TAXATION SPECIAL PRE-WEEK BAR REVIEW Atty. Vic C. Mamalateo Sept.

7, 2010 GAPUZ LAW REVIE W, SM ARROCEROS

INCOME TAX

INCOME TAX INCOME TAX Tax on all yearly profits arising from property, professions, trades or offices, or as a tax on a person s income, emoluments, profits and the like (Fisher v. T rinidad). Income tax is a direct tax on actual or presumed income (gross or net) of a taxpayer received, accrued or realized during the taxable year. WITHHOLDING TAX It is not an internal revenue tax but a mode of collecting income tax in advance on income of the recipient of income thru the payor of income. [NOTE: Sec. 21, NIRC enumerates various internal revenue taxes.] There are 2 types of withholdin g taxes, namely: (1) final withholding tax; and (2) creditable withholding tax.

FINAL WITHHOLDING TAX FINAL WITHHOLDING INCOME TAX FWT withheld by the payor of income (e.g., 20% FWT on interest income on bank de posits) represents FULL payment of income tax due on such income of the recipien t. Income payee (or recipient of income) does not report income subjected to FWT in his income tax return, although income is reflected in his audited financial statements for the year. However, he is not allowed to claim any tax credit on income subjected to FWT. Withholding agent files the withholding tax return, whi ch includes the FWT deducted from the income payee, and pays the tax to the BIR. There is no Certificate of Tax Withheld issued to income payee. No Certificate of Tax Withheld (BIR Form 2307) is attached to the income tax return of recipien t of income because he does not claim any tax credit in his tax return.

INCOME TAX SYSTEMS GLOBAL TAX SYSTEM Compensation income not subject to FWT Business and/or professional income Capit al gains not subject to FWT Passive investment income not subject to FWT Other i ncome not subject to FWT SCHEDULAR TAX SYSTEM Compensation income subject to FWT (salary of OBU expat) Capital gains subject t o FWT (real property in the Phil and shares of domestic corporation) Passive inv estment income subject to FWT (interest on bank deposit) Other income subject to FWT (auto won on X mas raffle) The Philippines adopted the semi-global or semi-schedular tax system. Either the global or schedular system, or both systems may apply to a taxpayer.

FORMULA GLOBAL SYSTEM Gross sales/revenue Less: Cost of sales/service Gross income Less: Deductions PAE (for individual) Net taxable income Multiplied by applicable rat e (graduated or flat) Income tax due Less: Creditable WT Balance M Gross selling price or fair market value, whichever is higher times applicable tax rate = Tax due (real property) Gross selling price less cost or adjusted ba sis = Capital gain times applicable tax rate = Tax due (shares of dom corp) Gros s income times applicable rate = Tax due (passive inv income)

SCHE

NATURE OF ASSET ORDINARY ASSET Inventory if on hand at end of taxable year Stock in trade held p rimarily for sale or for lease in the course of trade or business Asset used in trade or business, subject to depreciation Real property used in trade or busine ss All other assets, whether or not used in trade or business, other than the ab ove assets CAPITAL ASSET

KINDS OF TAXPAYERS INDIVIDUAL CITIZEN Resident Taxable on worldwide income within the Phil

Non-resident Taxable on income from sources

Immigrant or permanent worker NRC from date of departure from the Phil OFW (seam en) 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 tra de or business (180 days or less stay in Phil) CORPORATION DOMESTIC Taxable on worldwide income FOREIGN Taxable on income from sources with in 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 co nsortiums EXEMPT General professional partnership (GPP), but partners are taxed on their share of partnership profits actually or constructively paid during the year Joint ventu re 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 wi thin the Phil Offshore banking unit (OBU) and foreign currency deposit unit (FCD U) [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 contr actor 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 fro m foreign corporation, unless less than 50% of gross income of foreign corporati on for 3 years prior to declaration of dividends was derived from sources within the Phil; hence, apply only ratio of Philsource income to gross income from all sources Services Place where services are performed, except in case of internat ional 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 incom e from sources within the Philippines, while revenues from inbound trips are tre ated as income from sources outside the Philippines. Rentals and royalties Locat ion or use of property or property right in Phil Sale of real property Located i n 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 GOODS Gross Sales Less: Cost of Sales: Beg. Inventory SALE OF SERVICES Gross Revenue Less: Cost of Service consisting of all direct co sts and expenses Gross income Times 2% MCIT NOTE: MCIT is imposed beginning on t he 4th taxable year immediately following the year in which the corp commenced b us operations (Sec 27(E)(1), NIRC) + Purchases Total available for sale - Ending inventory Cost of Sales

Gross income Times 2% MCIT NOTE: MCIT is now computed on quarterly basis. If qua rterly MCIT > than RCIT, excess MCIT of prior year is not allowed. Pay MCIT after 4 years immediately following the year bank commenced bus operati ons (Manila Bank v CIR, GR 168118, 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 inves tment. It covers gain derived from capital, from labor, or from both combined, i ncluding gain from sale or conversion of capital assets. FBT is a tax on fringe benefits received by employees, although the tax is assum ed by the employer-payor of income. Return of capital is exempt from income tax (e.g., tax-free exchange of property ). To be taxable, there must be income, gain or profit; gain is received, accrue d or realized during the year; and it is not exempt from income tax under the Co nstitution, treaty or law. Mere increase in the value of property does not constitute taxable income. It is not yet realized during the year. Transfer of appreciated property to the emplo yee for services rendered is taxable income.

