Professional Documents
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Notes in Taxation Law by Atty Vic Mamalateo
Notes in Taxation Law by Atty Vic Mamalateo
• All other assets, whether or not used in trade or business, other than the
above assets
• CAPITAL ASSET
KINDS OF TAXPAYERS
• INDIVIDUAL
– CITIZEN
• Resident – Taxable on worldwide income
• Non-resident – Taxable on income from sources within the Phil
– Immigrant or permanent worker – NRC from date of departure from the Phil
– OFW (seamen) – NRC if his aggregate stay outside the Phil is more than 183 days
– ALIEN – Taxable on income from sources within the Phil
• Resident
• Non-resident
– Engaged in trade or business (more than 180 days in the Phil)
– Not engaged in trade or business (180 days or less stay in Phil)
• CORPORATION
– DOMESTIC – Taxable on worldwide income
– FOREIGN – Taxable on income from sources within the Phil
• Resident (e.g., Phil branch of foreign corporation)
• Non-resident
– TEST FOR TAX PURPOSES: Law of incorporation
PARTNERSHIPS
• TAXABLE
– Partnerships, no matter how created or organized, including
joint ventures or consortiums
• EXEMPT
– General professional partnership (GPP), but partners are
taxed on their share of partnership profits actually or
constructively paid during the year
– Joint venture or consortium undertaking construction activity
or energy-related activities with operating contract with the
government
RESIDENT FOREIGN CORPS
• TAXABLE
– Ordinary branch of a foreign corporation in the Phil (30% of net
taxable income from sources within the Phil)
• PEZA- & SBMA-registered branch are exempt from branch profit remittance
tax
– Regional operating headquarters (ROHQ) – 10% of net taxable
income from sources within the Phil
– Offshore banking unit (OBU) and foreign currency deposit unit
(FCDU) [ING Bank Manila v. CIR] – 10% on gross interest income on foreign currency loans
– International carriers by air or water – 2.5% of Gross Phil Billings
– Foreign contractor or sub-contractor engaged in petroleum
operations in the Phil – 8% of gross income
• EXEMPT
– Representative office
– Regional headquarters (RHQ)
SOURCES OF INCOME
• Interest – Interest from sources within Phil and interest on bonds and obligations
of residents, corporate or otherwise
• Dividend – From domestic corporation and from foreign corporation, unless less
than 50% of gross income of foreign corporation for 3 years prior to declaration of
dividends was derived from sources within the Phil; hence, apply only ratio of Phil-
source income to gross income from all sources
• Services – Place where services are performed, except in case of international air
carrier and shipping lines which are taxed at 2.5% on their Gross Phil Billings.
Revenues from trips originating from the Phil are considered as income from
sources within the Philippines, while revenues from inbound trips are treated as
income from sources outside the Philippines.
• Rentals and royalties – Location or use of property or property right in Phil
• Sale of real property – Located in the Philippines
• Sale of personal property – Located in the Philippines
• Gain from sale of shares of stocks of a domestic corporation is ALWAYS treated as
income from sources within the Philippines.
• Other intangible property – Mobilia sequuntur personam – it follows domicile of
owner
GROSS INCOME
• SALE OF OF SERVICES
GOODS
• Gross Revenue
Sales
• Less: Cost
Cost ofof Service
Sales:
• consisting
Beg. Inventory of all direct
• costs and expenses
+ Purchases
• Gross
Total income
available for sale
- Ending inventory
• Times 2%
Cost of Sales
• MCIT
• Gross income
NOTE: MCIT is imposed beginning on the 4th taxable year immediately
• following
Times 2%the year in which the corp commenced bus operations
• (Sec
MCIT 27(E)(1), NIRC)
• NOTE:
Pay MCIT after
MCIT4isyears
nowimmediately
computed onfollowing
quarterly the year bank
basis. If quarterly
commenced
MCIT > than bus RCIT,operations
excess MCIT of prior
(Manila Bank vyear is 168118,
CIR, GR not allowed.
Aug 28, 2006)
INCOME
• INCOME means cash or its equivalent coming to a person within a
specified period, whether as payment for services, interest or profit from
investment. It covers gain derived from capital, from labor, or from both
combined, including gain from sale or conversion of capital assets.
