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TAXATION
BAR REVIEWER
Taxation Law 1
Taxation Law 2
LAW
Dean Danilo L. Concepcion
Dean, UP College of Law
Prof. Concepcion L. Jardeleza
Associate Dean, UP College of Law
Prof. Ma. Gisella D. Reyes
Secretary, UP College of Law
Prof. Florin T. Hilbay
Faculty Adviser, UP Law Bar Operations
Commission 2012
Eleanor Balaquiao
Mark Xavier Oyales
Academics Committee Heads
Karen Andrea Torres
Camille Umali
Taxation Law Subject Heads
Graciello Timothy Reyes
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2012 UP LAW
TAXATION
BAR REVIEWER
LAW
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Ramon Carlo Marcaida |Commissioner
Raymond Velasco Mara Kriska Chen |Deputy Commissioners
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TAXATION LAW TEAM 2012
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Copyright and all other relevant rights over this
material are owned jointly by the University of the
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Charles Icasiano Katrina Rivera |Hotel Operations
Marijo Alcala Marian Salanguit |Day-Operations
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8
Taxation Law 1 burden for the support of the government
and public needs.
TAXATION LAW - CIR v. Algue: Taxes are the lifeblood of the
Taxation Law 1 I. General Principles of Taxation government and so should be collected
Taxation Law 2 II. National Internal Revenue Code of without unnecessary hindrance. On the
1997 as amended (NIRC) other hand, such collection should be made
in accordance with law as any arbitrariness
will negate the very reason for government
I. General Principles of Taxation itself... It is said that taxes are what we
A. Definition and Concept of Taxation pay for civilized society. Without taxes, the
B. Nature of Taxation government would be paralyzed for lack of
C. Characteristics of Taxation the motive power to activate and operate
D. Power of Taxation Compared it. Hence, despite the natural reluctance to
E. Purpose of Taxation surrender part of one's hard earned income
F. Principles of Sound Tax System to the taxing authorities, every person who
G. Theory and Basis of Taxation is able to must contribute his share in the
H. Doctrines of Taxation running of the government. The government
I. Scope and Limitation of Taxation for its part, is expected to respond in the
J. Stages of Taxation form of tangible and intangible benefits
K. Definition, Nature and Characteristics of Taxes intended to improve the lives of the people
L. Requisites of valid tax and enhance their moral and material
M. Tax as distinguished from other forms of values. This symbiotic relationship is the
exactions rationale of taxation and should dispel the
N. Kinds of Taxes erroneous notion that it is an arbitrary
method of exaction by those in the seat of
power.
A. Definition and Concept of Taxation
Underlying theory and basis of taxation
The power of taxation proceeds upon the theory
TAXATION
that the existence of government is a necessity; that
- is a mode by which governments make
it cannot continue without means to pay its
exactions for revenue in order to support
expenses; and that for those means it has the right
their existence and carry out their
to compel all citizens and property within its limits
legitimate objectives.
to contribute.
- a mode of raising revenue for public
purpose; the exercise of sovereign power to
The basis of taxation is found in the reciprocal
raise revenue for the expense of the
duties of protection and support between the State
government;
and its inhabitants. The State receives taxes that it
- the act of laying a tax, i.e., the process or
may be enabled to carry its mandates into effect and
means by which the sovereign, through its
perform the functions of government and the citizen
law-making body, raises income to defray
pays the portion of taxes demanded in order that he
the necessary expenses of government.(1
may, by means thereof, be secured in the enjoyment
Cooley 72-73)
of the benefits of an organized society, (see 51 Am.
- the process or means by which the
Jur. 42-43.)This is the so-called benefits-received
sovereign, through its law-making body,
principle. One is compensation or consideration for
raises income to defray the necessary
the other: protection for support and support for
expenses of government; a method of
protection.
apportioning the cost of government among
those who in some measure are privileged
to enjoy its benefits and must, therefore, B. Nature of the Power of Taxation
bear its burdens, (see 51 Am. Jur. 341; 1
Cooley 72-93.)
The power to tax, being inherent in an independent
- as a power, it refers to the inherent power
state for its existence and survival by the
of the state to demand enforced
furtherance of its multifarious functions, the same
contributions for public purpose or
does not require delegation from the Constitution.
purposes.
However, exercise of such power upon the
inhabitants is subject to limitations inhabitants is
TAXES
subject to limitations.
- are enforced proportional contributions
from persons and property levied by the
The power of taxation is inherent in sovereignty as
law-making body of the State by virtue of
an incident or attribute thereof, being essential to
its sovereignty for the support of the
the existence of every government. It exists apart
government and all public needs.
from constitutions and without being expressly
- The enforced proportional and pecuniary
conferred by the people (71 Am.Jur.2d 397-398).
contributions from persons and property
Hence, it can be exercised by the government even
levied by the law-making body of the state
if the Constitution is entirely silent on the subject.
TAXATION LAW REVIEWER
Constitutional provisions relating to the power of Thus, the power to tax carries with it the
taxation do not operate as grants of the power to power to grant exemption therefrom.
the government. They merely constitute limitations
upon a power which would otherwise be practically (2) The purpose or object of the tax so long as 9
without limit. (1 Cooley 150). While the power to tax it is a public purpose. - The legislative body
is not expressly provided for in our Constitution, its can levy a tax or make an appropriation
existence is recognized by the provisions relating to provided it is for a public purpose. Its
taxation (infra). determination, however, on the question of
what is a public purpose is not conclusive.
It is essentially a legislative function. Even in the The courts can inquire into whether the
absence of any constitutional provision, the power purpose is really public or private.
falls to the legislature as a part of the more general
power of law-making. The power to tax is peculiarly In the final analysis, therefore, the decision
and exclusively legislative and cannot be exercised on the question is not a legislative but a
by the executive or judicial branch of the judicial function. But once it is settled that
government (1 Cooley 160-161). Hence, only the purpose is public, the courts can make
Congress, our national legislative body, can impose no other inquiry into the objective of the
taxes. The levy of a tax, however, may also be legislature in imposing a tax (see Pascual
made by a local legislative body subject to such vs. Sec. of Public Works, 110 Phil. 331
limitations as may be provided by law. The [1961]), or the wisdom, advisability, or
Constitution expressly grants the power to tax to expediency of the tax. (Blunt vs. U.S., 255
local government units (see Sec. 5, Art. X, Fed. 322.)
Constitution).
Judicial action is limited only to a review
It is subject to constitutional and inherent where it involves:
limitations. These limitations are those provided in (a) The determination of the validity of the
the fundamental law (e.g., equal protection of the tax in relation to constitutional
laws, due process of law, rule of uniformity, etc.) or precepts or provisions. Thus, a tax may
implied therefrom (e.g., public purpose and non- be declared invalid because it violates
delegation of legislative power which are also the constitutional requirement of
inherent limitations), while the rest spring from the uniformity and equity in taxation; or
nature of the taxing power itself although they may (b) The determination in an appropriate
or may not be provided in the Constitution(e.g., case of the application of a tax law.
territoriality, international comity, and exemption of (see 1 Cooley 165.) Thus, a court may
government entities). decide that a tax has been illegally
collected where the taxpayer is
Scope of taxation entitled to tax exemption or his
Subject to constitutional and inherent restrictions, liability has already been extinguished
the power of taxation is regarded as supreme, by reason of prescription.
unlimited and comprehensive. The principal check
on its abuse rests only on the responsibility of the (3) The amount or rate of the tax. - As a
members of the legislature to their constituents. general rule, the legislature may levy a tax
of any amount or rate it sees fit. If the
Extent of the legislative power to tax taxes are oppressive or unjust, the only
The power of taxation being legislative, all its remedy is the ballot box and the election of
incidents are naturally within the control of the new representatives. (see 1 Cooley 178-
legislature. Subject to constitutional and inherent 181.)
restrictions, the legislature has discretion to
determine the matters mentioned subsequently. According to Chief Justice John Marshall,
"the power to tax involves the power to
(1) The subjects or objects to be taxed. - These destroy." (McCulloch vs. Maryland, 17 U.S.
refer to the coverage and the kind or nature [4 Wheat.] 316-428, 4L. ed. 579.) To say,
of the tax. They may be persons, whether however, that the power to tax is the
natural or juridical; property, whether real power to destroy is to describe not the
or personal, tangible or intangible; purposes for which the taxing power may be
businesses, transactions, rights, or used but the extent to which it may be
privileges. A state is free to select the employed in order to raise revenues. (see 1
subject of taxation and it has been Cooley 178.) Thus, even if a tax should
repeatedly held that that inequalities which destroy a business, such fact alone could
result from a singling out of one particular not invalidate the tax. (84 C.J.S. 46.)
class for taxation or exemption infringe no
constitutional limitation so long as such As long as the power is exercised within the
exemption is reasonable and not arbitrary. bounds of constitutional limitations, a tax
(see Lutz vs. Araneta, 98 Phil. 148; City of cannot be held invalid merely because the
Baguio vs. De Leon, 25 SCRA 938 [1968]; power which is manifested by its imposition
Sison, Jr. vs. Ancheta, 130 SCRA 654 [1984]) may involve the power to destroy. (see 51
Am. Jur. 80-81.)
TAXATION LAW REVIEWER
Incidentally, our Constitution mandates that (6) It is levied by the law-making body of the
"the rule of taxation shall be uniform and State. The power to tax is a legislative
10 equitable." In a case, our Supreme Court power which only the legislature can
said: "The power of taxation is sometimes exercise. The power to tax is also granted
called also the power to destroy. Therefore, to local governments, but subject to such
it should be exercised with caution to guidelines and limitations as may be
minimize injury to the proprietary rights of provided by law (Sec. 5, Art. X,
the taxpayer. It must be exercised fairly, Constitution); and;
equally and uniformly, lest the tax collector (7) It is levied for public purpose. Taxation
kills the 'hen that lays the golden eggs.' And involves, and a tax constitutes, a charge or
in order to maintain the general public's burden imposed to provide public revenue
trust and confidence in the government, for the support of the government, the
this power must be used justly and not administration of the law, or the payment
treacherously." (Roxas vs. Court of Tax of public expenses. (71 Am. Jur. 2d 344).
Appeals, 23 SCRA276, App120, 1968; Philex Revenues derived from taxes cannot be
Mining Corp. vs. Comm. of Internal used for purely private purposes or for the
Revenue, 97 SCAD 777,294 SCRA 687, Aug. exclusive benefit of private persons.