TEST IN DETERMINING INCOME Realization test There must be separation from capital of something of exchangeable value (e.g., sale of asset) Claim of right doctrine CIR v. Javier, 199 SCRA 824 Economic benefit test Stock option given to the employee Payment of real property that has appreciated in value by employer to its employee Income from whatever source All income not expressly exempted from income, irrespective of voluntary or invo luntary action of taxpayer in producing income

NATURE OF INCOME COMPENSATION INCOME Existence of employer-employee relationship NO employer-employee relationship BUSINESS AND/OR PROFESSIONAL INCOME CAPITAL GAIN Real property in the Phil and shares of stock of domestic corporation Other sour ces of capital gain Interest, dividend, and royalty income BIR cannot compute co mpounded interest on delay in payment of promissory notes in the absence of stip ulation in contract (CIR v. Isabela Cultural Corp, GR 172231, Feb 12, 2007). PASSIVE INVESTMENT INCOME OTHER INCOME Prizes and winnings All other income, gain or profit not covered by the above cl asses

GROSS PHIL BILLINGS A. GPB applies on revenue from transport of passengers, cargoes or mail originat ing from the Philippines INTERNATIONAL AIR CARRIER From Phil to foreign destination Continuous and uninterrupted flight Transhipment of passenger in another country on another foreign airline: GPB tax applies only on aliquot portion of revenue on Philippine leg (Phil to foreign country) This is treated as income from forei gn sources; hence, exempt from Phil income tax From foreign country to the Phil INTERNATIONAL SHIPPING LINE From Phil to final foreign destination is taxable s exempt From foreign country to Phil i

B. ORDINARY INCOME Demurrage fees (for late return of containers) are akin to rental income subject to ordinary corporate income tax rate based on net taxable income from sources within the Philippines

INTEREST INCOME TYPES OF INTEREST INCOME Subject to FWT: Interest income on bank deposits, deposit substitutes, trust and other similar arrangements 20% FWT peso deposit 7.5% FWT foreign currency deposit NOT subject to FWT but subject to regular tax rates (5%-32%, if individual; 30%, if corporation): All other interest income or financing income Exempt income: Long-term deposit or investment by individuals Taxable income: Preferential tax rate Pre-termination of long-term deposit by individual (20%: 1 - less than 3 yrs; 12%: 3 yrs-less than 4 yrs; 5%: 4 yrs-less than 5 yrs); and i nterest on foreign loan Regular tax rate (30%) All other cases

DIVIDEND INCOME REQUISITES FOR DIVIDEND DECLARATION Presence of retained earnings No prohibition to declare dividend in loan agreeme nt Declaration of dividend by Board of Directors Taxable TYPES OF DIVIDENDS Cash dividend Property dividend Stock dividend (except when there is change in p roportionate interest among stockholders and there is subsequent cancellation or redemption of shares declared as stock dividend) Liquidating dividend distribut ion of assets to stockholders Taxable on the part of stockholder under the global tax system Exempt

DIVIDEND INCOME Inter-corporate dividend: Exempt from tax Corporation paying dividend: Domestic corporation Recipient of dividend: Another domestic corporation or resident foreign corporation Dividend paid to non-resident foreign corporation Corporation paying dividend: Domestic corporation Recipient of dividend Foreign head office makes direct investment in Phil company: 15% FWT Phil branch of foreign corporation makes investment in Phil company: Exempt from income tax Tax-sparing provision If foreign country does not impose income tax on dividend paid by foreign corpor ation

OTHER INCOME Income from any source whatever The words income from any source whatever disclo ses a legislative policy to include all income not expressly exempted from the c lass of taxable income under our laws (Madrigal vs. Rafferty, supra; Commissione r vs. BOAC). The words income from any source whatever is broad enough to cover gains contemplated here. These words disclose a legislative policy to include al l income not expressly exempted within the class of taxable income under our law s, irrespective of the voluntary or involuntary action of the taxpayer in produc ing the gains (Gutierrez vs. Collector, CTA Case 65, Aug. 31, 1955).

Any economic benefit to the employee whatever may have been the is effected is taxable. Thus, in stock options, the difference market value of the shares at the time the option is exercised rice constitutes additional compensation income to the employee . Smith, 324 U.S. 177).

mode by which it between the fair and the option p (Commissioner vs

EXCLUSIONS Life insurance proceeds Amount received by insured as return of premium Gifts, b equests and devises Compensation for injuries or sickness Income exempt under tr eaty Retirement benefits, pensions, gratuities R.A. 7641 (5 yrs & 60 yrs) and R.A. 4917 (10 yrs & 50 yrs) Interest income of employee trust fund or accredited retirement plan is exempt f rom FWT (CIR v. GCL Retirement Plan, 207 SCRA 487) Amount received as a consequence of separation because of death, sickness (that will endanger life of employee) or other physical disability or for any cause be yond the control of employee Miscellaneous items Income of foreign government Income of government or its political subdivisions from any public utility or exercise of governmental function

EXEMPT ASSOCIATIONS The phrase any of their activities conducted for profit does not qualify the wor d properties. -- The phrase any of their activities conducted for profit does no t qualify the word properties. This makes income from the property of the organiza tion taxable, regardless of how that income is used whether for profit or for lo fty non-profit purposes. Thus, the income derived from rentals of real property owned by the Young Men s Christian Association of the Philippines, Inc. (YMCA), established as a welfare, education and charitable non-profit corporation, is su bject to income tax. The rental income cannot be exempted on the solitary but un convincing ground that said income is not collected for profit but is merely inc idental to its operation. The law does not make a distinction. Where the law doe s not distinguish, neither should we distinguish. Because taxes are the lifebloo d of the nation, the Court has always applied the doctrine of strict interpretat ion in construing tax exemptions. YMCA is exempt from the payment of property ta xes only but not income taxes because it is not an educational institution devot ing its income solely for educational purposes. The term educational institution has acquired a well-known technical meaning. Under the Education Act of 1982, s uch term refers to schools. The school system is synonymous with formal educatio n which refers to the hierarchically structured and chronologically graded learn ings organized and provided by the formal school system and for which certificat ion is required in order for the learner to progress through the grades or move to higher levels (Commissioner vs. Court of Appeals and YMCA of the Phils., G.R. No. 124043, Oct. 14, 1998).