– FBT is a tax on fringe benefits received by employees, although the tax is assumed by the
employer-payor of income.
• Return of capital is exempt from income tax (e.g., tax-free exchange of
property).
• TYPES OF DIVIDENDS
– Taxable
• Cash dividend
• Property dividend
– Exempt
• Stock dividend (except when there is change in proportionate interest among
stockholders and there is subsequent cancellation or redemption of shares
declared as stock dividend)
• Computation of the quarterly and annual tax returns of individuals (except those
receiving purely compensation income) and corporations shall be made on the
cumulative basis; i.e., gross income and deductions are consolidated and the
income tax liability is computed on the consolidated net income, and the income
taxes paid for the preceding quarter(s) are credited against the consolidated
income tax due.
REFUND OR TAX CREDIT
• Taxpayer has 3 options: refund, tax credit, or carry over excess withholding tax or
payment.
• However, once taxpayer exercises option to carry over, such option is irrevocable
for that taxable period and no application for refund or tax credit shall be allowed
(Paseo Realty v CA, GR 119286, Oct 13, 2004).
• While a taxpayer is given the choice to claim refund or tax credit, such election is
not final. Prior verification and approval by CIR is required. Such remedy is not
absolute and mandatory (ibid).
• Conditions for grant of refund or tax credit: (1) claim was filed within 2 years from
date of payment; (2) income payment was declared in tax return; and (3) fact of
withholding is established by copy of BIR Form 2307 (BF Bank v. CA, GR 155682, Mar 27, 2007).
• In case of dissolution of corporation, the 2-year period for claim for refund is
counted 30 days after SEC approval of plan for dissolution, which is considered the
date of payment of taxes withheld on earned income (BPI v. CIR, GR 144653, Aug 28,
2001).
WITHHOLDING TAX
• An income payment is subject to the expanded withholding
tax, if the following conditions concur:
• a. An expense is paid or payable by the taxpayer, which is
income to the recipient thereof subject to income tax;
• b. The income is fixed or determinable at the time of
payment;
• c. The income is one of the income payments listed in the
regulations that is subject to withholding tax, except when
payor is a Top 20,000 Corporation;
• d. The income recipient is a resident of the Philippines liable
to income tax; and
• e. The payor-withholding agent is also a resident of the
Philippines.
WITHHOLDING TAX
• EXEMPT FROM EWT
• 1. National government and its instrumentalities, including provincial, city or municipal
governments and barangays, except government-owned or controlled corporations;
• 2. Persons enjoying exemption from payment of income taxes pursuant to the provisions
of any law, general or special, such as but not limited to the following:
• a. Sales of real property by a corporation which is registered with and certified by HLURB
or HUDCC as engaged in socialized housing project where the selling price of the house
and lot or only the lot does not exceed P180,000 in Metro Manila and other highly
urbanized areas and P150,000 in other areas;
• b. Corporations registered with the BOI, PEZA, and SBMA, enjoying exemption from
income tax under E.O. 226, R.A. 7916, and R.A. 7227;
• c. Corporations which are exempt from income tax under Section 30 of the Tax Code, such
as GSIS, SSS, PHIC, PCSO, and PAGCOR;
• d. General professional partnerships; and
• e. Joint ventures or consortium formed for the purpose of undertaking construction
projects or engaging in petroleum, coal, geothermal and other energy operations
• f. International carriers (by air or water) subject to 2.5% Gross Phil Billings
• VALUE ADDED TAX
BUSINESS TAXES
• NON-VAT/EXEMPT
VAT FROM VAT TRANSACTIONS
– Transaction
• Taxable is subject to Other Percentage Tax (Title V, NIRC) and
transactions
– exempt from of
Sale or lease VATgoods or properties
– VAT
– Sale isofimposed
services on transaction in addition to Excise Tax, if any
• Tax is imposed on Gross Receipts or Gross Income
– Importation of goods
– Transaction is exempt from VAT, OPT, and Excise Tax (e.g., sale of
• Formula for computing
agricultural food productsVAT
in their original state)
– Output Tax
– Less: Input Tax
– VAT Payable/(Excess Input Tax)
VALUE ADDED TAX