28, 1998.) (Gaston v. Republic Planters Bank, 158 SCRA
626, March 15, 1988). The public purpose
(4) The manner, means, and agencies of or purposes of the imposition is implied in
collection of the tax. - These refer to the the levy of tax. (see Mendoza v.
administration of the tax or the Municipality, 94 Phil. 1047[1954]), A tax
implementation of tax laws. Having the sole levied for a private purpose constitutes a
power to tax, the legislature must equally taking of property without due process of
possess the sole power to prescribe the law.
mode or method by which the tax shall be
collected, and to designate the officers It is also an important characteristic of most taxes
through whom its will shall be enforced as that they are commonly required to be paid at
well as the remedies which the State or the regular periods or intervals (see 1 Colley 64) every
taxpayer may avail in connection therewith. year,
While it is true that executive officials
enforce tax laws, their power or authority D. Power of Taxation Compared With
does not involve the choice of the subjects
to be taxed, the definition of the purpose Other Powers
for which the tax is imposed, or the
determination of the amount thereof. See Annex A.
Furthermore, they must observe and comply
with the procedural requirements E. Purpose of Taxation
prescribed in the administration of tax
laws.
Revenue-raising
Primary purpose of taxation is to provide funds or
C. Characteristics of Taxation property with which to promote the general welfare
and protection it its citizens (Ex. Income tax,
(1) It is an enforced contribution for its percentage tax)
imposition is in no way dependent upon the
will or assent of the person taxed. Fees may be properly regarded as taxes even though
(2) It is generally payable in the form of they also serve as an instrument of regulation... If
money, although the law may provide the purpose is primarily revenue, or if revenue is, at
payment in kind (e.g. backpay certificates least, one of the real and substantial purposes, then
under Sec. 2, R.A. No. 304, as amended);; the exaction is properly called a tax. [PAL v. Edu]
(3) It is proportionate in character or is laid by
some rule of apportionment which is Non-revenue/special or regulatory
usually based on ability to pay; Taxation is often employed as a device for regulation
(4) It is levied on persons, property, rights, by means of which certain effects or conditions
acts, privileges, or transactions. In each envisioned by governments may be achieved. Thus:
case, however, it is only a person who pays
the tax; ; the property is resorted to for the (1) Taxation can strengthen anemic enterprises
purpose of ascertaining the amount of the or provide incentive to greater production
tax that must be paid and of enforcing through grant of tax exemptions or the
payment in case of default of the taxpayer creation of conditions conducive to their
(84 C.J.S. 36). growth.
(5) It is levied by the State which has
jurisdiction or control over the subject to (2) Taxes on imports may be increased to
be taxed. This is necessary in order that the protect local industries against foreign
tax can be enforced; competition or decreased to encourage
foreign trade.
TAXATION LAW REVIEWER
(3) Taxes on imported goods may also be used F. Principles of Sound Tax System
as a bargaining tool by a country by setting
tariff rates first at a relatively high level
before trade negotiations are entered into (1) Fiscal Adequacy - the sources (proceeds) of 11
with another country to enhance its tax revenue should coincide with, and
approximate the needs of, government
bargaining power.
expenditures. The revenue should be elastic
(4) Taxes may be increased in periods of or capable of expanding or contracting
prosperity to curb spending power and halt annually in response to variations in public
inflation or lowered in periods of slump to expenditures.
expand business and ward off depression.
(2) Administrative Feasibility - Tax laws
(5) Taxes may be levied to reduce inequalities should be capable of convenient, just and
in wealth and incomes, as for instance, the effective administration. Each tax should be
estate, donor's and income taxes, their clear and plain to the taxpayer, capable of
payers being the recipients of unearned uniform enforcement by government
wealth or mostly in the higher income officials, convenient as to the time, place,
brackets. and manner of payment, and not unduly
burdensome upon, or discouraging to
(6) Taxes may be levied to promote science and business activity.
invention (see RA. No. 5448) or to finance
educational activities (see RA. No. 5447) or (3) Theoretical Justice or Equality - The tax
to improve the efficiency of local police burden should be in proportion to the
forces in the maintenance of peace and taxpayers ability to pay. This is the so-
order through grant of subsidy (see RA.No. called ability to pay principle. It also
6141.). connoted that the contribution of each
person towards the expense of the
(7) Taxation may be made as an implement of government should be so apportioned such
the police power to promote the general that he would feel neither more nor less
welfare. By way of illustration, it has been inconvenienced from his share of the
held that the Sugar Adjustment Act is an payment than every other person
act enacted primarily under the police experiences from his. In other words,
power and designed to obtain a taxation should be uniform as well as
readjustment of the benefits derived by equitable
people interested in the sugar industry as
well as to rehabilitate and stabilize the Note: The non-observance of the above principles
industry which constitutes one of the great will not necessarily render the tax imposed invalid
sources of the country's wealth and, except to the extent that specific constitutional
therefore, affects a great portion of the limitations are violated. (De Leon)
population of the country. (see Lutz vs.
Araneta, 78 Phil. 148; Republic vs. Bacolod- G. Theory and Basis of Taxation
Murcia Milling Co., 17 SCRA 632 [1966]; see
Pres. Decree No. 388.) Lifeblood Theory
Taxes are the lifeblood of the government and their
As long as a tax is for a public purpose, its validity is prompt and certain availability is an imperious need.
not affected by collateral purposes or motives of the [CIR v. Pineda]
legislature in imposing the levy, or by the fact that it
has a regulatory effect (51 Am. Jur. 381-382.) or it Taxes are the lifeblood of the government and so
discourages or even definitely deters the activities should be collected without unnecessary hindrance.
taxed. The principle applies even though the It is said that taxes are what we pay for civilized
revenue obtained from the tax appears very society. Without taxes, the government would be
negligible or the revenue purpose is only secondary. paralyzed for lack of the motive power to activate
(see United States vs. Sanchez, 340 U.S. 42; Tio vs. and operate it. [CIR v. Algue]
Videogram Regulatory Board, 151 SCRA 208 [1987])
Necessity Theory
Taxation is no longer envisioned as merely to raise The power of taxation proceeds upon theory that the
revenue to support the existence of government; existence of government is a necessity; that is
taxes may be levied with a regulatory purpose to cannot continue without means to pay its expenses;
provide means for rehabilitation and stabilization of and that for those means it has the right to compel
a threatened industry which is imbued with public all citizens and property within its limits to
interest as to be within the police power of the contribute.
State. The stabilization of oil prices is one of prime
concern which the State, via police power, may The power to tax is an attribute of sovereignty. It is
properly address. [Caltex v. COA] a power emanating from necessity. It is a necessary
burden to preserve the State's sovereignty and a
means to give the citizenry an army to resist an
TAXATION LAW REVIEWER
aggression, a navy to defend its shores from Exception to the exception: a tax law should not be
invasion, a corps of civil servants to serve, public given retroactive application when it would be so
12 improvement designed for the enjoyment of the harsh and oppressive for in such case, the
citizenry and those which come within the State's constitutional limitation of due process would be
territory, and facilities and protection which a violated (Republic v. Fernandez).
government is supposed to provide. [Phil. Guaranty
v. CIR]
It is a cardinal rule that laws hall have no retroactive
Benefits-Protection Theory (Symbiotic effect, unless the contrary is provided (citing Art. 4
Relationship) of the Civil Code). [Hydro Resources v. CA]
This principle serves as the basis of taxation and is
founded on the reciprocal duties of protection and Collection of interest in tax cases is not penal in
support between the State and its inhabitants. Also nature; it is but a just compensation to the State.
called symbiotic relation between the State and The constitutional prohibition against ex post facto
its citizens. laws is not applicable to the collection of interest on
back taxes. [Central Azucarera v. CTA]
The eradication of a dreaded disease is a public Though a tax statute may be applied retroactively,
purpose, but if by public purpose the petitioner legislative intent to that effect should be perfectly
means benefit to a taxpayer as a return for what he clear i.e., the language of the statute clearly
pays, then it is sufficient answer to say that the only demands or presses that it shall have a retroactive
benefit to which the taxpayer is constitutionally effect. [Lorenzo v. Posadas]
entitled is that derived from his enjoyment of the
privileges of living in an organized society, Non-retroactivity of Rulings (Sec. 246)
established and safeguarded by the devotion of taxes
to public purposes. Any other view would preclude General rule: IF REVOCATION, MODIFICATION OR
the levying of taxes except as they are used to REVERSAL WILL BE PRJUDICIAL TO THE TAXPAYER
compensate for the burden on those who pay them Any revocation, modification, or reversal of any of
and would involve the abandonment of the most the rules and regulations promulgated by the
fundamental principle of government that it exists Secretary of Finance and rulings and circulars
primarily to provide for the common good. [Gomez promulgated by the CIR shall NOT be given
v. Palomar] retroactive effect.
The obligation to pay taxes rests not upon the Exceptions:
privileges enjoyed by, or the protection afforded to, (1) Where the taxpayer deliberately misstates
a citizen by the government but upon the necessity or omits material facts from his return or
of money for the support of the state. For this any document required of him by BIR;
reason, no one is allowed to object to or resist the (2) Where the facts subsequently gathered by
payment of taxes solely because no personal benefit the BIR are materially different from the
to him can be pointed out. [Lorenzo v. Posadas] facts on which the ruling is based; OR
(3) Where the taxpayer acted in bad faith.
Jurisdiction over subject and objects
The limited powers of sovereignty are confined to
objects within the respective spheres of
Imprescriptibility
governmental control. These objects are the proper
Unless otherwise provided by the tax itself, taxes
subjects or objects of taxation and none else.
are imprescriptible. (CIR v. Ayala Securities
Corporation)
H. Doctrines in Taxation
The National Internal Revenue Code provides for
Prospectivity of tax laws statute of limitations (see Section 203 and 222) in
the assessment and collection of taxes therein
General rule: Tax laws are prospective in operation. imposed.
The reason is that the nature and amount of the tax
could not be foreseen and understood by the For the purpose of safeguarding taxpayers from any
taxpayer at the time the transaction which the law unreasonable examination, investigation or
seeks to tax was completed. assessment, our tax law provides a statute of
limitations in the collection of taxes. Thus, the law
Exception: Tax laws may be applied retroactively on prescription, being a remedial measure, should
provided it is expressly declared or clearly the be liberally construed in order to afford such
legislative intent. For instance, it has been the protection. As a corollary, the exceptions to the law
universal practice to increase taxes on income on prescription should perforce be strictly
already earned; yet notwithstanding this retroactive construed. [Commissioner v. C.A., G.R.No. 104171
operation, income taxes have not been successfully (1999)]
assailed as invalid.