DEDUCTIONS KINDS OF DEDUCTIONS Itemized Deductions Optional Standard Deductions Special Deductions ITEMIZED DEDUCTIONS Business expenses, incl. research and development Interests Taxes Losses ts Depreciation Depletion Charitable contributions Contributions to pension trus t Health or hospitalization premium

DEDUCTIONS BUSINESS EXPENSES

1. The expense must be ordinary and necessary; 2. Paid or incurred during the ta xable year; 3. In carrying on or which are directly attributable to the developm ent, management, operation and/or conduct of the trade, business or exercise of profession; 4. Supported by adequate invoices or receipts; 5. Not contrary to la w, public policy or morals. Operating expenses of an illegal or questionable bus iness are deductible, but expenses of an inherently illegal nature, such as brib ery and protection payments, are not. 6. The tax required to be withheld on the amount paid or payable is shown to have been paid to the BIR.

DEDUCTIONS An expense is ordinary when it connotes a payment, which is normal in relation t o the business of the taxpayer and the surrounding circumstances. An expense is necessary where the expenditure is appropriate or helpful in the development of taxpayer s business or that the same is proper for the purpose of realizing a pr ofit or minimizing a loss. P9.4 M paid in 1985 for advertising a product was sta ggering incurred to stimulate future sales to create or maintain some form of go odwill for the taxpayer s trade or business or for the industry or profession of which the taxpayer is a member. Goodwill generally denotes the benefit arising from connection and reputation, and efforts to establish reputation are akin to acquisition of capital assets. Therefore, expenses related thereto are not busin ess expenses but capital expenditures (CIR vs. General Foods Phi., GR No. 143672 , Apr. 24, 2003).

DEDUCTIONS Legal and accountant s fees for prior years were not billed in corresponding yea rs (1984-1985). It was paid by taxpayer in succeeding year (1986) when it was bi lled by the lawyer and accountant. Taxpayers uses accrual method of accounting. Accrual of income and expense is permitted when the all events test has been met . This test requires (1) fixing a right to income or liability to pay, and (2) t he availability of reasonably accurate determination of such income or liability . It does not, however, demand that the amount of income or liability be known a bsolutely; it only requires that a taxpayer has at its disposal the information necessary to compute the amount with reasonable accuracy, which implies somethin g less than an exact or completely accurate amount. Moreover, deduction takes th e nature of tax exemption; it must be construed strictly against the taxpayer (C ommissioner vs. Isabela Cultural Corporation, G.R. No. 172231, Feb. 12, 2007).

DEDUCTIONS

INTEREST EXPENSE There must be a valid and existing indebtedness; The indebtedness must be that o f the taxpayer; The interest must be legally due and stipulated in writing; The interest expense must be paid or incurred during the taxable year; The indebtedn ess must be connected with the taxpayer's trade, business or exercise of profess ion; 6. The interest payment arrangement must not be between related taxpayers a s mandated in Section 34(B)(2)(b), in relation to Section 36(B), of the Tax Code ; 7. The interest is not expressly disallowed by law to be deducted from the tax payer s gross income (e.g., interest on indebtedness to finance petroleum operat ions); and 8. The amount of interest deducted from gross income does not exceed the limit set forth in the law. In other words, the taxpayer s otherwise allowab le deduction for interest expense shall be reduced by forty-two percent (42%) of the interest income subjected to final tax beginning November 1, 2005 under R.A . 9337, and that effective January 1, 2009, the percentage shall be thirty-three percent (33%) [Sec. 34(B)(1), NIRC]. 1. 2. 3. 4. 5.

DEDUCTIONS TAXES

1. Payments must be for taxes, national or local; 2. Taxes are imposed by law u on the taxpayer; 3. Taxes must be paid or accrued during the taxable year in con nection with the taxpayer s trade, business or profession; and 4. Taxes are not specifically excluded by law from being deducted from the taxpayer s gross incom e.

DEDUCTIONS LOSSES (Rev. Regs. No. 12-77 and Rev. Regs. No. 10-79) 1. The loss must be that of the taxpayer; 2. The loss is actually sustained and charged off within the taxable year; 3. The loss is evidenced by a closed and co mpleted transaction; 4. The loss is not claimed as a deduction for estate tax pu rposes; 5. The loss is not compensated for by insurance or otherwise; 6. In the case of an individual, the loss must be connected with his trade, business or pr ofession, or incurred in any transaction entered into for profit though not conn ected with his trade, business or profession; and 7. In the case of casualty los s, it has been reported to the BIR within forty-five days from date of occurrenc e of the loss.

DEDUCTIONS BAD DEBTS 1. There must be an existing indebtedness due to the taxpayer which must be vali d and legally demandable; 2. The same must be connected with the taxpayer's trad e, business or practice of profession; 3. The same must not be sustained in a tr ansaction entered into between related parties enumerated under Sec. 36(B) of th e Tax Code of 1997; 4. The same must be actually charged off the books of accoun ts of the taxpayer as of the end of the taxable year; and 5. The same must be ac tually ascertained to be worthless and uncollectible as of the end of the taxabl e year.

DEDUCTIONS TAX BENEFIT RULE The taxpayer is obliged to declare as taxable income any subsequent recovery of bad debts in the year they were collected to the extent of the tax benefit enjoy ed by the taxpayer when the bad debts were written off and claimed as deduction from gross income. It also applies to taxes previously deducted from gross incom e but which were subsequently refunded or credited by the BIR. He has to report income to the extent of the tax benefit derived in the year of deduction.

DEDUCTIONS DEPRECIATION 1. The allowance for depreciation must be reasonable; 2. It must be for property arising out of its use in the trade or business, or out of its not being used temporarily during the year; 3. It must be charged off during the ta xable year from the taxpayer s books of accounts; 4. Depreciation shall be compu ted on the basis of historical cost or adjusted basis. While financial accounting allows computation based on appraised value, recovery of investment for tax purposes shall be limited to historical c ost.