• CHARACTERISTICS OF VAT
– Tax on value added of taxpayer
– Transparent form of sales tax
– Broad-based tax on consumption of goods, properties and
services in the Phil
– Indirect tax: tax is imposed on seller but burden of tax is
shifted to the buyer
– Tax is collected thru the tax credit method
• Output tax on sales; input tax on purchases
– No cascading of tax in VAT system
– “Tax-inclusive method” is adopted by the Phil
VALUE ADDED TAX
• TAXABLE PERSONS
– Seller of goods or properties
• Goods or properties are consumed or for consumption in the Phil
• In the course of trade or business
• Sales of goods or properties are not exempt from VAT
– Seller of services
• Listed services are performed or to be performed in the Phil
• In the course of trade or business
• For a valuable consideration
• Services are not exempt from VAT
– Importer of goods
• Whether done in the course of his trade or business or for
personal consumption
VALUE ADDED TAX
• Seller of real properties is subject to VAT
– Seller executes a document of sale (DAS or CTS)
– Real property is located in the Phil
– Seller is engaged in real estate business either as dealer, developer or
lessor
– Real property is held primarily for sale or for lease in the ordinary
course of trade or business
– Sale is not exempt from VAT
• However, Rev. Regs. No. 4-2007 (Feb 2007) provides that “if
the real property sold is used in his trade or business, said
transaction is subject to VAT, being incidental to the main
business” of the taxpayer, who is a VAT-registered taxpayer
engaged in other types of business.
VALUE ADDED TAX
• Sale, barter or exchange
– Sale, barter or exchange has the same tax consequence
– There must be valuable consideration; hence, donation is exempt from VAT
– Deemed sale is subject to VAT (output tax) in order to recoup previous VAT
(input tax) allowed
– Excise tax, if any, interest, and delivery charges form part of gross selling price
• In the course of trade or business
– The regular conduct or pursuit of a commercial or an economic activity,
including transactions deemed incidental thereto, regardless of whether or not
the person engaged therein is a non-stock, non-profit private organization
(irrespective of the disposition of its net income and whether or not it sells
exclusively to members or their guests), or government entity.
– Isolated transactions are not subject to VAT.
– Incidental income follows taxation of the principal activity.
VALUE ADDED TAX
– The absence of profit in the performance of taxable services does not
make such activity for a fee exempt from VAT (CIR v. COMASERCO, GR 125355, Mar 30, 2000).
• Goods or properties must be located in the Philippines and
consumed or destined for consumption in the Phil.
– Special economic zones under RA 7916 (PEZA Law) and freeport zones
under RA 7227 (BCDA Law) are treated as foreign territories by fiction
of law. Hence, importation of goods by a special economic or freeport
zone enterprise shall be exempt from VAT and customs duties and will
be subject to VAT and duties only upon their withdrawal from the
customs custody.
– Destination Principle:
• Export sales of goods are zero-rated (0% VAT)
• Import of goods into the Phil is taxable at 12% VAT
VALUE ADDED TAX
• Tax base is “Gross Selling Price” (GSP) - the total amount of money or its
equivalent, which the purchaser pays or is obligated to pay to the seller in
consideration of the sale, barter or exchange of the goods or properties,
excluding the VAT.
• As a rule, output tax accrues on sale of goods or properties (other than a
real property) at the time of sale, when the VAT sales invoice is issued,
although none or only a part of the gross selling price is paid by the buyer
at the time of sale.
• Excise tax, if any, shall form part of GSP.
• Sales discounts determined and granted at the time of sale, which are
expressly indicated in the sales invoice do not form part of the tax base.
Grant of discount must not depend upon the happening of a future event
or the fulfillment of certain condition. They must be recorded in the books
of accounts of the seller.
• 20% sales discounts to senior citizens under RA 9257 (Amended Senior
Citizens Law) shall be deducted from gross sales before applying the VAT
rate.
VALUE ADDED TAX
• To determine Gross Selling Price (100%), divide Total Invoice
Amount (112%) by 1.12.