The Tariff and Customs Code does not express any
general statute of limitation; it provides, however,
TAXATION LAW REVIEWER
that when articles have been entered and passed Double taxation in its narrow sense is undoubtedly
free of duty or final adjustments of duties made, unconstitutional but that in the broader sense is not
with subsequent delivery, such entry and passage necessarily so. (De Leon citing 26 R.C.L 264-265)
free of duty or settlements of duties will, after the 13
expiration of one (1) year, from the date of the final If the tax law follows the constitutional rule on
payment of duties, in the absence of fraud or protest uniformity, making all income, business or property
or compliance audit pursuant to the provisions of of the same class taxable at the same rate, there
this Code, be final and conclusive upon all parties, can be no valid objection to taxing the same income,
unless the liquidation of the import entry was merely business or property twice. [China Banking Corp. v.
tentative. (Sec. 1603) CA, G.R.No. 146749 (2003)]
The Local Government Code prescribes prescriptive Modes of eliminating double taxation
periods for the assessment (5 years) and collection (1) Allowing reciprocal exemption either by law
(5 years) of taxes. (see Sections 194 and 270, Rep. or by treaty;
Act No. 7160). (2) Allowance of tax credit for foreign taxes
paid
Double taxation (3) Allowance of deduction for foreign taxes
paid
Means taxing twice for the same tax period the same (4) Reduction of Philippine tax rate.
thing or activity, when it should be taxed once, for
the same purpose and with the same kind of Escape from taxation
character of tax.
1. Shifting of tax burden
Strict sense
In order to constitute double taxation in the strict SHIFTING - is the transfer of the burden of a tax by
sense or direct duplicate taxation: the original payer or the one on whom the tax was
(1) the same property must be taxed twice assessed or imposed to someone else. What is
when it should be taxed once; transferred is not the payment of the tax but the
(2) both taxes must be imposed on the same burden of the tax.
property or subject matter;
(3) for the same purpose; Ways of shifting the tax burden
(4) by the same State, Government, or taxing (1) Forward shifting - When the burden of the
authority; tax is transferred from a factor of
(5) within the same territory, jurisdiction or production through the factors of
taxing district; distribution until it finally settles on the
(6) during the same taxing period; and ultimate purchaser or consumer. Example:
(7) of the same kind or character of tax. VAT, percentage tax
Double taxation, standing alone and not being (3) Onward shifting - When the tax is shifted
forbidden by our fundamental law, is not a valid two or more times either forward or
defense against the legality of a tax measure (Pepsi backward. Thus, a transfer from the seller
Cola v. Mun. of Tanauan) But from it might emanate to the purchaser involves one shift; from
such defences against taxation as oppressiveness and the producer to the wholesaler, then to
inequality of the tax. retailer, we have two shifts; and if the tax
is transferred again to the purchaser by the
Constitutionality of double taxation retailer, we have three shifts in all.
There is no constitutional prohibition against double
taxation in the Philippines. It is something not Taxes that can be shifted
favored, but is permissible, provided some other Only indirect taxes may be shifted; direct taxes
constitutional requirement is not thereby violated, cannot be shifted.
such as the requirement that taxes must be uniform.
[Villanueva v. City of Iloilo (1968)] Meaning of impact and incidence of taxation
Impact of taxation is the point on which a tax is
originally imposed. In so far as the law is concerned,
TAXATION LAW REVIEWER
the taxpayer is the person who must pay the tax to taxpayer to be legally due, or in paying no
the government. He is also termed as the statutory tax when such is due.
14 taxpayer the one on whom the tax is formally (2) An accompanying state of mind described as
assessed. He is the subject of the tax. being evil, in bad faith, willful or
Incidence of taxation is that point on which the tax deliberate and not accidental.
burden finally rests or settle down. It takes place (3) A course of action (or failure of action)
when shifting has been effected from the statutory which is unlawful.
taxpayer to another.
Since fraud is a state of mind, it need not be proved
Relationship between Impact, Shifting, and by direct evidence but may be inferred from the
Incidence of a Tax circumstances of the case. Thus:
The impact is the initial phenomenon, the shifting is
the intermediate process, and the incidence is the (1) The failure of the taxpayer to declare for
result. Thus, the impact in a sales tax (i.e. VAT) is taxation purposes his true and actual
on the seller (manufacturer) who shifts the burden income derived from his business for two
to the customer who finally bears the incidence of consecutive years has been held as an
the tax. indication of his fraudulent intent to cheat
the government of its due taxes. (Republic
Impact is the imposition of the tax; shifting is the v. Gonzales, 13 SCRA 633 [1965]).
transfer of the tax; while incidence is the setting or (2) The substantial underdeclaration of income
coming to rest of the tax. in the income tax returns of the taxpayer
for four (4) consecutive years coupled with
2. Tax avoidance his intentional overstatement of deductions
justifies the finding of fraud. (Perez v. CTA
The exploitation by the taxpayer of legally and Collector, 103 Phil. 1167 [1958]).
permissible alternative tax rates or methods of
assessing taxable property or income in order to Exemption from taxation
avoid or reduce tax liability. It is politely called tax
minimization and is not punishable by law. Meaning of exemption from taxation
The grant of immunity to particular persons or
Example: A person refrains from engaging in some corporations or to person or corporations of a
activity or enjoying some privilege in order to avoid particular class from a tax which persons and
the incidental taxation or to lower his tax bracket corporations generally within the same state or
for a taxable year. taxing district are obliged to pay. It is an immunity
or privilege; it is freedom from a financial charge or
A taxpayer has the legal right to decrease the burden to which others are subjected.
amount of what otherwise would be his taxes or
altogether avoid them by means which the law Strictly construed against the taxpayer.
permits.
General rule: In the construction of tax statutes,
3. Transformation exemptions are not favoured and are construed
strictissimi juris (by the most strict right or law)
TRANSFORMATION method of escape in taxation against the taxpayer. An exemption from the
whereby the manufacturer or producer upon whom common burden cannot be permitted to exist upon
the tax has been imposed, fearing the loss of his vague implication or inference.
market if he should add the tax to the price, pays
the tax and endeavors to recoup himself by The fundamental theory is that all taxable property
improving his process of production thereby turning should bear its share of the cost and expense of
out his units of products at a lower cost. government. Moreover, applying the rule of strict
construction to statutory provisions granting tax
The taxpayer escapes by a transformation of the tax exemptions (or deductions) would minimize
into a gain through the medium of production. differential treatment and foster fairness and
equality of treatment among taxpayers.
4. Tax evasion
Taxation is the rule and exemption, the exception,
TAX EVASION - is the use by the taxpayer of illegal and therefore, he who claims exemption must be
or fraudulent means to defeat or lessen the payment able to justify his claim or right thereto, by a grant
of a tax. It is also known as tax dodging. It is expressed in terms too plain to be mistaken and too
punishable by law. categorical to be misinterpreted. If not expressly
mentioned in the law, it must at least be within its
Example: Deliberate failure to report a taxable purview by clear legislative intent.
income or property; deliberate reduction of income
that has been received. Nature of tax exemption
(1) Mere personal privilege. Being personal in
Elements of Tax Evasion nature, it cannot be assigned or transferred
(1) The end to be achieved. Example: the without the consent of the Legislature. The
payment of less than that known by the legislative consent to the transfer may be
TAXATION LAW REVIEWER
given either in the original act granting the public property is involved, exemption is
exemption or in a subsequent law the rule, and taxation, the exception.
(2) General rule: revocable by the government.
(3) Contractual - agreed to by the taxing 15
Exception: It is founded on a contract which authority in contracts lawfully entered into.
is protected from impairment. But the Subject to non-impairment of contracts. In
contract must contain the essential the real sense of the term and where the
elements of other contracts, such as for non-impairment clause of the Constitution
example, a valid cause or consideration. An can rightly be invoked, are those agreed to
exemption provided for in a franchise, by the taxing authority in contracts, such as
however, may be repealed or amended those contained in government bonds or
pursuant to the Constitution (see Sec. 11, debentures, lawfully entered into by them
Art. XII). A legislative franchise is in the under enabling laws in which the
nature of a contract. government, acting in its private capacity,
(3) Implies a waiver on the part of the sheds its cloak of authority and waives its
government of its right to collect taxes due governmental immunity. Truly, tax
to it, and, in this sense, is prejudicial exemptions of this kind may not be revoked
thereto. Hence, it exists only by virtue of without impairing the obligations of
an express grant and must be strictly contracts. These contractual tax
construed. exemptions, however, are not to be
(4) Not necessarily discriminatory, provided it confused with tax exemptions granted
has reasonable foundation or rational basis. under franchises. A franchise partakes the
Where, however, no valid distinction exists, nature of a grant which is beyond the
the exemption may be challenged as purview of the non-impairment clause of
violative of the equal protection guarantee the Constitution. (Manila Electric Company
or the uniformity rule. v. Province of Laguna, G.R.No. 131359, May
(5) General rule: Strict construction against 5, 1999)
taxpayer claiming exemption.
Exception
Compromise (1) When the law provides for liberal
construction
A contract whereby the parties, by making (2) Exemptions in favor of government, its
reciprocal concessions avoid litigation or put an end political subdivisions, and instrumentalities;
to one already commenced. It involves a reduction or in case of property owned by the state or
of the taxpayers liability. a city or other public corporations (Maceda
v. Macaraig)
Tax amnesty (3) The rule of strict construction of tax
exemption should not be applied to
organizations performing strictly religious,
Definition charitable, and educational functions.