DEDUCTIONS CHARITABLE CONTRIBUTIONS 1. The charitable contribution must actually be paid or made to the Philippine government or any political subdivision thereof exclusiv ely for public purposes, or any of the accredited domestic corporation or associ ation specified in the Tax Code; 2. It must be made within the taxable year; 3. It must not exceed 10% (individual) or 5% (corporation) of the taxpayer s taxabl e income before charitable contributions (whether deductible in full or subject to limitation); 4. It must be evidenced by adequate receipts or records; and 5. The amount of charitable contribution of property other than money shall be base d on the acquisition cost of said property (Sec. 34(H), NIRC). The limitation is imposed to prevent abuse of donating paintings and other valuable properties an d claiming excessive deductions therefrom.

DEDUCTIONS D. Optional Standard Deduction Privilege is available only to citizens or reside nt aliens as well corporations subject to the regular corporate income tax; thus , non-resident aliens and non-resident foreign corporations are not entitled to claim the optional standard deduction. Standard deduction is optional; i.e., unl ess taxpayer signifies in his/its return his/its intention to elect this deducti on, he/it is considered as having availed of the itemized deductions; Such elect ion when made by the qualified taxpayer is irrevocable for the year in which mad e; however, he can change to itemized deductions in succeeding year(s);

DEDUCTIONS Amount of standard deduction is limited to 40% of taxpayer s gross sales or rece ipts (in the case of an individual) or gross income (in the case of a corporatio n). If the individual is on the accrual basis of accounting for his income and d eductions, OSD shall be based on the gross sales during the year. If he employs the cash basis of accounting, OSD shall be based on his gross receipts during th e year. It should be noted that cost of sales or cost of services shall not be a llowed to be deducted from gross sales or receipts. A general professional partn ership (GPP) may claim either the itemized deductions or in lieu thereof, the OS D allowed to corporations in claiming the deductions in an amount not exceeding 40% of its gross income. The net income determined by either the itemized deduct ion or OSD from the GPP s gross income is the distributable net income from whic h the share of each share is to be ascertained. Proof of actual expenses is not required; hence, he is not also required to keep books of accounts and records w ith respect to his deductions during the year.

PERSONAL EXEMPTIONS RA 8424: Jan 1, 1998 Single and estate or trust P20,000 Head of family P25,000 M arried P32,000 For each child, not to exceed 4 P8,000 RA 9504: July 6, 2009 Indi vidual, whether single, HOF, or married P50,000 For each child, not to exceed 4 P25,000 Law exempts income of minimum wage earners and increases OSD from 10% to 40% of gross sales or receipts, for individuals, and of gross income, for corpo rations.

PERSONAL EXEMPTIONS Status-at-the-end-of-the-year rule Status-at-the-end-of-the-year rule which means that whatever is the status of th e taxpayer at the end of the calendar year shall be used for purposes of determi ning his personal and additional exemptions generally applies. A change of statu s of the taxpayer during the taxable year generally benefits, but does not preju dice, him. Thus, if he marries at the end of the year, he shall be entitled to p ersonal exemption of P32,000/P50,000. If a child is born at any time during the calendar year, even on the last day of the year, the taxpayer is entitled to cla im his child as a dependent entitling him to deduct additional exemption of P8,0 00/P25,000 for that year. On the other hand, if one of his qualified dependent c hildren dies during the year, the law considers that the child died on the last day of the year; hence, he is entitled to claim the full amount of additional ex emption of P8,000/P25,000 for the deceased child for the year.

ACCOUNTING METHODS Cash method Accrual method All events test; amounts received in advance are not treated as revenue of the p eriod in which received but as revenue of future periods in which earned (Manila Mandarin Hotels vs. CIR, CTA Case No. 5046, Mar 24, 1997). Installment sales Sale on the installment plan Initial payments do not exceed 25% of GSP Deferred payment sale, not on the installment plan Initial payments exceed 25% of GSP Percentage of completion Crop year method

FILING OF TAX RETURN SUBSTITUTED FILING OF ITR: No individual income tax return for the year will be filed by the employee concerned, and the employer is the one that files the retu rn for him Applies only to individuals With only one (1) employer Who correctly withholds t he income tax on compensation income paid to the employee and remits the same to the BIR Substituted filing of return does not apply when the conditions above are not me t, such as when the individual has (a) two or more employers, (b) mixed incomes, correct WT was not deducted from compensation income, etc.

FILING OF TAX RETURN Individual deriving mixed income, or purely business/ professional income, or ot her income must file his quarterly income tax returns (BIR Form 1700 Q) and annu al income tax return (BIR Form 1700 ) as follows: Period Q1 Return Q2 Return Q3 Return Annual Return Due Date for Filing Return April 15 of same year August 15 of same year November 15 of same year April 15 of the following year

FILING OF TAX RETURN A domestic corporation and resident foreign corporation shall file quarterly cor porate income tax return (BIR Form 1702 Q) and annual corporate income tax retur n (BIR Form 1702 as follows: Q1 Return Q2 Return Q3 Return Annual Return May 31 of same year August 31 of sam e year November 30 of same year April 15 of the following year (if on calendar y ear), or 15th day of the fourth month following the close of the fiscal year (if on fiscal year).

Computation of the quarterly and annual tax returns of individuals (except those receiving purely compensation income) and corporations shall be made on the cum ulative 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 t ax 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 cred it shall be allowed (Paseo Realty v CA, GR 119286, Oct 13, 2004). While a taxpay er 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 absolut e 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 i n tax return; and (3) fact of withholding is established by copy of BIR Form 230 7 (BF Bank v. CA, GR 155682, Mar 27, 2007). In case of dissolution of corporatio n, 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 withhe ld 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 c onditions concur: a. An expense is paid or payable by the taxpayer, which is inc ome to the recipient thereof subject to income tax; b. The income is fixed or de terminable at the time of payment; c. The income is one of the income payments l isted in the regulations that is subject to withholding tax, except when payor i s a Top 20,000 Corporation; d. The income recipient is a resident of the Philipp ines 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 corpo rations; 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 fo llowing: 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 M etro Manila and other highly urbanized areas and P150,000 in other areas; b. Cor porations registered with the BOI, PEZA, and SBMA, enjoying exemption from incom e 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 con sortium formed for the purpose of undertaking construction projects or engaging in petroleum, coal, geothermal and other energy operations f. International carr iers (by air or water) subject to 2.5% Gross Phil Billings

