is 15% of Gross Income
3. MCIT
 Compare the 2% of Gross Income versus net income, choose higher of the 2.
4. International Carrier Doing business in the Philippines

 Liable to pay tax of 2½% on its Gross Philippine Billings (GPB)
 For international air carriers, the following requisites must be present:

o The persons, excess baggage, cargo, and the mail must be originating in
the Philippines
o In a continuous and uninterrupted flight or shipment
o Irrespective of the place of sale or issue and the place of payment of the
ticket.
 For international shipping carriers, the following are the pre-requisites:

o It must originate from the Philippines
o It must be up to the final destination
o Regardless of the place of sale or payments of the passage or freight
documents
5. Offshore Banking Units

 A final income tax at the rate of 10% is imposed on income derived by OBUs
authorized by the BSP from its foreign currency transactions (e.g branches of
commercial banks).
 Transactions of these OBUs are exempt from final income tax provided it is with
the following:
a. Nonresidents
b. Other OBUs
c. Local commercial banks
d. Branches of foreign banks
6. Tax on Branch Profit Remittance

 A 15% final income tax based on the total profits applied or earmarked for
remittance is imposed on any profit remitted by a branch to its head office.
 If the profit remitted us nor from activities connected with the conduct of its
business in the Phils., the net income tax rate of 35% shall apply.

Taxation Law Review
 This tax does not apply to local subsidiaries of foreign corps. (for branch offices
only)
7. Regional Area Headquarters and Regional Operating Headquarters of MNCs

 RAH – a branch established in the Phils by MNC and which headquarters do not
earn or derive income from the Philippines and which acts supervisory,
communications and coordinating center for their affiliates, subsidiaries, or
branches in the Asia-Pacific Regions and other foreign markets.
 ROH – a branch established in the Philippines by MNCs which are engaged in
any of the following: general administration and planning; business planning and
coordination; sourcing and procurement of raw materials and components;
corporate finance advisory services; marketing and control and sales promotion;
training and personnel management; logistic services; R & D; product
development; technical support and maintenance; data processing and
communication; and business development.
 RAH is exempt from income tax’ ROH is subject to a net income tax of 15%.
8. Final Income Tax

 Interest income and Royalties – subject to 20% final income tax
 Income derived from Expanded Foreign Currency Deposit Systems – The income
earner is a resident foreign corporation depository bank . The tax rate is 35%.
 Intercorporate Dividends – The income received by the foreign corporation from
the domestic corporation shall be exempt from income tax.
C. NON-RESIDENT FOREIGN CORPORATIONS
1. In General
 Liable for gross income tax at the rate of 35% on income derived from sources within the
Philippines.
2. Interest on foreign loans

 A final WHT at the rate of 20% is imposed on the amount of interest on foreign loans.
 Contemplated transaction here is one where the lender is a non-resident foreign
corporation and the borrower is a domestic corporation.
 Exemption applies only when the lender is a foreign government or any of its GFI,
international and regional financial institutions (supra-nationals).
3. Intercorporate Dividends
 Among the three corporate taxpayers, only the NR foreign corporation is liable for dividends
received by it from a domestic corporation at the rate of 35%.
 Tax deemed paid credit rule (tax sparing rule) – The country of domicile of the non-resident
foreign corporation allows a tax credit of 20% for taxes deemed paid in he Philippines to be
entitled to the lower rate of 15%.
4. CGT from Sale of Shares not Traded in the Stock Exchange

 Rules on individuals apply.
VII. MINIMUM CORPORATE INCOME TAX

Taxation Law Review
Nota Bene:
 This tax is imposed on two types of corporations: the domestic corporation and the
resident foreign corporation.
 To discourage these corporations from claiming too many deduction to avoid
payment of tax, the MCIT of 2% on the gross income is imposed in lieu of the net
income tax of 35%
A. IMPOSITION OF THE TAX

 The 2% MCIT cannot be imposed simultaneously with the net income tax of 35%. Impose
whichever is higher!
 The MCIT can be imposed only at the beginning of 4th taxable year immediately following the
year in which the corporation commenced its operations.
B. CARRY FORWARD IF EXCESS MINIMUM TAX

 This is the 2nd carry over tax under the NIRC. The first is the NOLCO.
 Any excess of the MCIT over the net income tax shall be carried forward and credited
against the net income tax over the net income tax shall be carried forwards and credited
against the net income tax for the 3 immediately succeeding taxable years.
 Unlike the NOLCO, the MCIT can be carried over for the 3 immediately succeeding years.
C. RELIEF FROM THE MCIT

 The Secretary of Finance is authorized to suspend the MCIT on any corporation who suffers
losses on account of:
o Prolonged labor dispute
o Force majeure
o Legitimate business reverses
IX. IMPROPERLY ACCUMULATED EARNINGS TAX
A. IN GENERAL
 Generally, a tax of 10% is imposed on the improperly accumulated income for the purpose of
avoiding the income tax with respect to its shareholders.
 The tax compels the corporations to declare dividends.
 Inclusion: only domestic corporations and closely-held corporations.
 Closely held corporations are those with at least 50% in value of the outstanding capital
stock or at least 50% of the total combined voting power of all classes of stock entitled to
vote is owned directly or indirectly by or for not more than 20 individuals.
B. EXEMPTED CORPORATIONS
 Under the NIRC, the following are exempted from the application of this tax without
qualification:
o Publicly-held corporations
o Banks and NBFIs
o Insurance companies
 Under the RR 2-2001, the following were added to the list with the proviso that the improperly
accumulated earnings must be for reasonable needs of the business:

Taxation Law Review
o Taxable partnerships
o General professional partnerships
o Non-taxable joint ventures
o Enterprises located within economic zones.
C. IMPROPERLY ACCUMULATED TAXABLE INCOME
IATI is “taxable income” adjusted by:

o Income exempt from tax
o Income excluded from tax
o Income subject to final income tax
o The amount of NOLCO deducted, and reduced by the sum of dividends actually
or constructively paid and income tax paid for the year.
D. EVIDENCE OF PRUPOSE TO AVOID INCOME TAX
There are 2 instanced which are to be considered:

o The fact that the company is a mere holding company or investment company
o The fact that the earnings or profits of a corporation are permitted to accumulate
beyond the reasonable needs of the business.
o The presence of either brings a prima facie evidence of the purpose to avoid payment
of this tax.
o The intention of the taxpayer at the time of accumulation is controlling to determine
whether the profits are accumulated beyond the reasonable needs of the business.
o Definiteness of plans coupled with actions taken towards its consummation are
essential.
X. EXEMPT CORPORATIONS
A. GENERAL PROFESSIONAL PARTNERSHIPS
A GPP is a partnership formed by persons for the sole purpose of exercising their common
profession, no part of income of which is derived from engaging in any trade or business. Any other
partnership is liable for corporate income tax.
A GPP may be exempted from corporate income tax if these 2 requisites are met:
1. It is formed by persons for the sole purpose of exercising their
common profession.
2. No part of the income of which is derived from engaging in any trade
or business.
Notes:
 If the GPP is exempt from corporate income tax, the share of each partner is subject to
income tax. Each partner is liable in his separate and individual capacity.

Taxation Law Review
 If the 2 requisites are absent, the partnership is deemed a corporation and is subject to
corporate income tax. The share of each partner, whether actually or constructively received,
is deemed as a dividend which is SUBJECT to final income tax.
 If there is other income but the income derived is passive (e.g. interest income, which is
subject to final income tax of 20%), still the partnership can be exempt from the corporate
income tax. Passive income is not included in the partnership’s annual return.
B. JOINT VENTURE UNDER A SERVICE CONTRACT WITH THE GOVERNMENT
The JV which is exempt from corporate income tax, is a merger of two or more corporations for the
purpose of engaging in construction projects or energy operations pursuant to a consortium
agreement or a service contract with the government. The corporations must be engaged in the
same line of business.
Notes:
 It is only the JV which is exempt from corporate income tax, not the income of each
corporation from the JV.
 Thus, each corporation is liable for corporate income tax.
C. GOVERNMEN-OWNED OR CONTROLLED CORPORATIONS
The net income tax is applicable to all GOCCs except the following:
 SSS
 PHIC
 PCSO
 GSIS
D. OTHER EXEMPT CORPORATIONS
The following are exempt under Section 30 of the NIRC:

1. Labor and agricultural organizations not organized principally for profit.
2. Mutual savings bank not having a capital stock represented by shares, and cooperative
bank without capital stock organized and operated for mutual purposes and without
profit.
3. A beneficiary society operating for the exclusive benefit of the members, such as a
fraternal organization operating under a lodge system, or a mutual aid association or a non-
stock corporation organized by employees providing for the payment of life, sickness,
accident, or other benefits exclusively to the members of such society or their
dependents.
4. Cemetery companies owned and operated exclusively for the benefits of its members.
5. Non-stock corporations organized and operated exclusively for religious, charitable,
scientific, athletic, or cultural purposes, or for the rehabilitation of veterans, no part of its net
income or asset shall belong to or inure to the benefit of any member, organizer,
officer or any specific person.
6. Business league, chamber of commerce, or board of trade, not organized for profit and no
part of the income of which inures to the benefit of any private stockholder or
individual.
7. A non-stock and non-profit educational institution.
8. Government educational institution.
9. Farmers’ or other mutual typhoon or fire insurance company, mutual ditch or irrigation
company, mutual or cooperative telephone company , or like organization satisfying the
following requirements:

Taxation Law Review
a. The organization must be operating within a locality

b. The income of such organization must be used to meet the necessary expenses.
10. Farmers’ associations for organized and operated as a sales agent for the purpose of
marketing the products of its members and turning back to them the proceeds of sales
less necessary selling expenses on the basis of quantity of produce.
Notes:
 An exempt corporation can be held liable for corporate income tax if it derives income from
any of their property or any of their activities conducted for profit regardless of the disposition
made of such income.
 Above corporations are only exempt from income tax under Section 30 but this same section
doe not bar the applicability of other axes to these corporations.
CHAPTER XI. GROSS INCOME AND EXCLUSIONS
Section 32 of the NIRC speaks of gross income and exclusions. To arrive at the gross income, the
exclusions must be deducted from all the income, hence the formula is:
All income – Exclusions = Gross Income
A. GROSS INCOME INCLUSIONS
Gross income is defined by Section 32 quite broadly, as “all income derived from whatever source.”
This is an open ended definition, suggestive of an intention to include rather exclude. The following
items comprise the gross income subject to income tax:
1. Compensation for services in whatever form paid, including but not limited to fees, salaries,
wages, commissions, and similar items., EXCEPT for the following:
a. Those received by taxpayers who are subject to the Gross Income Tax
b. Those received by Aliens employed by MNCs, OBUs and Petroleum Service
Contractors because their compensation are subject to the 15% Final tax unless they
choose pay by way of final income tax.
2. Gross income derived from the conduct of trade or business or the exercise of a profession.
3. Gains derived from dealings in property.
a. If the real property is capital, the gain therefrom is subject to income tax and not
included as gross income.
b. If the real property is ordinary, it should be included.
4. Interest income
a. Interests from loans are always included in the gross income.
b. Interests from bank deposits are not included since they are subject to final income
tax.
5. Rental income
6. Royalties
a. The royalty is subject to final income tax if it is derived from sources within the
Philippines.
b. If the source is outside the Philippines, the net income tax is applicable.
7. Dividends
8. Annuities
9. Prizes and winnings, instances to be included in the gross income:

Taxation Law Review
a. It should be derived from sources within the Philippines and should be less than or
equal to P10k
b. The prize is derived from sources without the Philippines
c. The taxpayer is a corporation.
10. Pensions (unless excluded)
11. Partner’s distributive share from the net income of the GPP
B. EXCLUSIONS
Classes of income not included in the gross income:

 Passive income, since this is already subject to final income tax.
 Incomes which are exempt under the income tax law.
 Income classified as exclusions under Section 32(b).
The following are the exclusions provided in section 32(b):
1. Life Insurance payable upon death of the insured.

2. Amount received by Insured a Return of Premium
3. Gifts, bequests and Devises
 These are gratuitous in nature. Hence, exempt from gross income tax but is
subject to donor’s tax.
4. Compensation for Injuries and Sickness
5. Income exempt under treaty
6. Retirement Benefits, Pensions, Gratuities, etc.
a. Retirement Pay
i. Retirement benefits under RA 7641 (retirement benefits of private firms
without retirement plan)
1. The retiring employee is between 60 to 65 years old.
2. He must have served the company for at least 5 years.
ii. Retirement benefits pursuant to RA 4917 (retirement under private retirement
plan)
1. Retiring employee must not be less than 50 years old.
2. Must have been in the service for at least 10 years.
3. Exemption must be availed only once.
4. The private benefit plan must be approved by the BIR.
iii. Retirement pay given by GSIS, SSS and PVAO are exempted from income
tax without any qualification
iv. Retirement gratuities, pensions and other similar benefits given by foreign
government agencies and other institutions, private or public to residents,
nonresident citizens of the Philippines or aliens who come to reside in the
Phils., without any qualification.
b. Separation Pay
i. Exempted from income tax as long as the cause for separation from service is
death, sickness, physical disability or for any cause beyond the control of the
employee.
ii. If from foreign government agencies and other institutions, tax exempt also.
c. Terminal Leave Benefits
i. EO 291 provides that terminal leave benefits of government employees are
exempt from tax
ii. For private employees, if terminal leave benefits are paid upon retirement,
such benefits are exempt from income tax.
iii. However, if given annually, RR 2-98 provides:

Taxation Law Review
1. If sick leave – not exempt

2. If less than 10 days VL – exempt
3. If more than 10 days VL – subject to income tax.
7. Miscellaneous items
a. Income derived by foreign government.
i. Foreign government
ii. Financing institutions owned or controlled by foreign government
iii. International or regional financial institutions established by foreign
governments.
b. Income derived by the Government or its political subdivisions from:
i. Any public utility
ii. The exercise of any essential government function
c. Prizes and Awards
i. Primarily in recognition of religious, charitable, scientific, educational, artistic,
literary or civic achievement.
ii. The recipient was selected without any action on his part to join the contest.
iii. The recipient is not required to render future service as a condition to receive
the prize or award.
d. Prizes and Awards in Sports Competition
i. Held locally or internationally and
ii. Sanctioned by national sports association
e. 13th Month Pay and other Benefits
i. Applied both to the government and the private sector
ii. Exemption covers only the maximum amount of P30,000
f. GSIS, SSS, Philhealth, and Pag-ibig contributions
g. Gains from sale of bonds, debentures or other certificate of indebtedness
i. Maturity must be more than 5 years to be exempt
ii. If less than 5 years, subject to final income tax.
h. Gains from redemption of shares in Mutual fund
XII. FRINGE BENEFITS TAX
This tax was introduced in 1998. A final income tax of 32% is imposed on the grossed-up
monetary value of the fringe benefit furnished or granted to the employee by the employer.
Who is liable to pay the final income tax on fringe benefits?

The employee shall be liable because:
 The law did not say that it is the liability of the employer but it says that is payable.
 The law did not say that it is the of the employer period, but the law referred to Section 57(a)
– Withholding of Final Tax on Certain Incomes
 The law admits that is the liability of the managerial employee
A. EXCLUSIONS
By way of exception, the following benefits are not subject to final income tax:
 Those received by R&F employees
 The fringe benefit is necessary for business
 The fringe benefit is for the convenience or advantage of the employer.
 If the fringe benefit is exempted from income tax under the code.
 Employer contributions to employee retirement, insurance, and hospitalization benefit plans.

Taxation Law Review
 De minimis benefits which limited to facilities or privileges furnished or offered by an

employer to his employees that are relatively small value and are given as a means of
promoting health, goodwill, contentment, or efficiency of his employees.
B. INCLUSIONS
Fringe benefit is any good, service, or other benefit furnished or granted in cash or in kind by an
employer to an individual employee such as but not limited to:
1. Housing, except:
 RR 3-98 provides that a housing unit situated inside or adjacent to the premises of a
business within maximum of 50 meters shall not be considered as a taxable fringe
benefit.
 Temporary housing for an employee who stays in the housing unit for 3 months or
less shall not be considered a taxable fringe benefit.
2. Expense Account – refers those incurred by the managerial worker which are to be
reimbursed by management.
3. Vehicle of any kind
4. Household personnel, such as maid, driver and others.
5. Interest on loans at less than prevailing market rate to the extent of the difference between
the market rate and actual rate granted.
6. Membership fees, dues and other expenses borne by the employer for the employee in
social and athletic clubs or other similar organizations.
7. Expenses fore foreign travel
8. Holiday and vacation expenses.
9. Educational assistance to the employee or his dependents.
10. Life or health insurance and other non-life insurance premiums in excess of GSIS and SSS.
XIII. ALLOWABLE DEDUCTIONS
This provision is applicable only to net income since it is only income tax which allows deductions.
 Deductions are allowed because they are necessary to generate income
 Pure compensation earners are not allowed under Section 34 for any deduction
 Exception is for premium paid for health and/or hospitalization insurance.
The following deductions are allowed for a taxpayer under the net income tax:
A. EXPENSES
1. Ordinary and necessary trade, business or professional expenses.