(4) Exemptions from certain taxes granted
A tax amnesty, being a general pardon or intentional under special circumstances to special
overlooking by the State of its authority to impose classes of persons. (Vitug and Acosta)
penalties on persons otherwise guilty of evasion or
violation of a revenue or tax law, partakes of an 3. Tax rules and regulations
absolute forgiveness or waiver by the Government
of its right to collect what otherwise would be due
The Secretary of Finance, upon recommendation of
it, and in this sense, prejudicial thereto, particularly
the CIR, shall promulgate all needful rules and
to give tax evaders, who wish to relent and are
regulations for the effective enforcement of the
willing to reform a chance to do so and become a
provisions of the NIRC. (Sec. 244)
part of the new society with a clean slate. [Republic
v. IAC (1991)]
Requisites of a valid tax regulation
(1) Reasonable
Distinguished from tax exemption (2) Within the authority conferred
(3) Not contrary to law
Tax amnesty is an immunity from all criminal and (4) Must be published in the Official Gazette
civil oblifgations arising from non-payment of taxes. and filed with the UP Law Center
It is a general pardon given to all taxpayers. It
applies to past tax periods, hence of retroactive NOTE: Administrative regulations must always be in
application. (People v. Castaeda, 1988). harmony with the provisions of the law. In case of
discrepancy between the basic law and the
Tax exemption is an immunity from all civil liability implementing rule or regulation, the former
only. It is an immunity or privilege, a freedom from prevails.
a charge or burden of which others are subjected. It
4. Penal provisions of tax laws
TAXATION LAW REVIEWER
General rule: Tax laws are prospective in operation. Stated in another way, taxation may exceptionally
be delegated, subject to such well-settled
Exception: Tax laws may be applied retroactively limitations as
provided it is expressly declared or clearly the (1) The delegation shall not contravene any
legislative intent. constitutional provision or the inherent
limitations of taxation;
Exception to the exception: A tax law should not be (2) The delegation is effected either by the
given retroactive application when it would be so Constitution or by validly enacted
harsh and oppressive for in such case, the legislative measures or statute; and
constitutional limitation of due process would be (3) The delegated levy power, except when the
violated (Republic v. Fernandez). delegation is by an express provision of the
Constitution itself, should only be in favor
of the local legislative body of the local or
I. Scope and Limitation of Taxation municipal government concerned. [Vitug
and Acosta]
(3) Delegation to administrative agencies - Intangible Gen Rule: Domicile of the owner.
Limited to the administrative personal Mobilia sequuntur personam
18 implementation that calls for some degree property (movables follow the person)
of discretionary powers under sufficient
standards expressed by law or implied from Exceptions:
the policy and purposes of the Act. (1) When property has
Note: Delegation to administrative agencies acquired a business situs in
is really not an exception to the rule as no another jurisdiction; or
delegation of the strictly legislative power (2) When the law provides for
to tax is involved. The powers which are not the situs of the subject of
legislative include: tax (i.e., Sec 104 NIRC)
(a) The power to value property for Excise Tax
purposes of taxation pursuant to fixed Income Source of the income, nationality
rules; or residence of the taxpayer (Sec
(b) The power to assess and collect the 23 NIRC)
taxes; and Donors Tax Location of the property;
(c) The power to perform any of the nationality or residence of the
innumerable details of computation, taxpayer
appraisement, and adjustment, and the Estate Location of the property;
delegation of such details. [Cervantes nationality or residence of the
v. Auditor General] taxpayer
VAT Where the transaction is made
3. Territorial Others
Poll, Residence of the taxpayer,
Meaning of Situs of Taxation Capitation or regardless of the source of
Situs of taxation refers to the place of taxation, or Community income or location of the
the state or political unit which has jurisdiction to Tax property of the taxpayer
impose tax over its inhabitants.
4. International Comity
General Rule: The taxing of a country is limited to
persons and property within and subject to its
Comity is the respect accorded by nations to each
jurisdiction.
other because they are sovereign equals. Thus, the
property or income of a foreign state or government
Reasons: may not be the subject of taxation by another state.
(1) Taxation is an act of sovereignty which
could only be exercised within a countrys
Reasons:
territorial limits. (1) In par in parem non habet imperium. As
(2) This is the result of the concept that taxes
between equals there is no sovereign.
are paid for the protection and services (Doctrine of Sovereign Equality)
provided by the taxing authority which
(2) The rule of international law that a foreign
could not be provided outside the territorial government may not be sued without its
boundaries of the taxing State.
consent so that it is useless to impose a tax
which could not be collected.
Exceptions: (3) The concept that when a foreign sovereign
(1) Where tax laws operate outside territorial
enters the territorial jurisdiction of
jurisdiction. (i.e., Taxation of resident
another, it does not subject itself to the
citizens on their incomes derived from jurisdiction of the other.
abroad.)
(2) Where tax laws do not operate within the
territorial jurisdiction of the State. 5. Exemption of Government Entities,
(3) When exempted by treaty obligations. Agencies, and Instrumentalities
(4) When exempted by international comity.
If the taxing authority is the National Government:
Factors that Determine Situs: General Rule: The government is exempt from tax.
(1) Nature of the tax;
(2) Subject matter of the tax; Exception: When it chooses to tax itself. Nothing
(3) Citizenship of the taxpayer; can prevent Congress from decreeing that even
(4) Residence of the taxpayer; instrumentalities or agencies of the government
(5) Source of income. performing governmental functions may be subject
to tax. Where it is done precisely to fulfill a
KIND OF TAX SITUS constitutional mandate and national policy, no one
can doubt its wisdom. (Mactan Cebu Airport v
Property Tax
Marcos, 1996)
Real property Where it is located (lex rei sitae)
Tangible Where the property is physically
If the taxing authority is the local government unit:
Personal located although the owner
RA 7160 expressly prohibits LGUs from levying tax on
property resides in another jurisdiction.
TAXATION LAW REVIEWER
the National Government, its agencies and (2) its real properties are actually, directly and
instrumentalities and other LGUs. exclusively used for charitable purposes.
The tax exemption under this constitutional NOTE: Lung Center did not necessarily overturn the
provision covers real property taxes only. case of Abra Valley College v. Aquino (1988). Lung
center just provided a stricter interpretation of the
In general, special assessments are not covered by rule. In Abra Valley, the court held: The primary use
the exemption because by nature they are not of the school lot and building is the basic and
classified as taxes. [Apostolic Prefect v. City controlling guide, norm and standard to determine
Treasurer of Baguio] tax exemption, and not the mere incidental use
thereof. Under the 1935 Constitution, the trial court
To be entitled to the exemption, the petitioner must correctly arrived at the conclusion that the school
prove that: building as well as the lot where it is built, should be
(1) it is a charitable institution taxed, not because the second floor of the same is
being used by the Director and his family for
TAXATION LAW REVIEWER
residential purposes (incidental to its educational Basis of the grant: The inherent power of the state
purpose), but because the first floor thereof is being to impose taxes carries with it the power to grant
20 used for commercial purposes. However, since only a tax exemptions.
portion is used for purposes of commerce, it is only
fair that half of the assessed tax be returned to the Exemptions may be created by:
school involved. (1) the Constitution or
(2) statute subject to constitutional limitations
Prohibition against taxation of non-stock, non-
profit institutions Vote required for the grant of exemption: Absolute
Art XIV, Sec 4, 1987 Consti xxx majority of the members of Congress (at least
(3) All revenues and assets of non-stock, non- plus 1 of ALL the members voting separately)
profit educational institutions used
actually, directly, and exclusively for Vote required for withdrawal of such grant of
educational purposes shall be exempt from exemption: Relative majority is sufficient (majority
taxes and duties. Upon the dissolution or of the quorum)
cessation of the corporate existence of such
institutions, their assets shall be disposed of Grants in the nature of tax exemptions:
in the manner provided by law. (1) Tax amnesties
Proprietary educational institutions, (2) Tax condonations
including those cooperatively owned, may (3) Tax refunds
likewise be entitled to such exemptions,
subject to the limitations provided by law, Note:
including restrictions on dividends and (1) The LGU shall have the authority to grant
provisions for reinvestment. local tax exemption privileges. (Sec. 192,
(4) Subject to conditions prescribed by law, all LGC)
grants, endowments, donations, or (2) The President of the Philippines may, when
contributions used actually, directly, and public interest so requires, condone or
exclusively for educational purposes shall reduce real property taxes and interest.
be exempt from tax. (Sec. 277, LGC)
This provision covers only non-stock, non-profit Prohibition on use of tax levied for special purpose
educational institutions All money collected on any tax levied for a special
purpose shall be treated as a special fund and paid
The exemption covers internal revenue taxes, out for such purpose only. If the purpose for which a
custom duties on all revenues and assets of such special fund was created has been fulfilled or
institutions, and incidental income from facilities abandoned, the balance, if any, shall be transferred
located inside the school campus. to the general funds of the Government.
However, incomes which are unrelated to school Presidents veto power on appropriation, revenue,
operations are taxable. tariff bills
Art 6, Sec 28, 1987 Constitution
Art. VI, sec. 28, par. 3 Art. XIV, sec. 4, par. 3 (2) The President shall have the power to veto
Charitable institutions, Non-stock, non-profit any particular item or items in an
churches and parsonages educational institutions. appropriation, revenue, or tariff bill, but
or convents appurtenant the veto shall not affect the item or items
thereto, mosques, non- to which he does not object.
profit cemeteries, and all
lands, buildings, and
Non-impairment of jurisdiction of the Supreme
improvements, actually,
Court
directly, and exclusively Art VIII, Sec 5 par 2[b], 1987 Consti The Supreme
used for religious,
Court shall have the power to review, revise, modify
charitable, or educational or affirm on appeal or certiorari, as the laws or the
purposes.
Rules of Court may provide, final judgments and
Property taxes Income, property, and orders of lower courts in all cases involving the
donors taxes and legality of any tax, impost, assessment or toll or any
custom duties. penalty imposed in relation thereto.
Majority vote of Congress for grant of tax San Miguel Corp v. Avelino: It is undoubted that
exemption under the Constitution, even the legislative body
Art 6, Sec 28, 1987 Consti xxx cannot deprive this Court of its appellate jurisdiction
(4) No law granting any tax exemption shall be over all cases coming from inferior courts where the
passed without the concurrence of a constitutionality or validity of an ordinance or the
majority of all the Members of the legality of any tax, impost, assessment, or toll is in
Congress. question.
TAXATION LAW REVIEWER
Art VI, Sec 30 of the Constitution provides that no fund and paid out for such purpose only. If
law shall be passed increasing the appellate the purpose for which a special fund was
jurisdiction of the Supreme Court without its advice created has been fulfilled or abandoned,
and concurrence. the balance, if any, shall be transferred to 21
the general funds of the Government.
Scope of Judicial Review in taxation: The Power of
Judicial Review in taxation is limited only to the
interpretation and application of tax laws. The
2. Provisions Indirectly Affecting Taxation
judicial tribunals have no concern on the wisdom of
the taxing act. Its power does not include inquiry Due process
into the policy of legislation. Neither can it Art III, Sec 1, 1987 Consti: No person shall be
legitimately question or refuse to sanction the deprived of life, liberty, or property without due
provisions of any law consistent with the process of law, nor shall any person be denied the
Constitution. (Bisaya Land Transportation Co v. equal protection of the laws.
Collector, May 29, 1959)
Deprivation of life, liberty or property by the
government conforms with due process when the ff
Grant of power to the local government units to concur:
create its own sources of revenue
LGUs have power to create its own sources of (1) Substantive Due Process An act is done
revenue and to levy taxes, fees and charges, subject under the authority of a valid law or the
to such guidelines and limitations as the Congress Constitution itself.
may provide which, however, must be consistent
with the basic policy of local autonomy. [Art X, Sec (2) Procedural Due Process An act is done
5, 1987 Consti] after compliance with fair and reasonable
methods or procedure prescribed by law.