VALUE ADDED TAX

BUSINESS TAXES VAT Taxable transactions Sale or lease of goods or properties Sale of services Importation of goods NON-VAT/EXEMPT FROM VAT TRANSACTIONS Transaction is subject to Other Percentage Tax (Title V, NIRC) and exempt from V AT VAT is imposed on transaction in addition to Excise Tax, if any Tax is imposed on Gross Receipts or Gross Income Formula for computing VAT Output Tax Less: Input Tax VAT Payable/(Excess Input Tax) Transaction is exempt from VAT, OPT, and Excise Tax (e.g., sale of agricultural food products in their original state)

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 i mposed 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 tr ade 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 le ssor Real property is held primarily for sale or for lease in the ordinary cours e of trade or business Sale is not exempt from VAT However, Rev. Regs. No. 4-2007 (Feb 2007) provides that if the real property sol d is used in his trade or business, said transaction is subject to VAT, being in cidental 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 con sideration; hence, donation is exempt from VAT Deemed sale is subject to VAT (ou tput 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, includin g transactions deemed incidental thereto, regardless of whether or not the perso n 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 su bject 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, importa tion 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 thei r withdrawal from the customs custody. Destination Principle: Export sales of goods are zero-rated (0% VAT) Import of goods into the Phil is t axable at 12% VAT

VALUE ADDED TAX Tax base is Gross Selling Price (GSP) - the total amount of money or its equival ent, which the purchaser pays or is obligated to pay to the seller in considerat ion of the sale, barter or exchange of the goods or properties, excluding the VA T. As a rule, output tax accrues on sale of goods or properties (other than a re al 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 inv oice do not form part of the tax base. Grant of discount must not depend upon th e 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 seni or citizens under RA 9257 (Amended Senior Citizens Law) shall be deducted from g ross 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 Pri ce. 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 e ntire gross selling price as shown in the document of sale, even though only a p art of it has been received during the period If initial payments during the yea r of sale do not exceed 25% of gross selling price, the tax base is only the amo unt 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 un der BOI law (EO 226) and special laws (RA 7916 and RA 7227). Ecozones and freepo rt zones are deemed foreign territories by fiction of law (CIR v. Seagate Techno logy (2005); CIR v. Toshiba Information Equipment (2005) For as long as the good s remain within the zone, consumed or destroyed there, they will be duty-free an d 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 ope rations

VALUE ADDED TAX ZERO-RATED SALE Transaction is completely free of VAT; rate charged by seller is zero VAT-registered seller can reclaim input taxes passed on to it by sellers o f goods or services from BIR in form of refund or tax credit Zero-rated sales ar e taxable sales for purposes of registration as VAT taxpayer to determine thresh old EXEMPT SALE Exemption removes the VAT at the exempt stage Exempt taxpayer cannot reclaim VAT passed on to it by VAT-registered sellers Exempt sales are not taxa ble sales for VAT purposes

VALUE ADDED TAX PERSONS SELLING TAXABLE SERVICES Construction and service contractors Brokers Lessors of property, real or person al Warehousing services Lessors or distributors of cinematographic films Persons engaged in milling, processing, manufacturing or repacking goods for others Pro prietors or operators or keepers of hotels, motels, resthouses, pension houses, inns and resorts Proprietors or operators of restaurants and other similar estab lishments

VALUE ADDED TAX PERSONS SELLING TAXABLE SERVICES Dealers in securities Lending investors Transportation contractors on their tran sport of goods or cargoes Domestic common carriers by air and sea between points in the Philippines Sales of electricity (by generation, transmission, and distr ibution companies) Services of franchise grantees, except water and gas Non-life insurance companies, except crop insurance Similar services, regardless of whet her or not the performance thereof calls for the exercise or use of the physical or mental faculties

VALUE ADDED TAX Gross receipts means the total amount of money or its equivalent, representing t he contract price, compensation, service fee, rental or royalty, including the a mount charged for materials supplied with the services and deposits and advance payments actually or constructively received during the taxable quarter for the services performed or to be performed for another person, excluding the VAT, exc ept those amounts earmarked for payment to unrelated third party or received as reimbursement for advance payment on behalf of another, which do not redound to the benefit of the payor. For sale of services, the test is not whether services have been performed or no t, but whether amount of compensation or fee is received, actually or constructi vely. 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 ou tside the Phil, which goods are subsequently exported, where the services are pa id for in acceptable foreign currency and accounted for in accordance with BSP r ules and regulations Services other than processing, manufacturing or repacking rendered to a person engaged in business conducted outside the Phil or to a nonresident person not engaged in business who is outside the Phil when the service s 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 i nternational agreements to which the Phil is a signatory effectively subjects th e 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 manu facturing goods for an enterprise whose export sales exceeds 70% of total annual production Transport of passengers and cargo by domestic air or sea carriers fr om the Phil to a foreign country Sale of power or fuel generated thru renewable sources of energy (biomass, solar, wind, hydropower, geothermal and other emergi ng sources)

VALUE ADDED TAX Tax Code not only requires that the services other than processing, manufacturin g or repacking of goods and that payment for such services be in acceptable fore ign currency accounted for in accordance with BSP rules. Another essential condi tion 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 n ot expressly stated in the 2nd paragraph of Sec. 102(b), this is clearly provide d 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 se rvices enumerated in the first paragraph, but also pertains to the general term services appearing in the second paragraph. Otherwise, those subject to the regu lar 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 i n 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 mus t be rendered to a person engaged in business conducted outside the Phil. The pa yer-recipient of respondent s services is the Consortium which is a joint ventur e doing business in the Phil. While the Consortium s principal members are non-r esident 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 singl e or isolated transaction. This case is different from CIR v. American Express I nternational, Inc. (Phil Branch), because in the latter case, the recipient of s ervices 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 c laim for refund effectively serves as a revocation of VAT Ruling 03-99 and BIR R uling 23-95. However, such revocation cannot be given retroactive effect since i t will prejudice respondent.