In General, requirements are:
 The expenses are incurred within the taxable year
 These are ordinary and necessary
 The expenses are incurred pursuant to the trade or business or the exercise of
profession
 These should be supported by evidence.
a. A reasonable wages and salary, other forms of compensation for personal services
actually rendered, and the grossed-up monetary value of fringe benefits provided the
final income tax thereof has been paid.

Taxation Law Review
b. A reasonable allowance for travel expenses, here and abroad, while away from home
in the pursuit of trade, business or profession.
c. A reasonable allowance for rentals and/or other payments which are required as a
condition for the continued use or possession, for purposes of trade, business or
profession, of property to which the taxpayer has not taken or is not taking title or in
which he has no equity other than a lessee, user or possessor.
d. A reasonable allowance for entertainment, amusement and recreation expenses
during the taxable year that are directly connected to the development, management
and operation of the trade, business or profession of the taxpayer.
Conditions for an expense to be deductible:

 The expense must be ordinary and necessary.
 It must be paid or incurred within the taxable year.
 It must be paid or incurred while carrying on a trade or business.
Note: Bribes, Kickbacks and other similar payments are not ordinary and necessary to the
trade, business or profession of the taxpayer, therefore not deductible!
2. Expenses allowable to Private Educational Institutions

a. To deduct expenditures otherwise considered as capital outlays of depreciable assets
incurred during a taxable year for the expansion of school facilities; or
b. To deduct allowance for depreciation thereof.
NIRC expressly prohibits the deduction of:

 Any amount paid out for new buildings or for permanent improvements or betterments
made to increase the value of any property.
 Any amount expended in restoring property or in making good the exhaustion thereof
for which an allowance is or has been made.
B. INTEREST
1. The amount of interest paid and incurred by the taxpayer within the taxable year shall be
allowed as a deduction from gross income.
 Interest expense to be deducted is limited by the proviso which provides that the
allowable deduction shall be reduced by 42% of the interest income which was
previously subjected to final income tax.
2. By way of exception, the NIRC enumerated several instances where the interest expense
incurred by a taxpayer is allowed as a deduction but such is subject to qualifications:
a. If within the taxable year an individual taxpayer reporting income on the cash basis
incurs an indebtedness on an interest paid in advance through discount or otherwise,
provided:
i. That such interest shall be allowed as a deduction in the year the
indebtedness is paid.
ii. That if the indebtedness is payable in periodic amortizations, the amount of
interest which corresponds to the amount of the principal amortized or paid
during the taxable year shall be allowed as deduction in such taxable year.
b. If both the taxpayer and the person to whom payment has been made or is to be
made are persons specified under Section 36(b).

Taxation Law Review
3. The interest expense may be treated as part of the value of the property acquired which
property will be treated as a capital expenditure which is subject to the allowance for
depreciation.
C. TAXES
There are 2 ways to minimize a taxpayer’s liability:

 Tax Deductions (deducted from gross income)
 Tax Credits (deducted from the income tax due)
Formula: Gross Income

Less: Deductions
Net Income
X Tax Rate
Les: Tax Credits
Net Income Tax Payable
The taxes paid or incurred by a taxpayer during the taxable year in connection with his trade
or business, shall be allowed as deduction, except:
 Income Tax
 Income taxes imposed by authority of any foreign country, but this deduction shall be
allowed in the case of a taxpayer who does not signify in his return his desire o have
any extent of the benefits of Section 34(c)[3].
o The tax credit for taxes paid or incurred in any foreign country should not
exceed the taxes from which the tax credit is taken.
o Said tax should be compared with the tax to be paid in the Philippines by the
taxpayer and such credit should not exceed the amount of tax to be paid in the
Philippines
 Estate and donor’s taxes
 Taxes assesses against local benefits of a kind tending to increase the value of the
property assesses.
D. LOSSES
Losses may be deducted from the gross income provided the following requisites are present:
 The losses are actually sustained during the taxable year.
 Said losses are not compensated for by insurance or other forms of indemnity
 Losses must be incurred from the exercise of business or from property connected
with the business or profession
 Loss shall not be allowed as deduction if such loss has been claimed as a deduction
for estate tax purposes in the estate tax return.
NOLCO RULE
 This rule provides that the net operating loss of the business for the taxable year
preceeding the current taxable year can be carried over as a deduction from the
gross income for the next 3 consecutive years immediately following the year the loss
was incurred.
 For mining companies, net operating loss incurred during the first 10 years may be
carried over as a deduction from taxable income for the next 5 years.
 Not allowed if there was substantial change in ownership of the business for
corporations.

Taxation Law Review
E. BAD DEBTS
Bad debts result from the unpaid receivables of the taxpayers from its customers in the
exercise of his trade, business or profession. These can be deducted and charged off within
the taxable year, EXCEPT in the following instances:
 Those not connected with the profession, trade or business of the taxpayer
 Those between related parties
Tax Benefit Rule

 The rule provides that where the creditor was allowed a deduction of bad debts but
said debts are subsequently recovered, the previous deduction will not be cancelled
but the recovered amount will be added in the computation of the gross income.
F. DEPRECIATION
Depreciation is the expense which can be deducted by the taxpayer for several years as the
case may be. This deduction is an exception to the rule that expenses to be deducted
should have been incurred during the taxable year.
 Incurred due to the ordinary exhaustion, wear and tear, including allowance for
obsolescence of property used in business.
 Since the property is used for more than a year, it is only reasonable that the
expense be spread over the usual life of the property.
 Every property can be subject to depreciation EXCEPT land.
Method of depreciation allowed under the NIRC:

 Straight line method
 Declining balance method
 Sum-of-the-years digit method.
 Any other method prescribed by the DOF and BIR
G. DEPLETION OF OIL & GAS WELLS AND MINES
A reasonable allowance for depletion or amortization is allowed as deduction from gross

income in accordance with the cost-depletion method. The provision is not self-executing.
This needs approval of the BIR and DOF.
H. CHARITABLE & OHER CONTRIBUTIONS
This deduction is deducted from the net income, not from the gross income since one of the
bases of the amount to be deducted is a percentage of the net income.
Who is entitled to claim the deduction for charitable contributions?

 The donor is the one entitled to this deduction since, obviously, he was the one who
incurred this expense.
 A pure compensation earner cannot claim this deduction

Taxation Law Review
There are 2 types of deduction:

 Partial deduction may be claimed if the donee is ay of the following:
o GOP
o Accredited domestic corporations or associations organized and operated
exclusively for religious, charitable, scientific, youth and sports development,
cultural or educational purposes or for the rehab of veterans.
o Social welfare institutions
o NGOs
o Deduction should not exceed 10% of the taxable income for individuals and
should not exceed 5% of its taxable income for corporations.
 Full deduction
o GOP, exclusively to finance undertakings in educations, health, youth and
sports development, human settlements, science and culture and in economic
development.
o Foreign institutions or international organizations in compliance with treaties,
agreements or special laws.
o NGOs accredited by the government certifying body
I. RESEARCH & DEVELOPMENT
Generally, expenses incurred for R&D are treated as ordinary and necessary expenses
which are not chargeable to the capital account. These expenses can only be allowed and
claimed during the taxable year when such expenses are incurred or paid.
R & D expenses can be treated as deferred expenses over a period of 6o months:

 Those incurred in connection with the business or profession
 Those not treated as expense under Section 34(I)1.
 Those chargeable to the capital account but not chargeable to a property of a
character which is subject to depreciation or depletion.
This deduction is NOT ALLOWED for:

 Any acquisition or improvement of land (except for private educational institutions in
case of school expansion)
 Any expenditure related to ascertaining the existence, location, extent or quality of
mineral or oil deposits.
J. PENSION TRUSTS
The deduction refers to the reasonable amount transferred or paid by the employer into the
pension trusts of the employees. Prerequisites:
 Not have been previously allowed as a deduction
 Be apportioned in equal parts over a period of 10 consecutive years.
K. OPTIONAL STANDARD DEDUCTION as amended by RA 5904