• If Total Invoice Amount includes EWT, determine first the
Gross Selling Price.
• Tax base for installment sales of real property
– If initial payments (consisting of down payment and all monthly
amortizations in the year of sale) exceeds 25% of the gross selling
price, the tax base is the entire gross selling price as shown in the
document of sale, even though only a part of it has been received
during the period
– If initial payments during the year of sale do not exceed 25% of gross
selling price, the tax base is only the amount received
• Tax rates
– 12% beginning Feb 1, 2006 (RA 9337)
– 0% VAT on zero-rated sales
VALUE ADDED TAX
• Sales of goods subject to 0% VAT
– Actual export sales
– Deemed export sales
• Internal or constructive export sales under BOI law (EO 226) and special
laws (RA 7916 and RA 7227).
– Ecozones and freeport zones are deemed foreign territories by fiction
of law (CIR v. Seagate Technology (2005); CIR v. Toshiba Information Equipment (2005)
– For as long as the goods remain within the zone, consumed or
destroyed there, they will be duty-free and tax-free (Coconut Oil Refiners
Asso v. Torres (2005)
• Effectively zero-rated sales (sales to ADB, embassies, etc)
– Sales of gold to BSP
– Foreign currency denominated sales
– Sales of goods, supplies, equipment and fuel to persons engaged in
international shipping or international air transport operations
VALUE ADDED TAX
• ZERO-RATED
EXEMPT SALE SALE
• Transaction
Exemptionisremoves
completelythe
freeVAT
of VAT; rate exempt
at the charged by seller is zero
stage
• VAT-registered seller can reclaim input taxes passed on to it by sellers of
• goods
Exemptor services from BIR in form of refund or tax credit
taxpayer cannot reclaim VAT passed on to it by VAT-
• Zero-rated
registeredsales are taxable sales for purposes of registration as VAT
sellers
taxpayer to determine threshold
• For sale of services, the test is not whether services have been
performed or not, but whether amount of compensation or fee
is received, actually or constructively. The rule is: NO RECEIPT OF
PAYMENT, NO VAT LIABILITY.
VALUE ADDED TAX
• ZERO-RATED SALES OF SERVICES
– Processing, manufacturing or repacking goods for other persons doing
business outside the Phil, which goods are subsequently exported,
where the services are paid for in acceptable foreign currency and
accounted for in accordance with BSP rules and regulations
– Services other than processing, manufacturing or repacking rendered
to a person engaged in business conducted outside the Phil or to a
non-resident person not engaged in business who is outside the Phil
when the services are performed, the consideration for which are paid
for in acceptable foreign currency and accounted for in accordance
with BSP rules and regulations (CIR v. BWSC Mindanao, GR 153205, Jan 22, 2007)
– Services rendered to persons or entities whose exemption under
special laws or international agreements to which the Phil is a
signatory effectively subjects the sale of services to 0% rate
VALUE ADDED TAX
• ZERO-RATED SALES OF SERVICES
– Services rendered to persons engaged in international
shipping or international air transport operations,
including leases of property for use thereof
– 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 domestic air or sea
carriers from the Phil to a foreign country
– Sale of power or fuel generated thru renewable sources of
energy (biomass, solar, wind, hydropower, geothermal and
other emerging sources)
VALUE ADDED TAX
• Tax Code not only requires that the services other than “processing, manufacturing
or repacking of goods” and that payment for such services be in acceptable foreign
currency accounted for in accordance with BSP rules. Another essential condition
for qualification to zero-rating under Sec 102(b)(2) is that the recipient of such
services is doing business outside the Phil.
• While this requirement is not expressly stated in the 2nd paragraph of Sec. 102(b),
this is clearly provided in the 1st paragraph of Sec 102(b) where the listed services
must be “for other persons doing business outside the Phil.”
• The above phrase not only refers to services enumerated in the first paragraph, but
also pertains to the general term “services” appearing in the second paragraph.
• Otherwise, those subject to the regular VAT under Sec 102(a) can avoid paying the
VAT by simply stipulating payment in foreign currency inwardly remitted by the
recipient of services. To interpret Sec. 102(b)(2) to apply apply to a payer-recipient
of services doing business in the Phil is to make the payment of regular VAT
dependent on the generosity of the taxpayer.