VALUE ADDED TAX VAT-EXEMPT TRANSACTIONS A. Sale or importation of agricultural and marine food products in their origina l state; livestock and poultry generally producing food for human consumption; a nd breeding stock B. Sale or importation of fertilizers; seeds, seedlings and fi ngerlings; fish, prawn, livestock and poultry feeds (except specialty feeds for race horses, fighting cocks and other pets) C. Importation of personal and house hold effects belonging to residents of the Phil returning from abroad and non-re sident citizens coming to resettle in the Phil D. Importation of professional in struments 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 p rofessionals H. Educational services rendered by private educ institutions accre dited by DepEd, CHED, TESDA, and those rendered by government educational instit utions I. Services rendered by individuals pursuant to an employer-employee rela tionship O. Export sales by persons who are not VAT-registered P. Sale of real p roperty not primarily held for sale to customers or for lease in the ordinary co urse 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. Sa le, importation, printing or publication of books and any newspaper or magazine which appear at regular intervals with fixed prices and is not devoted principal ly to publication of paid advertisements V. Sale or lease of goods or property o r 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, bu t sale to out-patients is subject to 12% VAT (St. Luke s Medical Center v. CTA a nd CIR, 1998). Tolling fees received by a hotel for PLDT is not part of its gros s receipts Payment of VAT by the hotel on fees for providing limousine service t o 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 theat re owner or operator from sales of tickets to moviegoers are exempt from VAT. Th eatres 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 term s for sale or exchange of services to include showing of films in public (SM Pri me 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 subs equent 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 out put 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 VA T 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 supplie s, whichever is higher Presumptive Input Tax Persons or firms engaged in the processing of sardines, mackerel and milk, and i n manufacturing refined sugar and cooking oil, and packed noodle-based instant m eals are entitled to presumptive input tax equivalent to 4% of gross value in mo ney 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 z ero-rated and effectively zero-rated sales Carry over the excess input tax to the next quarter, until excess is utilized Fi le a claim for refund File a claim for tax credit, within two years after the cl ose 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 sal es 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 fi le 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 P agbilao Corp, 2008).

TAX REMEDIES UNDER THE TAX CODE

ASSESSMENT CYCLE Filing of tax return Tax audit by BIR Informal Conference Preliminary Assessm Notice (PAN) Reply to PAN Final Assessment Notice (FAN) Protest to FAN Suppleme ntal Protest Law prescribes due date 120 days + 120 days 15 days from receipt g of protest 3 years or 10 years 30 days from receipt 60 days from filin

ASSESSMENT CYCLE BIR ACTION Cancell assessment Deny protest Revise assessment 180 days from filing of protest, if any, or supplemental protest 30 days from da te of receipt of denial of protest or lapse of 180 days 15 days from date of rec eipt; addl 15 days may be granted by CTA after payment of docket fee. BIR INACTION Appeal to CTA

Appeal to CTA en banc

REMEDIES OF TAXPAYERS ADMINISTRATIVE REMEDY BEFORE PAYMENT OF TAX PROTEST OF ASSESSMENT AFTER PAYMENT OF TAX TAX CREDIT, OR REFUND JUDICIAL REMEDY APPEAL TO COURT OF TAX APPEALS

NO PRE-ASSESSMENT NOTICE REQUIRED Deficiency tax is the result of mathematical error Discrepancy is between amount of tax withheld and amount remitted to BIR Taxpayer who opted to claim refund/t ax credit also carried over and applied the same against tax of next taxable qua rter Excise tax due has not been paid Constructive importation (Sec. 228, NIRC)

ASSESSMENT 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. Le tter demanding payment of erroneously refunded amount (Guagua Electric Co v. CIR ), or amount paid by bouncing check (Republic v. Limaco & de Guzman) b. Follow-u p or collection letter duly received by taxpayer within the prescriptive period (TAXPAYER DENIED RECEIPT OF ORIGINAL DEMAND LETTER AND ASS. NOTICE) (Republic v. Nielson & Co) NOTE: Letter from revenue officer granting opportunity to disprove findings (SHO W-CAUSE LETTER) is NOT an assessment

ASSESSMENT WHEN MUST ASSESSMENT BE MADE? (Sec. 203 & 222, NIRC) RETURN WAS FILED Not false or fraudulent 3 years from filing of return rs from date of discovery of false or fraudulent return False or fraudulent 10 yea

NO RETURN WAS FILED 10 years from date of discovery of omission If assessment due falls on Saturday, government has next business day within which to assess (CIR v. Western Pacific Corp)

COUNTING OF PERIOD TAXABLE YEAR Normal year (365 days) Leap year (366 days) If there is a leap year within the prescriptive period (3 years from filing of r eturn), a year shall be deemed to have 365 days only (NAMARCO v. Tecson, 29 SCRA 70). Thus, assessment issued on April 15 of the third year from filing of return shall be treated as invalid due to prescription. EO 292 governs od to be calendar (Administrative Code of 1987), being the more recent law than Civil Code, the computation of legal period. Accor-dingly, a year shall be understo 12 calendar months; a month of 30 days, unless it refers to a specific month (CIR vs. Primetown Property Group, GR No. 162155, Aug 22, 2007).

ASSESSMENT WHEN IS ASSESSMENT DEEMED MADE? Issue date of assessment notice is not reckoning point for prescription Date the assessment notice and demand letter is released , mailed or sent to taxpayer constitutes actual assessment (Republic v. Limaco & de Guzman) Presumption of receipt in the regular course of mail applies, if it was properly addressed, postage was prepaid, and was mailed. If one element is a bsent, presumption does not lie (Enriquez v. Sunlife of Canada)

COMPLIANCE WITH SEC. 228 BIR disallowed certain itemized deductions and considered some cost items as sub ject to 5% tax, without indicating factual and legal bases. During the prelimina ry stage, BIR informed taxpayer thru preliminary 5-day letter and furnished copy of audit working paper. CTA considered assessment as void. CA affirmed CTA deci sion. SC ruled above documents were not valid substitutes for mandatory notice i n writing of legal and factual bases of assessment. These steps were mere perfun ctory discharge of CIR s duties in correctly assessing a taxpayer. Just because CIR issued an advice, preliminary letter and final notice does not necessarily m ean taxpayer was informed of law and facts. Law requires that they be stated in DL and FAN. Otherwise, the express provisions of Art. 228 of NIRC and RR 12-99 w ould be rendered nugatory. The alleged factual bases in the advice, preliminary letter and audit working papers did not suffice. Moreover, due to the absence of a fair opportunity to be informed of legal and factual bases of assessment, the assessment is void. Old law merely required taxpayer to be notified of assessme nt. This was changed in 1998 (CIR vs. Enron Subic Power Corp, GR No. 166387, Jan . 19, 2009).