Taxation Law Review
Individual and corporate taxpayers, instead of availing the itemized deductions, can claim a
deduction in an amount not exceeding 40% of their gross income. Once this option is
chosen, this will be irrevocable for the taxable year. Note that an NRA NETB is excluded
since his liability is by way of the gross income tax where deductions are not allowed.
L. PREMIUM PAYMENTS ON HEALTH & HOSPITALIZATION INSURANCE
This is the only deduction which can be claimed by a pure compensation earner. Life
insurance premium is not included as a deduction.
Limitations:
 Amount to be deducted shall not exceed P2,400.00 per family
 Allowed only if the said family has a gross income of not more than P250,000.00
 For married couple, only the spouse claiming the additional exemption for
dependents shall be entitled to this deduction.
XIV. ALLOWANCE FOR PERSONAL EXEMPTIONS
The exemption provided in Section 35 is available to the following taxpayers: RC; NRC;
OCW & Seamen; RA ETB; and NRA ETB.
A. SECTION 35A AS AMENDED BY RA 9504
For purposes of determining the net income of the taxpayer, a personal exemption of
P50,000 shall be allowed for single individuals, legally separated, head of the family, and
married individuals.
Note that individual taxpayers are no longer classified as such. The P50,000 exemption is
regardless of status. For married individuals, only the earning spouse shall be allowed
personal exemption
B. ADDITIONAL EXEMPTIONS FOR DEPENDENTS
An additional exemption of P25,000 shall be allowed for each dependent not to exceed 4.
Applicable only for married individuals and shall be claimed by only one of the spouses.
They must be legally married. In case of legally separated spouses, the one who has
custody of the children can claim.
Dependent is a child chiefly dependent upon and living with the taxpayer, not more than 21
years of age, unmarried and not gainfully employed, or is incapable of self-support because
of mental or physical defect.
With the passage of RA 9504, a family of 6 can now claim a total of P200,000.
C. CHANGE OF STATUS

Taxation Law Review
The change of status of the taxpayers shall be effective only if such change will benefit the
taxpayer. Thus, the rule is the higher exemption will be the applicable exemption for the
taxpayer.
D. PERSONAL EXEMPTION ALLOWABLE TO NRA
NRA ETB shall be allowed personal exemptions in the amount equal to the exemptions
allowed in the income tax law in the country of which they are citizens.
XV. ITEMS NOT DEDUCTIBLE
These items are usually not related to the trade, business or profession of the taxpayer.
A. SECTION 26(A) IN GENERAL
The following items are not deductible:

1. Personal, living or family expenses
2. Any amount paid out for new buildings or for permanent improvements
3. Property restoration
4. Premiums paid on any life insurance policy covering the life of any officer or
employee and when the taxpayer is directly or indirectly a beneficiary of such
policy.
B. LOSSES FROM SALES OR EXCHANGE OF PROPERTY
Such losses are not allowed as deduction:

1. Between members of the family
2. Between an individual and a corporation more than 50% in value is owned by
or for such individual
3. Between 2 related corporations (more than 50% of each owned by the same
individual)
4. Between a grantor and a fiduciary of any trust
5. Between a fiduciary of a trust and a beneficiary of such trust
For number 4 to 6, the law presumes irregularity.
XVI. DETERMINATION OF AMOUNT & RECOGNITION OF GAIN OR LOSS
This shall be applicable to the income tax only since it is the only tax where the
determination of gain or loss is material.
A. COMPUTATION OF GAIN OR LOSS
For this purpose, the “amount realized from the sale or other disposition of the property” is
defined as the sum of money received plus the FMV of the property received.

Taxation Law Review
Notes:
 With respect to personal property, the gain or loss should always be determined
since any gain or loss from the sale of such property is subject to the net income tax
(except gain from sale of shares not traded which is a capital asset which is subject
to final income tax.
 As regards real property, determine first whether the property is a capital asset or
not. If it is a capital asset, the gain or loss is immaterial since the basis of the tax is
the FMV or assessed value of the property. The sale is subject to final income tax. If
the property is an ordinary asset, the gain or loss is material since it is subject to net
income tax.
B. BASIS OF DETERMINING GAIN OR LOSS
The following are the rules to be considered:

1. If the property was acquired by purchase, the acquisition cost shall be the basis of
determining the gain or loss. (Cost = purchase price + expenses)
2. If acquired through inheritance, the cost at the time of acquisition should be
determined.
3. If acquired by gift, the basis shall be the same as if the property was in the hands of
the donor who did not acquire the property by gift. Thus, the basis may either be the
acquisition cost or the FMV at the time of acquisition.
4. If property was acquired for less than adequate consideration, the basis is the
amount paid by the transferee for the property.
C. EXCHANGE OF PROPERTY
As a rule, the entire amount of the gain or loss shall be recognized subject to the following
exceptions under Section 40(C):
1. It is a contract if exchange
2. The parties are parties to the merger and consolidation
3. The subject matter is the one specifically provided by law.
Basic elements in order for the gain to be not taxable and loss not deductible:
1. The parties are not members of a merger or consolidation
2. Property is given in exchange of stocks, if cash is given, this is not applicable
3. After the exchange, said giver, alone or together with others not exceeding 4, gains
control over the corporation.
XVII. SITUS OF ESTATE AND DONOR’S TAX
The following are the taxpayers under the estate tax:

 RC
 NRC
 RA
 NRA

Taxation Law Review
Under the donor’s tax, the taxpayers are the following:

 RC
 NRC
 RA
 NRA
 Domestic corporations
 Foreign corporations
Note that a corporation is incapable of death, hence not a taxpayer under estate tax. It is
subject to donor’s tax since it is a juridical person who can enter into contract of donations,
thus may be subject to donor’s tax.
Only the NRAs and foreign corporations are liable for property within the Philippines. Others
are liable for properties located within and without the Philippines.
The following are intangibles deemed located in the Philippines:

 Franchise exercised in the Phils.
 Shares issued in the Phils.
 Shares of foreign corporations, 85% of the business of which is located in the Phils.
 Shares of any corporation which have acquired a business situs in the Phils.
 Shares r rights in any partnership established in the Phils.
The enumeration is relevant to NRA and foreign corporations only.
Exceptions:
1. When the national law of the decedent does not impost a transfer tax in respect of
intangible personal property of citizens of the Philippines residing in that foreign
country
2. If the laws of the foreign country allow similar exemption from transfer taxes.
XVIII. ESTATE TAX
The formula for this tax is:
Gross Estate
Less: Deductions__
Net Estate
X Rate__________
Taxable Net Estate
Less: Tax Credit___
Estate Tax Payable
A. GROSS ESTATE

Taxation Law Review
This shall consist of the value of all the property, real or personal, tangible or intangible,
wherever situated with the exception of non-resident aliens since they are only liable for
property located in the Philippines.
In addition to the property owned by the decedent, there are certain properties which
although are not owned by the decedent, still form part of the gross estate:
1. Decedent’s interest at the time of his death
2. Transfer in contemplation of death (TICOD)
3. Revocable transfer (because of the tremendous power and control which the
transferor can exercise, he can revoke the transfer anytime)
4. Property passing under General Power of Appointment (executed by the decedent
similar to TICOD)
5. Proceeds of life insurance in which the beneficiary is the estate.
6. Prior interests
7. Transfers of insufficient consideration, EXCEPT in case of a bona fide sale.
8. Capital of surviving spouse – This is an exclusion in the gross estate.
Note: Transfer is a TICOD if:

 The decedent still retained the possession
 Notwithstanding the transfer, the decedent continued to receive the income of
the fruits
 The decedent retained the right to designate the person who shall possess or
enjoy the property or the income there from.
B. COMPUTATION OF NET ESTATE
B(a) Deductions Allowed to the Estate of a Citizen or Resident

1. Expenses, Losses, Indebtedness, and Taxes
a. Funeral expenses not to exceed 5% of the gross estate not to exceed
P200,000
i. Mourning apparel of spouse and unmarried minor children
ii. Catering and food expenses during the wake
iii. Publication charges for death notices
iv. Telecommunication expenses incurred in informing relatives of the
deceased
v. Cost of burial plot, tombstones, mausoleum
vi. Interment and/or cremation fees.
vii. Expenses incurred for the performance of interment rites EXCLUDE
expenses incurred during 40 days, kalag luksa and death anniversary.
b. Judicial Expenses
i. Expenses incurred in the testamentary or intestate proceedings for he
settlement of estate
ii. Also include EJ expenses for the settlement of the estate of he
deceased
c. Claims Against the Estate; the following requisites must be present:
i. Amount of the indebtedness
ii. The debt instrument must be notarized at the time of indebtedness