Flexible tariff clause
Delegation of Tariff powers to the President under Due Process in Taxation requirements:
the flexible tariff clause [Art VI, Sec 28(2), 1987 (1) Tax must be for public purpose
Consti] (2) It must be imposed within taxing authoritys
territorial jurisdiction
The flexible tariff clause refers to the authority (3) Assessment or collection must not be
given to the President, upon the recommendation of arbitrary or oppressive
NEDA, to adjust the tariff rates under Sec. 401 of
the Code in the interest of national economy, When taxpayer may invoke violation of due process:
general welfare and/or national security. The due process clause may be invoked where a
taxing statute is so arbitrary that it finds no support
in the Constitution, as where it can be shown to
Exemption from real property taxes amount to the confiscation of property. (Sison v.
Sec. 28(3), Art. VI, 1987 Constitution: Charitable Ancheta)
institutions, churches and personages or convents
appurtenant thereto, mosques, non-profit Instances of violations of the due process clause:
cemeteries, and all lands, buildings, and (1) If the tax statute amounts to confiscation of
improvements, actually, directly, and exclusively property;
used for religious, charitable, or educational (2) If the subject of confiscation is beyond the
purposes shall be exempt from taxation. jurisdiction of the state;
(3) If the tax statute is not for a public
No appropriation or use of public money for purpose;
religious purposes (4) If the retroactive law is harsh and
Art VI, Sec 29. unreasonable. (Sison v. Ancheta)
(1) No money shall be paid out of the Treasury
except in pursuance of an appropriation Equal protection
made by law. Art III, Sec 1, 1987 Consti: No person shall be
(2) No public money or property shall be deprived of life, liberty, or property without due
appropriated, applied, paid, or employed, process of law, nor shall any person be denied the
directly or indirectly, for the use, benefit, equal protection of the laws.
or support of any sect, church,
denomination, sectarian institution, or All persons subject to legislation shall be treated
system of religion, or of any priest, alike under similar circumstances and conditions
preacher, minister, other religious teacher, both in the privileges conferred and liabilities
or dignitary as such, except when such imposed.
priest, preacher, minister, or dignitary is
assigned to the armed forces, or to any The equal protection clause is subject to reasonable
penal institution, or government orphanage classification. Classification is valid as long as:
or leprosarium. (1) classification rests on substantial
(3) All money collected on any tax levied for a distinctions which make real differences,
special purpose shall be treated as a special
TAXATION LAW REVIEWER
(2) classification is germane to achieve the TAXES - are enforced proportional contributions
legislative purpose, from persons and property levied by the law-making
22 (3) the law applies, all things being equal, to body of the State by virtue of its sovereignty for the
both present and future conditions, and support of the government and all public needs.
(4) the classification applies equally well to all
those belonging to the same class. NATURE: The power to tax, being inherent in an
independent state for its existence and survival by
Religious freedom the furtherance of its multifarious functions, the
Art III, Sec 5, 1987 Consti-. No law shall be made same does not require delegation from the
respecting an establishment of religion, or Constitution. However, exercise of such power upon
prohibiting the free exercise thereof. (non- the inhabitants is subject to limitations.
establishment clause) The free exercise and
enjoyment of religious profession and worship, CHARACTERISTICS:
without discrimination or preference, shall forever (1) It is an enforced contribution for its
be allowed. (free exercise clause) No religious test imposition is in no way dependent upon the
shall be required for the exercise of civil or political will or assent of the person taxed.
rights. (2) It is generally payable in the form of
money, although the law may provide
The free exercise clause is the basis of tax payment in kind;
exemptions. (3) It is laid by some rule of apportionment
which is usually based on ability to pay;
License fees on the sale of bibles and religious (4) It is levied on persons, property, acts,
articles by a non-stock, non-profit missionary privileges, or transactions. In each case,
organization not for purposes of profit amounts to a however, it is only a person who pays the
condition or permit for the exercise of their right, tax;
thus violating the free exercise clause. [American (5) It is levied by the State which has
Bible Society v. City of Manila, L-9637 April 30, jurisdiction or control over the subject to
1957] However, if the activity is for profit or from be taxed. This is necessary in order that the
any of their property, the income is taxable tax can be enforced;
(6) It is levied by the law-making body of the
Non-impairment of obligations of contracts State. The power to tax is legislative power
Art III, Sec 10. No law impairing the obligation of which only the legislature can exercise. The
contracts shall be passed. power to tax is also granted to local
governments, but subject to such guidelines
Not only are existing laws read into contracts in and limitations as may be provided by law;
order to fix obligations as between parties, but the (7) It is levied for public purpose. Taxation
reservation of essential attributes of sovereign involves, and a tax constitutes, a charge or
power is also read into contracts as a basic postulate burden imposed to provide public revenue
of the legal order. The Contract Clause has never for the support of the government, the
been thought as a limitation on the exercise of the administration of the law, or the payment
State's power of taxation save only where a tax of public expenses. A tax levied for a
exemption has been granted for a valid private purpose constitutes a taking of
consideration. [Tolentino v. Secretary of Finance] property without due process of law.
(1) Levy the act of the Legislature in choosing (1) It should be for a public purpose
the persons, properties, rights, or privileges (2) The rule of taxation should be uniform
to be subjected to taxation. (3) That either the person or property taxed be
(2) Assessment and Collection the act of within the jurisdiction of the taxing
executing the law through administrative authority
agencies of the government. (4) That the assessment and collection be in
(3) Payment the act of the taxpayer in consonance with the due process clause
settling his tax obligations. (5) The tax must not infringe on the inherent
(4) Refund reimbursement of the tax paid and constitutional limitations of the power
under grounds provided for by law. of taxation
License fee
TAXES LICENSE AND Debt
REGULATORY FEE TAXES DEBT
Imposed under the Levied under the police Based on laws Generally based on
taxing power of the state power of the state. contract, express or
for purposes of revenue. implied.
Forced contributions for Exacted primarily to Generally cannot be Assignable
the purpose of regulate certain assigned
maintaining government businesses or Generally paid in money May be paid in kind.
functions. occupations. Cannot be a subject of Can be a subject of set
Generally, unlimited as Should not unreasonably set off off
to amount exceed the expenses of Non-payment is punished No imprisonment in case
issuing the license and of by imprisonment except of non-payment (Art. III,
supervision. in poll tax Sec. 20 1987
Imposed on persons, Imposed only on the Constitution)
property and to exercise right to exercise a Governed by the special Governed by the
a privilege. privilege prescriptive periods ordinary periods of
Failure to pay does not Failure to pay makes the provided for in the NIRC. prescription.
necessarily make the act act or business illegal. Does not draw interest Draws interest when it is
or business illegal. except only when so stipulated or where
delinquent there is default.
Penalty for non- Imposed only by public Can be imposed by
payment: surcharges or authority private individual
imprisonment (except
poll tax).
N. Kinds of Taxes
Progressive Development Corp v. QC (1989): To be
considered a license fee (PRIMARY PURPOSE TEST):
(1) the imposition questioned must relate to an As to object
occupation or activity that so engages the
public interest in health, morals, safety and (1) Personal, Poll or Capitation Tax tax of a
development as to require regulation for fixed amount imposed on persons residing
the protection and promotion of such public within a specified territory, whether
interest; citizens or not, without regard to their
(2) the imposition must also bear a reasonable property or the occupation or business in
relation to the probable expenses of which they may be engaged. (i.e.
regulation, taking into account not only the community tax)
costs of direct regulation but also its (2) Property Tax tax imposed on property,
incidental consequences as well. real or personal, in proportion to its value
or in accordance with some other
reasonable method of apportionment. (ie.,
Note: Taxes may also be imposed for regulatory
real estate tax)
purposes. It is called regulatory tax.
TAXATION LAW REVIEWER
Different types of incomes are subject to different 3. Criteria in Imposing Philippine Income
sets of graduated or flat income tax rates. The Tax
applicable tax rate(s) will depend on the
classification of the taxable income and the basis 25
could be gross income or net income. a. Citizenship or Nationality Principle
A citizen of the Philippines is subject to Philippine
Semi-schedular or semi-global tax system income tax
(a) on his worldwide income, if he resides in the
The compensation income, business or professional Philippines; or
income, capital gain and passive income not subject (b) only on his income from sources within the
to final tax, and other income are added together to Philippines, if he qualifies as a nonresident citizen.
arrive at the gross income, and after deducting the
sum of allowable deductions, the taxable income is b. Residence Principle
subjected to one set of graduated tax rates or
normal corporate income tax.
A resident alien is liable to pay Philippine income tax
on his income from sources within the Philippines
NOTE: The Philippines, under EO 37 (1986) and RA
but exempt from tax on his income from sources
8424 (1998), follows a semi-schedular and semi-
outside the Philippines.
global tax system.
2. Retirement pay (R.A. 7641) due to old age insurance coverage where the heirs of the employee
provided the following requirements are are the beneficiaries is the employees income.
32 met:
a. The retirement program is
approved by the BIR Commissioner;
b. It must be a reasonable benefit Withholding Tax on Compensation Income
plan. (fair and equitable) The income recipient (i.e., EE) is the person liable to
c. The retiree should have been pay the tax income, yet to improve the collection of
employed for 10 years in the said compensation income of EEs, the State requires the
company; ER to withhold the tax upon payment of the
d. The retiree should have been 50 compensation income.
years old or above at the time of
retirement; and
e. It should have been availed of for 2) Fringe Benefits
the first time.
a) Special treatment of fringe benefits
Persons liable
Separation pay taxable if VOLUNTARILY availed of.
It shall not be taxable if involuntary i.e. Death,
The Employer (as a withholding agent), whether
sickness, disability, reorganization /merger of
individual, professional partnership or a corporation,
company and company at the brink of bankruptcy or
regardless of whether the corporation is taxable or
for any cause beyond the control of the said official
or employee. not, or the government and its instrumentalities
Vacation and sick leave Basic Rule: Convenience of the Employer Rule
If meals, living quarters, and other facilities and
Rules in determining whether money received
privileges are furnished to an employee for the
for vacation and sick leave is taxable or not:
convenience of the employer, and incidental to
a. If paid or availed of as salary of an
the requirement of the employees work or
employee who is on vacation or on sick
position, the value of that privilege need not be
leave notwithstanding his absence from
included as compensation (Henderson v.
work, it constitutes TAXABLE income. [RR 6-
82, 2d] Collector)
b. Monetized value of unutilized vacation
Fringe benefit tax is
leave credits of ten (10) days or less which
imposed on fringe benefits received by
were paid to private employees during the
year and the monetized value of leave supervisory and managerial employees. The
fringe benefits of rank and file employees are
credits paid to government officials and
treated as part of his compensation income
employees are not subject to income tax
subject to income tax and withholding tax on
and to the withholding tax. [RR no. 2-98,
compensation.