ASSESSMENT NOTICE Preliminary collection letter presupposes the existence of valid assessment noti ce. Preliminary collection letter shall serve as assessment notice, if it was in itial notice received by taxpayer, taxpayer did not receive any assessment notic e, and no follow-up letter was sent or preliminary conference was arranged. 30-d ay period to protest shall commence from date of receipt of preliminary collecti on letter (United International Pictures vs. CIR, CTA Case No. 5884, Jan. 5, 2002)

PROTEST Valid protest of an assessment is one assailing the formal assessment notice (FA N) and the letter of demand, not the preliminary assessment notice (PAN). PAN is required merely to inform the taxpayer of the proposed assessment. Failure to p rotest within 30 days will make the formal assessment notice final and executory . Failure to respond to PAN within 15 days will render taxpayer in default and a FAN would subsequently be issued (Cebu Rosver Pawnshop vs. CIR, CTA Case No. 64 25, Mar. 17, 2003).

PROTEST CIR vs. BPI Oct 28, 1988 CIR assessed petitioner for def. percentage tax and DST for 1986 De c 10, 1988 -- BPI replied stating Your def assessments are no assessments at all As soon as this is explained and clarified in a proper letter of assessment, we shall inform you of the taxpayer s decision on whether to pay or protest the as sessment. June 27, 1991 -- BPI received letter from BIR, stating .. Your letter failed to qualify as a protest under RR 12-85 still we obliged to explain the ba sis of the assessments. July 6, 1991 -- BPI requested a reconsideration of asses sments. Dec 12, 1991 -- BIR denied protest, which was received on Jan 21, 1992. Feb 18, 1992 -- BPI filed petition for review in CTA.

PROTEST Nov 16, 1995 -- CTA dismissed petition for lack of jurisdiction; assessments had become final and unappealable. May 27, 1996, CTA denied reconsideration. On app eal, CA reversed CTA s decision. It ruled Oct 28, 1988 notices were not valid as sessments because they did not inform the taxpayer of the legal and factual base s therefor. It declared the proper assessments were those in May 8, 1991 letter which provided the reasons for claimed deficiencies. CIR elevated case to SC. CI R did not inform BPI in writing of the law and facts on which assessments were m ade. He merely notified BPI of his findings, consisting of the computation of th e tax liabilities and a demand for payment within 30 days from receipt. He relie d on former Sec. 270, NIRC, prior to its amendment by RA 8424. In CIR vs.Reyes, GR 159694, Jan 27, 2006, the only requirement was for the CIR to notify or infor m the taxpayer of his findings. Nothing in the old law required a written statem ent to the taxpayer of the law and the facts. The Court cannot read into the law what obviously was not intended by Congress. That would be judicial legislation .

PROTEST Jurisprudence simply required that assessments contain a computation of tax liab ilities, the amount to be paid plus a demand for payment within a prescribed per iod. The sentence the taxpayer shall be informed in writing of the law and the f acts on which the assessment is made; otherwise, the assessment shall be void. w as not in old Sec. 270, but was only inserted in Sec. 228 in 1997 (R.A. 8424). T he inserted sentence was not an affirmation of what the law required; the amendm ent by RA 8424 was an innovation and could not be reasonably inferred from the o ld law. The Oct 28, 1998 notices were valid assessments, which BPI should have p rotested within 30 days from receipt. The Dec 10, 1988 reply it sent to BIR did not qualify as a protest, since the letter itself stated we shall inform you of the taxpayer s decision on whether to pay or protest the assessment. BPI s failu re to protest the assessment made it final and executory. The assessment is pres umed to be correct (CIR vs BPI, GR 134062, Apr 17, 2007).

DENIAL OF PROTEST DIRECT DENIAL Letter of CIR states in clear terms his denial of protest. INDIRECT DENIAL Final Notice Before Seizure constitutes as a decision on a protested assessment; hence, appealable to the CTA (CIR vs. Isabela Cultural Corp, 361 SCRA 71 (2004) Issuance by BIR of Warrant of Distraint and Levy constitutes a denial of the pro test.

INACTION OF COMMISSIONER The taxpayer has two options: Wait for the decision of the Commissioner on the protest and file the appeal to the CTA within 30 days from date of receipt of the denial of protest; or File ap peal to the CTA within 30 days from lapse of the 180-day period (Lascona Land Co vs CIR, CTA Case No. 5777, Jan 4, 2000)

BIR appealed CTA decision to CA. In the meantime, RA 9282 was signed by PGMA on Apr 2, 2004, which provides that inaction of CIR during the 180-day period is co nstrued as a denial of protest. Decision of the CTA on Lascona case was reversed by the CA. If there is no appeal filed within 30 days after the lapse of 180 da y period, the matter/decision under protest becomes final. The word decision in Sec. 228 cannot be strictly ck strictly construed as referring only to decision per se of CIR but should be considered synonymous with disputed assessment (CIR vs. Lascona Land Co, CA GR SP No. 58061, Oct 25, 2005). CA decision was appealed to SC, where it is still pending.