Taxation Law Review
iii. Statement showing the disposition of the proceeds of loan

iv. Certification on the unpaid balance of loan
d. Claim Against Insolvent Persons
e. Mortgage Indebtedness, Taxes which accrued before the death of the
decedent (exclude Estate Tax) and Losses by virtue of natural calamities (no
insurance coverage)
2. Vanishing Deduction
a. This refers to a property which forms part of the gross estate of any person
who died within 5 years prior to his death.
b. The following percentages should be taken into account in the computation of
the net estate
i. 100% - Within 1 year
ii. 80% - 1 to 2 years
iii. 60% - 2 to 3 years
iv. 40% - 3 to 4 years
v. 20% - 4 to 5 years
3. Transfers for Public Use
a. Include the amount of all bequests, legacies, devises or transfers to the GOP
b. The property should be used for public purpose.
4. Family Home, conditions:
a. The amount to be deducted should not exceed P1.0M, excess is subject to
estate tax
b. Certification from the Barangay Captain that the family home is the actual
residence of the decedent.
c. Legally married or head of the family
d. The amount of the family home must be included in the gross estate.
5. Standard Deduction
a. The standard deduction is P1.0 Million
b. Automatic, no conditions attached.
6. Medical Expenses
a. Must be incurred within 1 year prior to death of decedent
b. Must be substantiated by official receipts
c. Maximum limit: P500,000.00
7. Retirement Pay
a. Received under RA 4917
b. Must satisfy the 50 and 10 Rule
B(b) Deductions allowed to NRAs are the following:

1. Expenses, losses, indebtedness and taxes
2. Vanishing deduction
3. Transfers for Public Use
The rules deductions on residents and citizens are applicable to NRAs except the following:
1. Family home
2. Standard deduction
3. Hospitalization expenses
4. Retirement pay

Taxation Law Review
B(c) Share in the conjugal property
The net share of the surviving spouse in the conjugal partnership is considered as a
deduction from the gross estate. The relevance lies in determining whether or not it is
necessary to comply with the requirements under Sections 89 and 90:
1. Written notice to the Commissioner
2. Filing of an estate return
3. A statement duly certified by a CPA
B(d) Miscelaneous Provisions
In cases of NRAs, for purposes of the estate tax return, all the properties of such NRA,
whether situated in the Philippines or outside, shall be included in the return. Failure to
comply will bar the estate to claim any deduction!
C. Exemption of Certain Acquisitions and Transmission
The following shall not be taxed:

1. The merger of the usufruct in the owner of the naked title
a. The decedent is the usufructuary (no fixed period)
b. Property is not included in his estate
2. The transmission or delivery of the inheritance or legacy by the fiduciary heir or
legatee to the fideicommissary
a. The decedent is the fiduciary heir
b. Upon his death, the property is transferred to the heir of the decedent.
3. The transmission from the first heir, legatee or donee in favour of another
beneficiary, in accordance with the desire of the predecessor
4. All bequests, devises, legacies or transfers to social welfare, cultural and charitable
institutions, provided:
a. No part of the income of such institution inures to the benefit of the individual
b. Not more than 30% of said bequest, devise, legacy or transfer shall be used
by such institutions for administration purposes.
D. Determination of the Value of the Estate
1. Usufruct for a fixed period

a. This forms part of the estate since the period has not yet lapsed
b. The value is determined by taking into account the probable life of the
beneficiary in accordance with the latest Basic Standard Mortality table, to be
approved by the DOF, upon recommendation of the IC.
2. Properties
a. Personal Property
i. Use FMV at the time of death
ii. Listed shares – highest value immediately before the death
iii. Unlisted Preferreds – Use par value
iv. Unlisted Commons – Book value
b. Real Property, us higher of the two:
i. FMV as determined by the BIR (Zonal Value)

Taxation Law Review
ii. FMV as determined by the Assessor’s Office (Assessed Value)
E. Notice of Death to be Filed
Guidelines:
1. File the notice if the gross estate exceeds P20,000
2. Executor, administrator or any legal heir may file
3. Filing period is within 60 days after decedent’s death
E. Estate Tax Returns
Guidelines:
1. Filing is required when the gross estate exceeds P200,000.00
2. File even if below P200k when the gross estate consists of real property, motor
vehicle, shares of stock or other similar property
3. When the gross estate exceeds P2.0 Million, estate tax return shall be supported by
a CPA certification
4. The estate tax return shall be filed within 6 months from the decedent’s death.
5. In meritorious cases, CIR may grant 30 day extension.
6. Where to file?
a. Authorized Agent Bank
b. RDO
c. Collection Officer
d. City or Municipal Treasurer
e. If there is no legal residence in the Philippines, file with the CIR
G. Payment of Tax
Guidelines
1. General Rule: Pay-as-you-file system

2. CIR may give 5-year extension in case of judicial settlement
3. CIR may give 2-year extension in case of EJF
4. Acceptable ground for extension: if payment of tax would impose undue hardship
upon the estate or any of the heirs.
5. Requirement for extension: Bond and/or surety.
H. Discharge of Executor or Administrator from Personal Liability
This will take place upon payment of the estate tax.
I. Deficiency
Definitions:
1. The amount by which the state tax exceeds the amount shown in the estate tax
return
2. If no amount is shown upon the return or if there is no return, the amount by which
the tax exceeds the amounts previously assessed.

Taxation Law Review
J. Payment before delivery by Executor or Administrator
Before a judge can authorize the delivery of the distributive shares, there must be first a
certification from the Commissioner that the estate tax has been paid.
K. Duties of Certain Officers and Debtors
 Register of Deeds – must register the transfer upon showing a certification from the
CIR that the estate tax has been paid
 Attorney – the one who executed the settlement if obliged to file a petition or pleading
with the court
 Notary Public – the who will notarize the settlement
 City or Provincial Engineer – the one who makes the cadastral survey for purposes of
partition
 Debtor – obliged to pay only after a certification of the CIR that the tax has been paid.
L. Restitution of Tax upon Satisfaction of Outstanding Obligations
Note: Even if the estate tax has been paid but new obligations of the decedent has
appeared and been settled by the estate, the tax corresponding to that amount of the new
debt shall be restituted to the estate.
M. Payment of Tax Antecedent to the Transfer of Shares, Bonds or Rights
Notes:
 Show certification from the Commissioner that the estate tax has been paid before
allowing transfer to the new owner.
 Banks shall not allows withdrawal from deposits f deceased depositors without the
clearance from the BIR
 CIR may authorize the administrator or any one of the heirs to withdraw an amount
not exceeding P20,000.
XIX. DONOR’S TAX
Donor’s tax shall be imposed upon any transfer by any person or any property by gift.
Applicable whether the transfer is by trust or otherwise, whether the gift is direct or indirect,
and whether the property is real or personal, tangible or intangible.
The formula for this tax is:
Gross Gifts
Less: Deductions___
Net Gifts
X Rate___________
Taxable Net Gifts

Taxation Law Review
Less: Tax Credit____

Donor’s Tax Payable
A. Stranger vs. Relative
1. Relatives
a. Brother, sister (whether full or half blood), spouse, ancestor and lineal
descendant
b. Relative by consanguinity in the collateral line within the 4 th degree
2. Strangers (30% donor’s tax)
- those not listed as relatives above
B. Cumulative vs. Splitting Method

a. Cumulative Method – When the donor makes 2 or more donations within the
same calendar year, it is required that said donations be included in the
returns for the last deduction
b. Splitting Method – Applicable if the donor makes two or more donations during
different calendar years
C. Donations to any candidate, political party or coalition

a. The Election Code exempts donation to a candidate, a political prty or a
coalition of parties
b. Requirement: Report donation to the COMELEC
D. Transfer for Inadequate Considerations

Note: if the subject property is located in the Philippines and is a capital asset, apply 6%
final income tax on the FMV or gross selling price whichever is higher.
E. Exemption of Certain Gifts

1. Gifts made by residents
a. Dowries
i. Donation propter nuptias
ii. Within 1 year after the celebration of marriage
iii. Donor is the parent
iv. Donee is the legitimate, recognized, adopted child of the donor
v. Exempt only to the extent of the first P10,000
b. Gifts to the Government (exclude proprietary agencies)
c. Gifts in favour of a qualifed non-profit organization
2. Gifts made by a non-resident, not a citizen of the Philippines
- Requirement: Not more than 30% of the gift should be used for
administration purposes
3. Tax Credit for Donor’s Tax Paid to a Foreign Country
- Shall not exceed the same proportion of the tax against such credit is taken
F. Valuation of Gifts Made in Property

a. Personal Property – use FMV at the time of donation
b. Real Properties – higher of Zonal Value or Assessed Value