Sec 2.78.1(A)(7)]
c. Terminal leave or money value of
accumulated vacation and sick leave b) Definition
benefits received by heir upon death of
employee is not taxable. Fringe benefit means any good, service, or other
benefit furnished or granted by an employer, in cash
Thirteenth month pay and other benefits or in kind, in addition to basic salaries, to an
Not taxable if the total amount received is individual employee (except rank and file
P30,000 or less. Any amount exceeding P30,000 employees) such as, but not limited to the following:
is taxable. [Sec. 32 (7)e, NIRC] 1. Housing
2. Expense Account
Overtime Pay premium payment received for 3. Vehicle of any kind
working beyond regular hours of work which is 4. Household personnel, such as maid, driver and
included in the computation of gross salary of others
employee. It constitutes compensation. 5. Interest on loan at less than market rate to the
extent of the difference between the market
Profit Sharing the proportionate share in the rate and actual rate granted.
profits of the business received by the employee in 6. Membership fees, dues and other expenses
addition to his wages. borne by the employer for the employee in
social and athletic clubs and similar
Awards for special services awards for past services organizations
or suggestions, etc. Are also compensations. 7. Expenses for foreign travel
8. Holiday and vacation expenses
Beneficial Payments such as where employer pays 9. Educational assistance to the employee or his
the income tax owed by an employee are additional dependents; and
compensation income. 10. Life or health insurance and other non-lire
insurance premiums or similar amounts on
Other forms of compensation those paid in kind, excess of what the law allows.
i.e. insurance premium paid by the employer for
TAXATION LAW REVIEWER
HOUSING
Note: The term Rank and File Employees
shall mean all employees who are holding HOUSING PRIVILEGE FRINGE BENEFIT TAX
neither managerial nor supervisory position BASE (MONETARY
as defined in the Labor Code VALUE)
1. LEASE of residential MV= 50% of lease
In the case of rank and file employees, property for the payments
fringe benefits other than those excluded residential use of
from gross income under the Tax Code and employees
other special laws, are taxable under the 2. Assignment of MV= [5% (FMV or ZV,
individual normal tax rate. residential property whichever is higher) x
owned by employer 50%]
De minimis benefits (exempt from income tax): RR for use of employees
13-98 3. Purchase of MV= 5% x acquisition
residential property cost x 50%
a) Monetized unused vacation leave in installment basis
credits of private employees not for the use of the
exceeding 10 days during the year and employee
the monetized value of leave credits to 4. Purchase of MV= FMV or ZV,
government officials and employees residential property whichever is higher
(RR 10-00) and ownership is
b) Medical cash allowance to dependents transferred in the
of employees not exceeding php750 name of the
employee
ORDINARY ASSET CAPITAL ASSET
Gain from
Non-taxable housing fringe benefit:
sale or Ordinary Gain Capital Gain
1. AFP, Philippine Army, Philippine Navy,
exchange
Philippine Air Force
Loss from 2. Situated inside of adjacent to the premises of a
sale or Ordinary Loss Capital Loss
business or factory maximum of 50 meters
exchange
from perimeter of the business premises
Excess of [goes into 3. Temporary housing for an employee who stays
Gains over computation of] Net Capital Gain in housing unit for three months or less
the Losses Ordinary Net Income
per employee per semester of Php125 MOTOR VEHICLE
per month MOTOR VEHICLE FRINGE BENEFIT TAX
c) Rice subsidy of Php1500 or one sack of BASE
50-kg rice per month amounting to
1. Purchased in the name MV= acquisition cost
not more than Php1500 (RR5-08)
of the employee
TAXATION LAW REVIEWER
5) Income from Dealings in Property Note: Capital losses can only be deducted from
capital gains; excess capital losses are to be carried
over by INDIVIDUALS in the succeeding taxable year
Dealings in property such as sales or exchanges
against capital gains.
may result in gain or loss. The kind of property
involved (i.e., whether the property is a capital
Note: Ordinary losses may be deducted from capital
asset or an ordinary asset) determines the tax
gains.
implication and income tax treatment, as
follows:
(2) Actual gain vis--vis Presumed gain
Taxable Ordinary Net Capital Gains
Net Net (other than PRESUMED GAIN: In the sale of real property
= +
Income Income those subject to classified as capital asset, the tax base is the gross
final CGT) selling price or fair market value, whichever is
higher. The law presumes that the seller makes a
gain from such sale. Thus, whether or not the seller
a) Types of Properties
makes a profit from the sale of real property, he has
to pay 6% capital gains tax.
Capital v. Ordinary Asset
ORDINARY ASSETS CAPITAL ASSETS ACTUAL GAIN: The tax base in the sale of real
1. Stock in trade of the Property held by the property classified as an ordinary asset is the actual
taxpayer or other taxpayer, whether or gain. If the seller incurs a loss from the sale, such
property of a kind which not connected with his loss may be deducted from his gross income during
would properly be trade or business the taxable year. The ordinary gain shall be added to
included in the inventory which is not an the operating income and the net taxable income
of the taxpayer if on ordinary asset. shall be subject to the graduated rates (if individual)
hand at the close of the Generally, they or to 30% corporate tax or to 2% MCIT.
TAXATION LAW REVIEWER
The property received as boot shall have - Stocks issued for services shall not be
as basis its FMV considered as issued in property.
36 If as part of the consideration to the
transferor, the transferee of property Meaning of merger, consolidation, control,
assumes a liability of the transferor or securities
acquires from the latter property subject to Merger and consolidation - shall mean (1)
a liability, such assumption or acquisition The ordinary merger or consolidation; or (2)
(in the amount of liability), shall be treated The acquisition by one corporation of all or
as money received by the transferor on the substantially all the properties of another
exchange corporation solely for stock
The Commissioner may allocate the basis Must be undertaken for a bona fide
among the several classes of stocks or business purpose and not solely for
securities received. the purpose of escaping the burden
of taxation
In determining whether a bona fide
2. Transfer to a controlled corporation exchange business purpose exists, each and
of property for stocks resulting in acquisition of every step of the transaction shall
corporate control by a person, alone or together be considered and the whole
with others not exceeding four. transaction or series of transaction
shall be treated as a single unit
SUBSTITUTED BASIS OF PROPERTY In determining whether the
TRANSFERRED: property transferred constitutes a
The basis of the property transferred in the substantial portion of the property
hands of the transferee shall be the same as it of the transferor, the term
would be in the hands of the transferor 'property' shall be taken to include
increased by the amount of the gain recognized the cash assets of the transferor.
to the transferor on the transfer. Securities: bonds and debentures but not
"notes" of whatever class or duration
Control: ownership of stocks in a
(c) Recognition of gain or loss in exchange of corporation possessing at least fifty-one
property percent (51%) of the total voting power of
all classes of stocks entitled to vote.
General rule
Upon the sale or exchange of property, the ENTIRE Transfer of a controlled corporation: property is
amount of the gain or loss shall be recognized. transferred to a corporation by a person in exchange
for stock or unit of participation in such a
Exceptions corporation, of which as a result of such exchange,
No gain or loss shall be recognized: said person, alone or together with others not
(a) If in pursuance of a plan of merger or exceeding 4 persons, gains control of the
consolidation: corporation.
a. A corporation, which is a party to a
merger or consolidation, exchanges
property solely for stock in a (6) Income tax treatment of capital loss
corporation, which is a party to the
merger or consolidation; (a) Capital loss limitation rule (applicable to both
b. A shareholder exchanges stock in a corporations and individuals)
corporation, which is a party to a
merger or consolidation, solely for General Rule: Losses from sales or exchanges of
the stock of another corporation capital assets shall be allowed only to the extent of
also a party to the merger or the gains from such sales or exchanges.
consolidation; or
c. A security holder of a corporation, EXCEPTION for Banks and Trust Companies: If a bank
which is a party to the merger or or trust company incorporated under the laws of the
consolidation, exchanges his Philippines, a substantial part of whose business is
securities in such corporation, the receipt of deposits or the sale of bond,
solely for stock or securities in debenture, note, certificate or other evidence of
another corporation, a party to the indebtedness, any loss resulting from such sale shall
merger or consolidation. not be subject to the foregoing limitation and shall
(b) If property is transferred to a corporation not be included in determining the applicability of
by a person in exchange for stock or unit of such limitation to other losses.
participation in such a corporation, of
which as a result of such exchange, said (b) Net loss carry-over rule (applicable only to
person, alone or together with others not individuals)
exceeding 4 persons, gains control of the
corporation. If an individual sustains in any taxable year a net
capital loss, the loss (in an amount not in excess of
TAXATION LAW REVIEWER
the net income for the year) shall be treated in the 28(B)(5)(c) of this Code and from
succeeding taxable year as a loss from the sale or the regular individual or corporate
exchange of a capital asset held for not more than income tax.
12 months. Note: Percentage tax paid is DEDUCTIBLE 37
for income tax purposes.
Dividends are included in the gross income of the It is a special form of rental income for the
stockholder, unless they are exempt from tax or use of intangible property.
38 subject to tax at preferential rate under the NIRC. Where a person pays royalty to another for
Cash dividend and property dividend are subject the use o its intellectual property, such
to income tax. royalty is a passive income of the owner
thereof subject to withholding tax.
d) Rental Income
Stock dividend Refers to earnings derived from leasing real
estate as well as personal property (tangible
Stock dividend is generally exempt from income
tax, EXCEPT: property). It also includes all other obligations
assumed to be paid by the lessee to the third
a. It shall be taxable only if subsequently
party in behalf of the lessor (i.e. interest, taxes,
cancelled and redeemed by the corporation and
loans, insurance premiums, etc.) [RR 19-86]
shares become treasury shares; or
Actual rent itself: included in gross income
b. It shall also be taxable if it leads to a (taxable); income recognition for tax purposes
substantial alteration in the proportion of tax follows income recognition for accounting
ownership in a corporation. purposes
Payments by lessee of obligations of lessor to
Property dividend third persons: considered as additional rent
Dividends are included in the gross income of the income of the lessor, and therefore included in
stockholder, unless they are exempt from tax or gross income (taxable).
subject to tax at preferential rate under the NIRC.