COUNTING OF 180-DAY PERIOD Since the petitioner did not submit any document in support of his protest withi n sixty days from the filing of its protest, the counting of the 180-day period was from the filing of the protest. Accordingly, when respondent failed to rende r his decision within 180 days from the filing of his protest, petitioner has 30 days therefrom to file an appeal to CTA (Oceanic Wireless Network vs. CIR, CTA Case No. 6111, Nov. 3, 2004)

APPEALS ADMINISTRATIVE APPEAL DECISION OF REGIONAL DIRECTOR MAY BE APPEALED TO COMMISSIONER PRIOR EXHAUSTION O F ADM REMEDIES GIVES ADM AUTHORITIES PRIOR OPPORTUNITY TO DECIDE CONTROVERSIES W ITHIN THEIR COMPETENCE (Aguinaldo Industries Corp. v. CIR)

JUDICIAL APPEAL FINAL DECISION OF COMMISSIONER MAY BE APPEALED TO COURT OF TAX APPEALS Where a taxpayer filed a valid protest within 30 days from date of receipt of as sessment and on same day also filed with CTA a petition for review, there is yet no final decision of CIR on the protest that is appealable to CTA (Moog Control s Corp vs. CIR, CTA Case No. 6700, Oct 18, 2004) CTA DIVISION DECISION IS APPEALED TO CTA EN BANC COURT O F APPEALS EN BANC DECISION APPEALED TO SUPREME COURT

PETITION FOR REVIEW Petitioner maintains that its counsel s neglect in not filing petition for revie w within reglementary period (due to counsel s secretary) was excusable. The 30day period to appeal is jurisdictional and failure to comply would bar the appea l and deprive the CTA of its jurisdiction. Such period is mandatory, and it is b eyond the power of the courts to extend the same (Chan Kian vs CTA, 105 Phil 906 (1959). The options granted to the taxpayer in case of inaction by the CIR is m utually exclusive and resort to one bars the application of the other. Petition for review was filed out of time (more than 30 days after lapse of 180 days), an d petitioner did not file MR or appeal; hence, disputed assessment became final and executory.

PETITION FOR REVIEW After availing of the first option (filing petition for review with CTA), petiti oner cannot successfully resort to the second option (awaiting final decision of CIR) on the pretext that there is yet no final decision on the disputed assessm ent because of CIR s inaction. Assessments are presumed to be correct unless oth erwise proven (RCBC vs CIR, GR No. 168498, Apr 24, 2007).

PRESCRIPTION The 3-year period within which to assess any deficiency tax commences after the last day prescribed by law for the filing of the income tax return. For VAT, eac h taxable quarter shall have its own prescriptive period. VAT return is filed qu arterly and a final return is not required at the end of the year. In case of cr editable withholding taxes, the 3-year period shall be counted shall be counted from the last day required by law for filing monthly remittance return. Each mon thly return is already a complete return. The annual information return submitte d to BIR is just an annual report of income payments and taxes withheld and is n ot in the nature of a final adjustment return (HPCO Agridev Corp. vs. CIR, CTA C ase No. 6355, July 18, 2002)

PRESCRIPTION Request for reconsideration or clarification on the assessment made by the taxpa yer does not suspend the running of the statute of limitations. However, request for reinvestigation may suspend the running of prescriptive period when it has been granted by CIR (BPI vs. CIR, GR No. 139736, Oct 17, 2005) Mere filing of th e protest letter without requesting for a reinvestigation does not suspend the r unning of the prescriptive period to collect (Phil Global Communications vs. CIR, CTA EB Case No. 37, Feb. 2005)

REQUISITES OF WAIVER Waiver must be in the form identified in RMO 20-90; Expiry date of period agreed upon is indicated in the waiver; Waiver form requires statement of the kind of tax and amount of tax due; if not indicated in the waiver, there is no agreement ; Waiver is signed by taxpayer or his authorized representative. In case of corp oration, waiver is signed by any responsible official. CIR or his authorized rep resentative shall sign waiver indicating that BIR has accepted and agreed to the waiver; Date of acceptance by BIR is indicated; Date of execution and acceptanc e by BIR should be before expiration of prescriptive period; Waiver is executed in 3 copies; second copy is for taxpayer. Fact of receipt by the taxpayer should be indicated in the original copy (Pfizer, Inc. vs. CIR, CTA Case No. 6135, Apr. 21, 2003; FMF Dev. Corp. vs. CIR, CTA Case No. 6153, Mar. 20 , 2003)

REQUISITES OF WAIVER Waiver must indicate definite expiration date agreed upon by CIR and taxpayer Wa iver should state date of acceptance by BIR. Without the date, it cannot be dete rmined whether waiver was accepted before expiration of 3-year period. Taxpayer must be furnished copy of accepted waiver. Under RMO 20-90, second copy of waive r is for taxpayer. Fact of receipt by taxpayer of his copy should be indicated i n the original copy (Phil. Journalists vs. CIR, supra). RMO 20-90 must be strict ly construed against the government; they are mandatory in character. More-over, the waiver of the statute of limitations is not a waiver of the right to invoke the defense of prescription (CIR vs. FMF Dev Corp, GR No. 167765, June 30, 2008).

FRAUD TAX AVOIDANCE is the tax saving device within the means sanctioned by law, used in good faith and at arms length. 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 achi eved; an accompanying state of mind that is described as evil, willful or delibe rate; and course of action which is unlawful. Altonaga s sole purpose of acquiri ng and transferring title of properties on same day was to create tax shelter. S ale to him by CIC was a sham and without business purpose. Sale by Altonaga to R MI was tainted with fraud. Even before the purported sale of property by CIC to Altonaga, it received P40 M from RMI. That was reflected by RMI in its financial statement (CIR vs. Estate of Benigno Toda, GR No. 147188, Sept. 14, 2004)

END OF PRESENTATION Atty. Vic C. Mamalateo ateo@vcmlaw.com.ph; vicmamalateo@yahoo.com

Mobile: 0918-9037436

Email: vic.mamal

END OF PRESENTATION Atty. Vic C. Mamalateo ateo@vcmlaw.com.ph; vicmamalateo@yahoo.com

Mobile: 0918-9037436

Email: vic.mamal