Taxation Law Review
G. Filing of Returns and Payment of Tax

a. File within 30 days after the the date the gift was made
b. Pay as you file system is used
c. No extension allowed (unlike estate tax)
XX. VALUE ADDED TAX
VAT – indirect tax
Indirect Tax – the amount of the tax may be shifted or passed on to the buyer, transferee or
lessee of the goods, property or services.
Input Tax – means the VAT due from or paid by a VAT-registered person in the course of
his trade or business from a VAT-registered person.
Output Tax – refers to the VAT due on the sale or lease of taxable goods or properties or
services by any person registered or required to register under VAT.
Note: The input tax paid by the taxpayer is to be deducted from his output tax to arrive at his
VAT payable or creditable.
Output Tax
Less: Input Tax________
VAT Payable (Creditable)
A. Persons Liable
1. Any person who, in the course of trade or business, sells, barters, exchanges,
leases goods or properties
2. Any person who renders services
3. Any person who imports goods
4. Any person who is engaged in exportation
VAT Transactions
 Transfer, use or consumption not in the course of business of goods or properties
originally intended for sale or for use in the course of business
 Distribution of transfer to:
- Shareholders or investors as shares in the profits of VAT-registered
persons
- Creditors in payments of debt
 Consignment of goods if actual sale is not made within 60 days
 Retirement from or cessation of business, with respect to inventories
B. VAT on Sale of Goods or Properties

1. Rate and Base – 12% of the gross selling price or gross value in money shall be
imposed on the following:

Taxation Law Review
 Real properties for sale or lease

 Right to use patent, copyright, design or model plan, secret formula or
process, goodwill, trademark, trade brand or the like
 The privilege to use in the Philippines any industrial, commercial or scientific
equipment
 The right to use motion picture, films, tapes and discs.
 Radio, TV, satellite transmission and cable TV time
Formula: Gross Selling Price X 12% = Output Tax
2. Zero Rated
 An entity that is VAT-registered is subject to 0%, meaning the gross selling
price of his goods or properties shall be multiplied by 0%, hence, his output
tax shall be equivalent to P0.00.
 On the other hand, since he is VAT-registered, he may claim input tax for the
purchases he made from VAT-registered entities.
 The result will be a VAT creditable amount or a creditable input tax which can
serve as a tax credit which can be deducted from any tax under the NIRC.
 Advantage of being subject to 0% rather than being tax-exempt is obvious –
the input tax can be credited against any NIRC tax.
 The following are subject to 0% VAT:
o Export Sales
 Shipment of goods from the Philippines to a foreign country
 Sale of goods to a non-resident for delivery to the Philippines
 Sale of raw materials or packaging materials to export-oriented
enterprise whose sales exceed 70% of total annual production
 Sale of gold to the BSP
 Those considered export sales under the Omnibus Investment
Code
 Sale to persons engaged in international shipping or
international air transport operations
o Foreign Currency Denominated Sale
 This is a sale to a non-resident of goods assembled or
manufactured in the Philippines for delivery to a resident in the
Philippines, paid in acceptable foreign currency
o Sales to persons exempted under special laws or international
agreements
C. VAT on Importation of Goods

 12% VAT based on the total value used by the BOC shall be assessed and
collected
D. VAT on Sale of Services and Use or Lease of Properties

1. Rate and Base of Tax – 12%VAT on the gross receipts derived from the sale of
exchange of services, including the use or lease of properties:
 Construction and service contractors

Taxation Law Review
 Stock, real estate, commercial, customs and

immigration brokers
 Lessors of property
 Warehouse services
 Lessors or distributors of cinematographic film
 Persons engaged in milling, processing, manufacturing
or repackaging goods for others
 Proprietors, operators or keepers of hotels, motels,
resthouses, pension houses, inns, resorts
 Proprietors or restaurants, cafes and other eating
places, clubs and caterers
 Dealers in securities
 Lending investors
 Transportation contractors
 Services of franchise grantees of telephone and
telegraph, radio and TV broadcasting and all other franchise grantees.
2. Transactions Subject to 0%
 Shipment of goods from the Philippines (export) paid for by any
acceptable foreign currency
 Services paid in acceptable foreign currency (e.g. recruitment agencies)
 Services rendered to persons or entities rated zero by special laws or
international agreements
 Services rendered to vessels engaged exclusively in international trade
 Services performed by subcontractors and/or contractors in processing,
converting, or manufacturing goods for an enterprise whose export
sales exceeds 70% of total annual production
 Transport of passengers and cargo by air or sea from vessels from the
Philippines to a foreign country
 Sale of power or fuel generated through renewable energy sources
E. Exempt Transactions
E(a) Exempt Transactions – Part 1 (Section 109[1])

The following transactions are exempt from the coverage of VAT
1. Sale of importation or agricultural and marine products in the
original state
2. Sale of importation of fertilizers, seeds, seedlings and fingerlings,
fish prawn, poultry and livestock feeds.
3. Importation of personal and household effects belonging t the
residents of the Philippines returning from abroad and NRCs coming to settle in
the Philippines
4. Importation of professional instruments and implements, apparel,
domestic animals and personal household effects (except any vehicle or
machinery) belonging to persons coming to settle in the Philippines, for their own
se and not for sale.
5. Services subject to percentage tax under Title V of the NIRC

Taxation Law Review
6. Services by agricultural contract growers and milling for others of

palay into rice, corn into grits and sugar cane into raw sugar.
7. Medical, dental, hospital and veterinary services except those
rendered by professional
8. Educational services
9. Services rendered by individuals pursuant to an employer-
employee relationship
10. Services rendered by regional or area headquarters established
by MNCs in the Philippines (do not earn income from the Philippines
11. Transactions which are exempt under special laws and
international agreements
12. Sales by agricultural cooperatives duly registered with the CDA
13. Gross receipts from lending activities by credit or multi-purpose
cooperatives duly registered with the CDA
14. Sales by non-agricultural, non-electric and non-credit
cooperative duly registered with the CDA provided that the share capital
contribution of each member does not exceed P15,000
15. Export sales by persons who not VAT registered
16. Sale of low-cost housing (Below P1.5 Million for residential lots
and P2.5 million for house and lot and other residential dwellings)
17. Lease of a residential unit with a monthly rental not exceeding
P10,000
18. Sale or publication of books and newspapers, magazines which
appear at regular interval nor devoted principally to the publication of paid
advertisements.
19. Sale, importation or lease of passenger or cargo vessels
20. Importation of fuel, goods and supplies by persons engaged in
shipping or air transport
21. Services of financial intermediaries
22. Sale or lease of goods or performance of services other that
those mentioned above and the gross receipts and/or annual sales must not
exceed P1.5 million
E (b) Options available – Part II (Section 109[2])
A VAT-registered person is given the option to be VAT-exempt or be subject to VAT.
Rationale: Such VAT-exempt person may incur a large amount of input tax in excess of his
output tax, and such input tax can be credited against any tax under the NIRC.
Such election is irrevocable for a period of 3 years from the quarter the election was made.
E (c) Creditable Input Tax
Note: The input tax shall be creditable against the output tax incurred by a VAT-registered
person. The rule is that only purchases from VAT-registered persons have input tax.
E (d) Transitional/Presumption Input Tax Credits

Taxation Law Review
1. Transitional Input Tax Credit

- A person who becomes liable to VAT or any person who elects to be
VAT-registered is allowed to claim input tax on his beginning inventory of
goods, materials and supplies equivalent to 2% of the value of such
inventory or the actual VAT paid on such goods, materials and supplies,
whichever is higher.
2. Presumptive Tax Input Credits
- For persons or firms engaged in the processing of sardines, mackerel or
milk, manufacturing refined sugar and cooking oil, and manufacturing
packed noodle-based instant meals, a presumptive input tax equivalent
to 4% of the gross value in money of their purchases of primary
agricultural products are used as inputs to their production.
E (e) Refunds or Tax Credits of Input Tax

- 2 Available options (period: within 2 years)
- Apply for tax credit
- Apply for a refund of the creditable input tax
E (f) Invoicing and Accounting Requirements
VAT-registered person must issue

- a VAT invoice for every barter, sale or exchange of goods or
properties
- a VAT Official Receipt for every lease of goods and services, and for
every sale, barter of or exchange or services
Components of VAT Invoice or VAT O.R.