• A tax is a mandatory exaction, not a voluntary contribution.
VALUE ADDED TAX
• Significantly, the amended Section 108(b) [previously Sec 102(b)] of the present
Tax Code clarifies this legislative intent. For zero-rating of services, it must be
rendered to a person engaged in business conducted outside the Phil.
• The payer-recipient of respondent’s services is the Consortium which is a joint
venture doing business in the Phil. While the Consortium’s principal members are
non-resident foreign corps, the Consortium itself is doing business in the Phil. This
is shown in BIR Ruling 23-95, which states that the contract between Consortium
and NPC is for a 15-year term. Considering the length of time, the Consortium’s
operation and maintenance of NPC’s power barges cannot be classified as a single
or isolated transaction.
• This case is different from CIR v. American Express International, Inc. (Phil Branch),
because in the latter case, the recipient of services is AEII (HK Branch) doing
outside the Phil (CIR v. BWSC Mindanao, Inc., GR153205, Jan 22, 2007).
• CIR’s filing of its Answer before the CTA challenging claim for refund effectively
serves as a revocation of VAT Ruling 03-99 and BIR Ruling 23-95. However, such
revocation cannot be given retroactive effect since it will prejudice respondent.
VALUE ADDED TAX
• VAT-EXEMPT TRANSACTIONS
– A. Sale or importation of agricultural and marine food products in their
original state; livestock and poultry generally producing food for
human consumption; and breeding stock
– B. Sale or importation of fertilizers; seeds, seedlings and fingerlings;
fish, prawn, livestock and poultry feeds (except specialty feeds for race
horses, fighting cocks and other pets)
– C. Importation of personal and household effects belonging to
residents of the Phil returning from abroad and non-resident citizens
coming to resettle in the Phil
– D. Importation of professional instruments and implements, and
personal effects (except vehicle, vessel, aircraft, machinery for use in
manufacture) belonging to persons coming to settle in the Phil
– E. Services subject to percentage tax under Title V
VALUE ADDED TAX
• VAT-EXEMPT TRANSACTIONS
– G. Medical, dental, hospital and veterinary services, except those
rendered by professionals
– H. Educational services rendered by private educ institutions
accredited by DepEd, CHED, TESDA, and those rendered by
government educational institutions
– I. Services rendered by individuals pursuant to an employer-employee
relationship
– O. Export sales by persons who are not VAT-registered
– P. Sale of real property not primarily held for sale to customers or for
lease in the ordinary course of trade or business, or real property for
low-cost and socialized housing, residential lot valued at P1.5 M or
below, house and lot and other residential dwellings valued at P2.5 M
or below
VALUE ADDED TAX
• VAT-EXEMPT TRANSACTIONS
– Q. Lease of a residential unit with a monthly rental not
exceeding P10,000
– R. Sale, importation, printing or publication of books and
any newspaper or magazine which appear at regular
intervals with fixed prices and is not devoted principally to
publication of paid advertisements
– V. Sale or lease of goods or property or the performance
of services other than transactions mentioned above, the
gross sales or receipts do not exceed P1.5 M
VALUE ADDED TAX
• Sale of medicines by the hospital pharmacy to in-patients is exempt from VAT, but
sale to out-patients is subject to 12% VAT (St. Luke’s Medical Center v. CTA and CIR,
1998).
• Tolling fees received by a hotel for PLDT is not part of its gross receipts
• Payment of VAT by the hotel on fees for providing limousine service to its client is
correct. It is not subject to the 3% common carrier’s tax. Claim for tax credit is
denied (Manila Mandarin Hotel v. CIR)
• Gross receipts of theatre owner or operator from sales of tickets to moviegoers are
exempt from VAT. Theatres and movie houses are not included in the enumeration
of taxable services in the VAT law. Our tax laws, past and present, did not adopt
more specific terms for “sale or exchange of services” to include showing of films
in public (SM Prime Holdings v. CIR, CTA Case 7079, 2006).