Cash dividend and property dividend are subject Lease of personal property
to income tax. Rental income on the lease of personal property
located in the Philippines and paid to a non-resident
Liquidating dividend taxpayer shall be taxed as follows:
Distribution of all the property of a corporation. It is
strictly not dividend income, but rather a sale of Non-Resident Non-
shares of stock resulting in capital gain or loss. It is Corporation Resident
taxable or deductible loss, depending on whether Alien
gain is realized or loss sustained by the stockholder Vessel 4.5% 25%
upon the distribution of the corporation of all its Aircraft, machineries 7.5% 25%
assts. The income is subject to ordinary income tax and other Equipment
rates and NOT to the FWT on dividends. Other assets 30% 25%
treated as derived partly from sources Note that the taxable gross income is affected by
within and partly from sources without exclusions because the latter are omitted from the
42 the Philippines. former and are not reported on the income tax
return but it is not affected by deductions because
Place of Place of Treatment they are subtracted after gross income is determined
PRODUCTION SALE and are reported on the return. (De Leon)
Philippines Abroad Partly within,
partly without
1) Rationale for the exclusions
Abroad Philippines Partly within, The term exclusions refers to items that are
partly without not included in the determination of gross
income because:
8) Shares of stock of domestic corporation
(a) They represent return of capital or are not
Treated as derived entirely from sources within the income, gain or profit;
Philippines regardless of where the said shares are (b) They are subject to another kind of internal
sold. revenue tax;
(c) They are income, gain or profit that are
expressly exempt from income tax under the
g. Situs of Income Taxation Constitution, tax treaty, Tax Code, or a
general or special law. (Mamalateo)
INCOME SITUS
Interest Residence of the debtor 2) Taxpayers who may avail of the exclusions
Dividends Residence of the corporation
Services Place of performance
Rentals Location of the property Return of capital All taxpayers since there
Royalties Place of exercise is no income.
Sale of Real Location of realty Already subject to All taxpayers unless
Property internal revenue tax provided that income is
Sale of A. Tangible to be included.
Personal Express exclusion As expressly provided.
1. Purchase and sale: Location of
Sale 3) Exclusions distinguished from deductions
2. Manufactured w/in and sold
w/o: Partly w/in and partly w/o Exclusions from gross income refer to a flow of
3. Manufactured w/o and sold wealth to the taxpayer which are not treated as part
w/in: Partly w/in and partly w/o of gross income, for purpose of computing the
taxpayers taxable income.
B. Intangible
Deductions, on the other hand, are the amounts
General rule: Place of Sale which the law allows to be deducted from gross
income in order to arrive at net income.
Exception: Shares of stock of
domestic corporations: Place of Exclusions pertain to the computation of gross
incorporation income, while deductions pertain to the
Shares of Stock Place of incorporation computation of the net income. (Mamalateo)
of Domestic
Corporation
4) Exclusion under the Constitution
h. Exclusions from Gross Income a. Income derived by the government or its
political subdivisions from the exercise of any
Exclusions from gross income refer to a flow of essential governmental function
wealth to the taxpayer which are not treated as part b. Income derived from any public utility or from
of gross income, for purposes of computing the the exercise of any essential governmental
taxpayers taxable income. function accruing to the Government of the
Philippines or to any political subdivision
Deductions (and exclusions) have generally been thereof.
deemed to be a matter of legislative grace. They
are allowed only where there is a clear provision in
the statute for the deduction claimed; and where
5) Exclusions under the Tax Code
particular deductions are authorized by the statute,
a) Proceeds of life insurance policies
no others may be made. The government is not
required to show that there is no provision of the
General rule: The proceeds of life insurance policies
Tax Code which authorizes the deduction. (De Leon)
paid to heirs or beneficiaries upon the death of the
TAXATION LAW REVIEWER
Exception: If the amounts received by the insured Income of any kind, to the extent required by any
(when added to the amounts already received before treaty obligation binding upon the Government of
the taxable year under such contract) exceed the the Philippines.
aggregate premiums or considerations paid
(whether or not paid during the taxable year), then g) Retirement benefits, pensions, gratuities, etc.
the excess shall be included in gross income.
a. RETIREMENT benefits under RA 7641 or under a
c) Amounts received under life insurance, reasonable private benefit plan
endowment or annuity contracts
b. TERMINAL pay
c. BENEFITS from foreign governments
Amounts received under life insurance, endowment
d. VETERANS benefits
or annuity contracts are excluded from gross
e. Benefits under the Social Security Act
income, but if such amounts (when added to
f. GSIS and SSS benefits
amounts already received before the taxable year
under such contract) exceed the aggregate
a. RETIREMENT benefits received under RA 7641;
premiums of considerations paid (whether or not
paid during the taxable year), then the excess shall OR
be included in gross income. in accordance with a reasonable private
benefit plan (RPBP).
d. VETERANS benefits
a. PASSIVE INCOME subject to FINAL TAX
Payments of benefits due or to become due to any [Sec. 24 (B) (1)]
person residing in the Philippines under the laws of
the United States administered by the United States Amounts already subject to final tax are no
Veterans Administration longer subject to income tax. These are
withheld by the payor and are no longer form
e. Social Security Act benefits part of gross income.
Payment of benefits under the Social Security Act,
(RA 8282) as amended, i.e., Maternity Benefits (IRDPO)
Interest income on bank deposits
f. GSIS and SSS benefits Royalties
Dividends from domestic corporations
TAXATION LAW REVIEWER
b. PCSO and lotto winnings [Sec. 24 (B)(1)] The income of a qualified senior citizen is
exempt from the payment of income tax
c. Income already subjected to final tax, such as provided his annual taxable income does not
gains from shares and real property subjected exceed the poverty level of P60,000 per year,
to capital gains tax. except interest income. [BIR Ruling 066-2000;
R.A. 7432; BIR Ruling 15-98]
d. GAIN from buying and selling stocks classified
as capital asset listed and traded in the PSE j. INVENTORS AND INVENTIONS
(Sec. 127)
Sec. 5 and 6 of R.A. 7459 (The Inventors and
Notes: The gain from such transaction is given a Inventions Act of 1991) provides tax exemption
specific exemption for one who is not a dealer for 10-year period which starts from the date of
in securities. Such gain is exempt from income first commercial sale.
tax but subject to percentage tax of of 1%.
However, prizes received are income earned not
attributable to the sale on commercial scale of
e. FRINGE benefits already subject to FBT (RR 3-
the invention or technology. The prize to be
98)
awarded to the individual inventor shall thus be
subject to the final tax of 20%. [BIR Ruling 069-
The actual monetary value of fringe benefits
2000]
received by supervisory and managerial
TAXATION LAW REVIEWER
BMBE refers to any business entity or enterprise Costs of goods purchased for resale, with proper
engaged in the production, processing or adjustment for opening and closing inventories, are
manufacturing of products or commodities, deducted from gross sales in computing gross income
including agro-processing, trading and services, (Sec. 65, Rev. Regs. 2)
whose total assets including those arising from
loans but exclusive of the land on which the
a) Sale of inventory of goods by manufacturers
particular business entitys office, plant and
and dealers of properties
equipment are situated shall not be more than
In sales of goods representing inventory, the
P3 million.
amount received by the seller consists of return of
capital and gain from sale of goods or properties.
i. Deductions from Gross Income That portion of the receipt representing return of
capital is not subject to income tax.
Deductions are amounts expressly allowed by law to
be deducted from gross income to arrive at taxable b) Sale of stock in trade by a real estate dealer
income. and dealer in securities
- Real estate dealers and dealers in securities are
It is in the nature of an exemption from taxation; ordinarily not allowed to compute the amount
it is strictly construed against the claimant who must representing return of capital through cost of sales.
point to a specific provision allowing it and has the Rather they are required to deduct the total cost
burden of proving he falls within the purview of such specifically identifiable to the real property or
provision. Thus, all deductions must be shares of stock sold or exchanged.
substantiated.
4. Substantiated with official receipts or other has not taken or is not taking title or in which he has
proper documents (must show the amount of no equity other than that of a lessee, use or
48 expense deducted and the connection to the possessor is deductible from income tax.
business);
5. Legitimately paid (not a BRIBE, kickback, or Requisites for deductibility:
otherwise contrary to law, morals, public 1. Required as a condition for continued use or
policy); possession;
6. If subject to withholding tax, proof of payment 2. For purposes of the trade, business or possession;
of such tax must be shown (i.e. FBT on fringe 3. Taxpayer has not taken or is not taking title to the
benefits); property or has no equity other than that of
7. Amount must be reasonable. lessee, user, or possessor.
(1) Salaries, wages and other forms of (7) Expenses for professionals
compensation for personal services actually Professional expenses are deductible in the year the
rendered, including the grossed-up monetary professional services are rendered, not in the year
value of the fringe benefit subjected to fringe they are billed, provided that the all events is
benefit tax which tax should have been paid present.
1. Bonuses are made in good faith.
2. They given for personal services actually All events test requires:
rendered. Fixing a right to income or liability to pay; and
3. They do not exceed a reasonable compensation The availability of reasonably accurate
for the services rendered. determinate of such income or liability.
Repairs in the nature of replacement to the extent BIR Ruling 102-97 (Sept. 29, 1997):
that they arrest deterioration and prolong the life of Under Section 30 of the Tax Code, as implemented
the property are capital expenditures and should be by Sec. 20 of the Revenue Regulations No. 2,
debited against the corresponding allowance for organization and pre-operating expenses of a
depreciation. corporation (including training expenses) are
considered as capital expenditures and are
(6) Expenses under lease agreements therefore, not deductible in the year they are paid
A reasonable allowance for rentals and/or other or incurred. But taxpayers who incur these expenses
payments which are required as a condition for the and subsequently enter the trade or business to
continued use or possession, for purposes of the which the expenditures relate can elect to amortize
trade, business or profession to which the taxpayer
TAXATION LAW REVIEWER
these expenditures over a period not less than sixty If the indebtedness is payable in periodic
(60) months. amortizations, the amount of interest which
corresponds to the amount of the principal
This rule, however, does not apply to a situation amortized or paid during the year shall be allowed as 49
where an existing corporation incurs these same deduction in such taxable year
expenditures for the purpose of expanding its
business in a new line of trade, venture or activity. (c) Interest expense incurred to acquire property
for use in trade/business/profession
b) Interest At the option of the taxpayer, interest expense on a
capital expenditure may be allowed as:
Requisites for deductibility
A deduction in full in the year when
1. There is an INDEBTEDNESS.
incurred;
2. The indebtedness is that of the TAXPAYER.
A capital expenditure for which the
3. The indebtedness is connected with the
taxpayer may claim only as a deduction the
taxpayers TRADE, profession, or business.
periodic amortization of such expenditure.