1. Statement that the seller is a VAT-registered person followed by his TIN
2. The total amount which the purchased is obligated to pay to the seller
a. The amount of tax shall be shown as a separate item in the invoice or
receipts
b. If the sale is exempt from VAT, the term “VAT-exempt sale” shall be written
or printed prominently on the invoice or receipt.
c. If the sale is subject to 0% VAT, the term “Zero-rated” shall be written or
printed prominently on the invoice or receipt
d. The date of transaction, quantity, unit cost and description of the goods or
properties or nature of service
3. In sales of P1000 or more, the name, business style, address and TIN of the
purchaser.
E (g) Return and Payments
- Every person liable to pay VAT shall file a quarterly return of the
amount of his gross sales or receipts within 25 days following the
close of each taxable quarter prescribed for each taxpayer. However,
the payment of the VAT shall be made on a monthly basis.

Taxation Law Review
E (h) Power of the Commissioner to Suspend the Business Operations of a taxpayer
Violations
- In case of VAT-registered persons
 failure to issue invoices or receipts
 failure to file a VAT return as required
 Understatement of taxable sales or receipts by 30% or more of
his correct taxable sales
- For failure of any person to register as required
 temporary closure for not less than 5 days
 Lifted only upon compliance of the requirements
XXI REMEDIES
A. Remedies to the Government (Assessment & Collection)
1. Normal or Ordinary Assessment and Collection

 Available to the Government if there was a return filed by the taxpayer
and such return is not false or fraudulent.
 Government may make the assessment within 3 years after the last day
prescribed by law for filing the return – not from the time of payment.
 If the return is filed beyond the period of filing prescribed by law, the 3-
year period shall be counted from the day of the filing of the return.
 Prescription period for collection is 5 years from final assessment.
2. Abnormal or Extraordinary Assessment and Collection

 This remedy is resorted in cases where:
o The taxpayer omits or fails to file his return
o The taxpayer files a return but the return was fraudulent
o The return filed by the taxpayer was false.
 Note: legal presumption is that the return filed by the taxpayers is true and
correct. Therefore, the burden of proof lies in the government to prove that
such return is fraudulent or false.
 Remedies (options available):
o Assessment and collection
 Prescriptive period for assessment is 10 years from the
discovery of the non-filing of the return or the fraudulent or
false return
 Period for collection prescribes in 5 years from the date of
final assessment
o Collection without Assessment
 No prescriptive period for assessment
 Prescriptive period for collection is 10 years from the
discovery of non-filing or fraudulent or false return.
B. Procedure for Assessment

Taxation Law Review
Section 228 of the NIRC provides for 2 steps for assessment

o pre-assessment notice
o final assessment notice
RR No. 12-99 provides for 3 steps, namely:

o Notice of informal conference
o Preliminary notice of assessment (PAN)
o Formal letter of demand and notice to pay the tax (FAN)
1. Pre-assessment Notice (PAN)

- issued to a taxpayer who fails to file a return, or files a return but fails
to pay the tax, or files a return, pays the tax but such payment is
insufficient.
- The following are instances where PAN is not necessary (Section
228)
 Mathematical error in computation
 Discrepancy discovered by the withholding agent
 When a taxpayer who opted to claim a refund or tax credit of
excess creditable WHT for a taxable period was determined t
have carried over and automatically applied the same amount
claimed against the estimated tax liabilities for the taxable
quarter or quarters of the succeeding taxable year
 When the excise tax due on excisable articles has not been paid.
 When an article locally purchased or imported by an exempt
person has been sold, traded, or transferred to non-exempt
persons (e.g. vehicles, capital equipment, machinery)
2. Final Assessment Notice (FAN) is issued when:
 The taxpayer, having received a pre-assessment notice, fails to
respond within the period provided by the rules
 Under the 5 instances enumerated under Section 228
3. Protest
 After receipt of the FAN, the taxpayer cannot immediately appeal to
the CTA. The Code mandates that before such appeal can be
made, a protest must first be filed by the taxpayer.
 Protest is an action disputing the final assessment. This is in
accordance with the principle of exhaustion of administrative
remedies.
 BIR is given 180 days within which to decide on the matter
 Upon denial of the protest or the lapse of the 180-day period without
action from BIR, taxpayer may appeal to the CTA within 30 days
from receipt of the denial or lapse of the period.
 If no appeal is made, the decision shall become final, executory and
demandable.
4. Appeal to the CTA
 Upon denial or lapse of the 180-day period, appeal to the CTA
Division

Taxation Law Review
 Pending appeal, BIR may amend the assessment during the

pendency of the appeal to avoid multiplicity of suits.
5. Appeal to the Supreme Court
 If the CTA decision is unfavorable, taxpayer may file an MR within
15 days from receipt of the decision of the CTA sitting in division.
 If the decision in MR is still unfavorable, elevate the appeal to the
CTA en banc
 If the decision of the CTA en banc is still unfavorable, the taxpayer
is given the remedy to file a petition for certiorari to the SC under
Rule 65.
 Only grave abuse of discretion amounting to lack or excess of
jurisdiction can be a ground for petition.
 Objections to assessments should only be raised to the BIR as well
as the CTA, not via petition for certiorari.
 Final assessment becomes final and executory when:

o The protest is not filed on time
o The supporting documents were not filed within the 60-day
period
o No appeal was filed to the CTA within 30 days after the lapse
of the 180-day period
o There was an appeal filed but such was beyond the period to
appeal.`
C. Forms of Protest
1. Protest under the Local Tax

 LGC provides that when the local treasurer finds that correct taxes,
fees, or charges have not been paid, he shall issue a notice of
assessment stating the nature of the tax, fee, or charge the amount of
deficiency, the surcharges, interests and penalties
 The taxpayer may file a protest within 60 days from the receipt of the
notice of assessment.
 Non filing will make the assessment final and executory
 Local treasurer may grant the protest, wholly or partly or deny the
protest, wholly or partly.
 The taxpayer is given a period of 30 days from the receipt of the denial
or the lapse of the 60-day period, within which to appeal to the court of
competent jurisdiction, the RTC
 In case the RTC renders an unfavorable decision, the taxpayer may
appeal such decision to the CTA sitting en banc.
 Elevate to the SC in case the decision of CTA en banc in unfavorable.
2. Protest under Real Property Tax
 Made by the taxpayer who is not satisfied with the action of the assessor in
the assessment of his property.
 Taxpayer has 60 days from the date of receipt of the written notice of
assessment to appeal to the LBAA.

Taxation Law Review
 Before this protest may be entertained, the LGC requires that the taxpayer
first pay the tax. This is referred as payment under protest (annotated on
the tax receipt).
 The protest must be filed within 30 days from the payment of the tax.
 LBAA shall decide within 120 days from receipt of the appeal.
 Burden proof required is substantial evidence only.
 In case the LBAA renders unfavorable decision, he may appeal to the
CBAA.
 If the CBAA likewise render an unfavorable decision, the taxpayer may
appeal to the CTA, and thereafter to the SC.
3. Protest under the Tariff and Customs Code
 Under the TCC, if the importer loses the case, his remedy is to appeal the
decision within 15 days before the Commissioner.
 In case the Commissioner decides in favor of the government, the imposter
may file an appeal to the CTA sitting in division within 30 days from receipt
of the decision.
 If the CTA decides in favor of the government, the importer may file an MR
before the same division within 15 days.
 In case of unfavorable decision from the CTA division, the importer may
appeal before the CTA sitting en banc.
 In case the importer still fails to have a decision in his favor, he may appeal
to the SC within 15 days from receipt of the unfavorable decision.
 A second situation is provided in case the importer-taxpayer prevails over

the government.
 There will be an automatic review within 5 days.
 Filing: Secretary of Finance in case the value of the commodity is P5million
above; and Commissioner if the value of commodity is less than P5million
 The Commissioner is given a period of 30 days within which to decide.
 If the Commissioner reverses the ruling of the Collector and renders a
decision in favor of the government, such decision shall be final and
executory
 If the Commissioner affirms the Collector or does not render a decision
within the 30 day period, there shall be automatic review before the
Secretary of Finance.
 The decision of the Secretary, in case it is unfavorable to the importer-
taxpayer, shall be appealable to the CTA.
 It is the decision of the Secretary that is appealable to the CTA.
D. Compromise
The Commissioner may compromise the payment of any internal revenue tax under
2 instances:
 When a reasonable doubt as to the validity of the claim against the taxpayer
exists.
 When the financial position of the taxpayer demonstrates a clear inability to
pay the assessed tax.
 May the government compromise both criminal and civil cases?