• PAGCOR is exempt from VAT pursuant to its charter, PD 1869. Being a special law,
PD 1869 prevails over RA 7716, a subsequent general law. To be valid, repeal of
special law should be express (CIR v. Acesite Hotel Corp, GR 147295, Feb 16, 2007).
VALUE ADDED TAX
• CATEGORIES OF INPUT TAXES
– Input tax credit on importations of goods and current local purchases
of goods, properties and services
• Input tax on capital goods must be amortized over certain period
– Transitional input tax credit
– Presumptive input tax credit
– Withholding input tax credit
– Excess input tax credit
• Only VAT-registered persons are entitled to credit input taxes
against their output tax.
• Non-registration as a VAT taxpayer does not exempt him from
VAT output tax liability on his taxable sales of goods,
properties or services.
VALUE ADDED TAX
• For sale of services, the rule is: NO PAYMENT OF FEE BY
BUYER AND ISSUANCE OF VAT RECEIPT BY SELLER, NO INPUT
TAX FOR BUYER!
• Transitional Input Tax
– 2% of value of inventory or actual VAT paid on such goods, materials
and supplies, whichever is higher
• Presumptive Input Tax
– Persons or firms engaged in the processing of sardines, mackerel and
milk, and in manufacturing refined sugar and cooking oil, and packed
noodle-based instant meals are entitled to presumptive input tax
equivalent to 4% of gross value in money of their purchases of primary
agricultural products which are used as inputs to their production (Sec.
111, NIRC)
VALUE ADDED TAX
• Tax reliefs of VAT taxpayers on their excess input
taxes (EIT) attributable to zero-rated and effectively
zero-rated sales
– Carry over the excess input tax to the next quarter, until
excess is utilized
– File a claim for refund
– File a claim for tax credit, within two years after the close
of taxable quarter where the sales were made
• For non-zero-rated sales, remedy available is only to
carry over EIT to the next quarter(s)
VALUE ADDED TAX
• Prescriptive period commences from the close of the
taxable quarter when the sales were made and not
from the time the input VAT was paid nor from the
time the official receipt was issued. Thus, when a
zero-rated VAT taxpayer pays its input VAT a year
after the pertinent transaction, said taxpayer only
has a year to file a claim for refund or tax credit of
the unutilized creditable input VAT. The reckoning
frame would always be the end of the quarter when
the pertinent sales or transaction was made,
regardless when the input VAT was paid (CIR v. Mirant
Pagbilao Corp, 2008).
• TAX REMEDIES UNDER THE TAX CODE
ASSESSMENT CYCLE
• Law prescribes
Filing of tax return
due date
• Tax audit
120 days +by120
BIRdays
• Informal Conference
• Preliminary Assessment Notice (PAN)
• Reply to PAN
• Final
15 days
Assessment
from receipt
Notice (FAN)
• Protest to FAN
• Supplemental
3 years or 10 years
Protest
• 30 days from receipt
• 60 days from filing of protest
ASSESSMENT CYCLE
• BIR ACTION
– Cancell
• 180 assessment
days from filing of protest, if any, or supplemental protest
– Deny protest
– Revise assessment
• 30 days from date of receipt of denial of protest or lapse of
• BIR INACTION
180 days
• Appeal to CTA
• 15 days from date of receipt; addl 15 days may be granted by
CTA after payment of docket fee.
• WHAT IS AN ASSESSMENT?
– Notice that taxpayer owes government a sum
of money
– Contains computation of tax liability and a
demand for payment of tax within a certain
period (CIR v. Pascor Realty & Dev Corp)
• PURPOSE OF ASSESSMENT
– To establish tax liability where an assessment is
required
ASSESSMENT
• FORMS OF ASSESSMENT
1. Formal assessment notice (FAN)
2. Collection letter
a. Letter demanding payment of erroneously refunded
amount (Guagua Electric Co v. CIR), or amount paid by bouncing
check (Republic v. Limaco & de Guzman)
• TAX EVASION is a scheme used outside of those lawful means and when
availed of, it usually subjects the taxpayer to further or additional civil or
criminal liabilities. It connotes 3 factors: end to be achieved; an
accompanying state of mind that is described as evil, willful or deliberate;
and course of action which is unlawful.