Taxation Law Review
o In civil cases, the government may compromise the liability of the

taxpayer at any stage of the proceeding except when the case is
already final and executory.
o In criminal cases, compromise is also allowed except if the criminal
case is already files before the RTC or if the case involves fraud.
 Suppose the civil case is already final and executory, can it still be subject to
compromise?
o If this would be allowed, the doctrine of separation of powers will be
violated!
 Suppose the corporation is already dissolved, can the stockholder still be
compelled to pay the tax liability?
o No, except in the following cases:
 If there is evidence to prove that the assets of the corporation
were taken by the stockholder
 If the stockholder has unpaid subscription.
Limitations on Compromise Agreements:

 For cases of financial incapacity, the minimum rate shall be equivalent
to 10% of the basic assessed tax.
 For other cases, the minimum rate shall be equivalent to 40% of the
basic assessed tax.
 Note: Where the basic tax involved exceeds P1million or where the
settlement offered is less than the prescribed minimum, the
compromise shall be subject to the approval of the Evaluation Board
(composed of the Commissioner + 4 Deputy Commissioners)
E. Remedies for Collection of Delinquent Taxes
1. Judicial Action
 Civil Action
 Criminal Action
2. Administrative Action
 Distraint
 Levy
 Tax Lien
F. Distraint
1. Constructive Distraint
 If delinquent taxpayer is retiring from any business subject to tax
 If DT is intending to leave the Philippines
 If DT is intending to remove his property in the Philippines
 If DT is intending to hide or conceal his property
 If DT is intending to perform any act to obstruct the proceedings for
collecting the tax due or which may be due to him.
 Note: The subject of the distraint is the personal property of the taxpayer.
 Distraint is effected by:

Taxation Law Review
o Requiring the taxpayer or any person having possession or control

of such property to sign a receipt covering the property distrained
o Obligate himself to preserve the same intact and unaltered and not
to dispose of the same in any manner whatever, without the
authority of the Commissioner
 In case the taxpayer refuses to sign the receipt, revenue officer can just
leave a copy in the premises in the presence of 2 witnesses.
2. Distraint of Intangible Properties

 Stocks and other securities
o A copy of the warrant of distraint shall be served upon the taxpayer
and upon the President, manager, treasurer, or other responsible
officer of the corporation which issues the stock certificates
 Debts and credits
o A copy of the warrant is left with the person owing the debts or
having in his possession or under his control of such credits, or his
agent
 Bank accounts
o Shall be garnished by serving a warrant of garnishment upon the
taxpayer and upon the president, manager, treasurer, or other
responsible person of the bank.
3. Actual Distraint
 The personal property of the taxpayer is physically taken by the distraining
officer.
 Within 10 days from the receipt of the warrant, a report on the distraint is
submitted to the RDO and RRD.
 The property distrained shall be sold in public auction (the time of sale
shall not be less than 20 days after notice to the owner or possessor of the
property
G. Levy
 This remedy is applicable to real property. Levy may be simultaneously or

after the distraint of personal property.
 Written notice shall me mailed or served upon the RD of the place where the
property is located and upon the delinquent taxpayer, his agent or the
manager of the business.
 Note that at any time before the day fixed for the same, the taxpayer may
discontinue all proceedings by paying the taxes, penalties and interest.
(RIGHT OF PREEMPTION)
 Unlike in cases of distraint, in cases of levy of real property, the taxpayer has
also the RIGHT OF REDEMPTION.
 Redemption price is the equal to the amount of public taxes, penalties, and
interest thereon from the date of delinquency to the date of sale.
 If there is no bidder, the property shall be forfeited to the Government (with 1
year redemption period).

Taxation Law Review
 In case there is a bidder and the bid is not enough, the rules on distraint of
personal property and other real property shall be applicable.
Note: In case of forfeiture, the title to the property is automatically transferred to the
government after registration of such forfeitures with the RD while in cases of
distraint, the title to the property is not automatically registered.
H. Injunction
 The NIRC prohibits any court to have the authority to grant an injunction to restrain the
collection of any NIRC tax, fee or charge.
 By way of exception, the CTA is authorized to issue writs of injunction for NIRC taxes.
I. Tax Lien
 In case where the taxpayer neglects or refuses to pay an internal revenue tax, the
amount due shall constitute as a lien in favor of the Government.
 Te tax lien shall not be valid against any mortgagee, purchaser or judgment creditor until
the notice of such lien is filed by the CIR to the RD.
 Thus, before such lien can affect the rights of the mortgagee, it should be registered first
with the RD. (Otherwise, it is the mortgagee who will prevail over the government.
J. Approval of the Commissioner
 Before an action, civil or criminal, may be filed in court, the Commissioner must first
approve such filing of the action.
 The Commissioner may delegate powers vested in him under the NIRC to any
subordinate with the rank of a division chief or higher.
 The following are the powers of the CIR which cannot be delegated:
o Power to promulgate rules and regulation by the Secretary of Finance
o Power to issue rulings of first impression or to reverse, revoke or modify any
existing ruling of the Bureau.
o Power to compromise or abate any tax liability
o Power to assign or reassign internal revenue officers to establishments where
articles subject to excise tax are produced.

Taxation Law Review Notes: I. Basic Principles of Taxation A. Taxation As An Inherent Power of The State

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Taxation Law Review Notes: I. Basic Principles of Taxation A. Taxation As An Inherent Power of The State

Uploaded by

Copyright:

Available Formats

Taxation Law Review

TAXATION LAW REVIEW NOTES

I. BASIC PRINCIPLES OF TAXATION

A. TAXATION AS AN INHERENT POWER OF THE STATE

Power to tax is inherent in sovereignty

Lifeblood Theory (CIR v Algue)

B. PHASES AND SCOPE OF TAXATION

Levy – where Congress enacts a statute to impose taxes

Subject Matter – refers to persons, things, transaction, privilege, etc.

1. Taxation should be for public use

1. Due Process Clause (Section 1, Art. III)

Substantive Due Process

Procedural Due Process

2. Equal Protection Clause (Section 1, Art. III)

Prepared by: Michael Gines Munsayac

Violations (Villegas v Hsiu Chiong Tsai Poi)

Valid Classification (Pp v Cayat)

3. Freedom of Religion (Section 5, Art. III)

Non Establishment Clause

Free Exercise Clause

4. Non-Impairment of Contracts (Section 10, Art. III)

5. Non-imprisonment for Non-Payment of Tax (Section 20, Art. III)

E. DOCTRINE OF EQUITABLE RECOUPMENT VS. DOCTRINE OF SET-OFF

Doctrine of Equitable Recoupment

Doctrine of Set-off or Compensation

Prepared by: Michael Gines Munsayac

When not allowed? Elements:

International Juridical Double Taxation

Most Favored Nation Clause

Methods to minimize burden

G. EXEMPTION FROM REAL ESTATE TAX

II. INCOME TAXATION (RA 8242 Tax Reform Act of 1997)

Prepared by: Michael Gines Munsayac

Definition: NIRC defines a corporation as including partnerships, no matter how created or

III. KINDS OF INCOME TAXES

A. NET INCOME TAX

Taxable Income: Gross Income

Prepared by: Michael Gines Munsayac

B. GROSS INCOME TAX

Gross Income X Tax Rate = Tax Due

C. FINAL INCOME TAX

Gross Income X Tax Rate = Tax Due

D. MINIMUM CORPORATE INCOME TAX – 2% on Gross Income

Gross Income X 2% = MCIT

Pay the MCIT or the Net Income Tax, whichever is higher!

E. IMPROPERLY ACCUMULATED EARNINGS TAX – 10% of Taxable Income

This tax is imposed on the improperly accumulated earnings by corporations.

Purpose: To discourage the practice of corporations of accumulating earnings

To avoid this: Distribute earnings among the shareholders.

F. OPTIONAL CORPORATE INCOME TAX – 15% on Gross Income

Prepared by: Michael Gines Munsayac

IV. SOURCES OF INCOME

What is the relevance in determining the sources?

A. GROSS INCOME FROM SOURCES WITHIN THE PHILIPPINES. (Section 42[a])

1. Interest from sources within the Philippines

4. Rentals and Royalties from property located in the Phils.

5. Sale of Real Property

6. Sale of Personal Property

Prepared by: Michael Gines Munsayac

B. GROSS INCOME FROM SOURCES WITHOUT THE PHILS.

Basic Formula: Gross Income Within

= Rate X Expenses World

P10k_ = 10% X P50K = P5K.