4. The interest must be legally DUE.
5. The interest must be stipulated in WRITING.
6. The taxpayer is LIABLE to pay interest on the Paper Industries Corp. v. Commissioner, 250 SCRA
indebtedness. 434: Should the taxpayer elect to deduct the
7. The indebtedness must have been paid or interest payments against its gross income, the
taxpayer cannot at the same time capitalize the
accrued DURING the TAXABLE YEAR.
8. The interest payment arrangement must not be interest payments. In other words, the taxpayer is
not entitled to both the deduction from gross
between RELATED taxpayers
income and the adjusted (increased) basis for
9. The interest must not be incurred to finance
determining gain or loss and the allowable
PETROLEUM operations.
depreciation charge.
10. In case of interest incurred to acquire property
used in trade, business or exercise of profession,
Related Taxpayers
the same was not treated as a CAPITAL
1. Between members of the family. For purposes of
expenditure,
this paragraph, the family of an individual shall
include only his brothers and sisters (whether by
LIMITATION: The taxpayer's allowable deduction for
the whole or half-blood), spouse, ancestor, and
interest EXPENSE shall be reduced by an amount lineal descendants; OR
equal to 42% of the interest INCOME subjected to 2. Except in case of distributions in liquidation,
final tax (SEE CHAPTER ON TAXATION OF PASSIVE between an individual and a corporation more
INCOME); provided, that effective January 1, 2009, than 50% in value of the outstanding stock of
the percentage shall be 33%. which is owned, directly or indirectly, by or for
such individual; OR
Non-deductible interest expense 3. Except in the case of distributions in liquidation,
1. Interest paid in advance by the taxpayer who between two corporations more than 50% in value
reports income on cash basis shall only be of the outstanding stock of each of which is
allowed as deduction in the year the owned, directly or indirectly, by or for the same
indebtedness is paid. individual, if either one of such corporations, with
2. If the indebtedness is payable in periodic respect to the taxable year of the corporation
amortizations, only the amount of interest preceding the date of the sale or exchange was,
which corresponds to the amount of the under the law applicable to such taxpayer, a
principal amortized or paid during the year personal holding company of a foreign personal
shall be allowed as deduction in such taxable holding company; OR
year. 4. Between the grantor and a fiduciary of any trust;
3. Interest payments made between related OR
taxpayers. 5. Between the fiduciary of a trust and a fiduciary of
4. Interest on indebtedness incurred to finance another trust if the same person is a grantor with
petroleum exploration. respect to each trust; OR
6. Between a fiduciary of a trust and a beneficiary of
such trust.
Interest subject to special rules
5. Not compensated for by insurance or other form GENERAL RULE: Not deductible from gross
of indemnity; income
6. Not claimed as a deduction for estate tax EXCEPT: If by a dealer in securities in the course
purposes; of ordinary business, it is deductible. 51
7. In case of casualty, notice of loss must be filed
with the Bureau of Internal Revenue within 45 (d) Wagering losses
days from the date of discovery of the casualty
Deductible only to the extent of wagering
or robbery, theft or embezzlement.
gains. A wager is made when the outcome
depends upon CHANCE.
No loss is recognized in the following:
1. Merger, consolidation, or control securities
(where no gains are recognized either); (e) NOLCO (Net Operating Loss Carry Over)
2. Exchanges not solely in kind;
3. Related taxpayers; Net operating loss is the excess of allowable
a. Between members of a family deductions over gross income for any taxable year
b. Between an individual and corporation immediately preceding the current taxable year.
more than fifty percent (50%) in value
of the outstanding stock of which is NOLCO: Net operating losses which have not been
owned, directly or indirectly, by or for previously offset as deduction from gross income
such individual; or shall be carried over as a deduction from gross
c. Between two corporations more than income for the next three (3) consecutive taxable
fifty percent (50%) in value of the years immediately following the year of such loss.
outstanding stock of which is owned,
directly or indirectly, by or for the Exception: Mines other than oil and gas wells,
same individual; where a net operating loss incurred in any of the
d. Between the grantor and a fiduciary of first ten (10) years of operation may be carried over
any trust; as a deduction from taxable income for the next five
e. Between the fiduciary of a trust and (5) years immediately following the year of such
the fiduciary of another trust if the loss.
same person is a grantor with respect
to each trust; REQUISITES for NOLCO:
f. Between a fiduciary and beneficiary of
a trust. 1. The taxpayer was not exempt from income tax
4. Wash sales; the year the loss was incurred;
5. Illegal transactions 2. There has been no substantial change in the
ownership of the business or enterprise wherein:
AT LEAST 75% of nominal value of outstanding
Other types of losses
issued shares is held by or on behalf of the same
persons;
(a) Capital losses
or
Deductible only to the extent of capital gains
AT LEAST 75% of the paid up capital of the
(except for banks and trust companies)
corporation is held by or on behalf of the same
a. Incurred in the sale or exchange of capital
persons.
assets;
b. Resulting from securities held as capital assets
Taxpayers Entitled to NOLCO
becoming worthless;
A. Individuals engaged in trade or business or in the
c. Losses from short sales of property;
exercise of his profession (including estates and
d. Losses due to failure to exercise privilege or
trusts);
option to buy or sell property.
Note: An individual who avails of optional
(b) Securities becoming worthless standard deduction cannot simultaneously claim
Loss in shrinkage in value of stock through deduction of NOLCO. However, the three-year
fluctuation in the market is not deductible period shall continue to run during such period
from gross income. notwithstanding the election made by the
Exception: If the stock of the corporation taxpayer.
becomes worthless, the cost or other basis may
be deducted by its owner in the taxable year in B. Domestic and resident foreign corporations
which the stock became worthless. subject to the normal income tax (e.g.,
manufacturers and traders) or preferential tax rates
(c) Losses on wash sales of stocks or securities under the Code (e.g., private educational
WASH SALE - a sale or other disposition of stock institutions, hospitals, and regional operating
or securities where substantially identical headquarters) or under special laws (e.g, PEZA-
securities are acquired or purchased within a registered companies).
61-day period, beginning 30 days before the sale
and ending 30 days after the sale Note: Corporations cannot avail of NOLCO as
long as it is subject to Minimum Corporate
TAXATION LAW REVIEWER
3. Taxpayer signifies in his return his intention to claimed by the spouse with custody
elect this deduction; otherwise he is considered of the child or children (but the
54 as having availed of the itemized deductions. total amount for the spouses shall
4. Election is irrevocable for the year in which not exceed the maximum of four).
made; however, he can change to itemized [Sec 35(B), NIRC]
deductions in succeeding years.
Who is a dependent for purposes of
additional exemptions?
b) Corporations, except non-resident foreign
1. A taxpayers child, whether legitimate,
corporations
The option to elect Optional Standard Deduction illegitimate or legally adopted child
2. chiefly dependent for support upon on
granted is now granted to corporations (domestic
the taxpayer
and resident foreign corporations) by virtue of RA
3. living with the taxpayer
9504.
4. a) not more than 21 years old,
unmarried and not gainfully employed
5) Personal and additional exemption OR
(Republic Act 9504 Minimum Wage Earner b) regardless of age, is incapable of
Law) self-support because of mental or
physical defect. (Sec 35 B, NIRC)
a) Basic personal exemptions
NOTE: Only children may be considered
According to RA 9504 (effective July 6,
dependent for purposes of additional
2008) basic personal exemption is Fifty
exemptions.
thousand pesos (P50,000) for each
individual taxpayer, regardless
whether single, married or head of the Who may claim personal exemptions?
family. Citizens (whether resident or non-
resident) and resident aliens are
allowed to avail of basic personal and
* BUT note Sec 35(A) - In the case of married
additional exemptions.
individuals where only one of the spouses is
deriving gross income, only such spouse shall Non-resident aliens engaged in trade
be allowed the personal exemption. or business are entitled to basic
personal exemptions only by way of
reciprocity, but not to additional
exemptions. [Sec. 35, NIRC]
b) Additional exemptions for taxpayer with o Limit of BPE Allowed to NRAETB:
dependents An amount equal to the
depends on the number of qualified exemptions allowed by the non-
dependent children resident aliens country to Filipino
Amount allowed as a deduction citizens not residing therein but
P25,000 per dependent child, but not deriving income therefrom, but not
to exceed four children (RA 9504) to exceed the amount fixed by
NIRC.[In other words, whichever is
Who may claim additional exemptions? LOWER]
Married Individuals: Additional
exemptions are claimed by only one c) Status-at-the-end-of-the-year rule
spouse. Change of Status [Sec 35(C), NIRC]
Generally, the spouse who is the 1. If taxpayer marries during taxable year,
gross compensation earner is the taxpayer may claim the corresponding
claimant of the additional exemptions. BPE in full for such year (i.e., no need
Where the husband and wife are both to pro-rate the exemption).
compensation income earners: the 2. If taxpayer should have additional
husband is the proper claimant of the dependent(s) during taxable year,
additional exemptions EXCEPT if there taxpayer may claim corresponding AE in
is an express waiver by the husband in full for such year.
favor of his wife, as embodied in the 3. If taxpayer dies during taxable year, his
withholding exemption certificate. estate may still claim BPE and AE for
When the spouses have business and/or himself and his dependent(s) as if he
professional income only: either may died at the close of such year.
claim the additional exemptions at the 4. If during the taxable year
end of the year. a. spouse dies or
The wife claims the additional b. any of the dependents dies or
exemptions in the following instances: marries, turns 21 years old or
i. husband has no income becomes gainfully employed,
ii. husband works abroad taxpayer may still claim same
iii. Legally separated spouses: exemptions as if the spouse or any
Additional exemptions can be of the dependents died, or
TAXATION LAW REVIEWER
and fees collected from members for the RESIDENT a citizen is deemed as a resident of the
sole purpose of meeting its expenses and Philippines unless he qualifies as a non-resident
56 11. Farmers', fruit growers', or like association under Sec. 22E of the NIRC;
organized and operated as a SALES agent taxable for income derived from all sources
for the purpose of marketing the products based on taxable (i.e., net) income
of its members and turning back to them
the proceeds of sales, less the necessary NON-RESIDENT a citizen of the Philippines who
selling expenses on the basis of the quantity according to Sec. 22 (E), NIRC):
of produce finished by them; (1) establishes to the satisfaction of the
Commissioner the fact of his physical presence
Note: Notwithstanding the exemptions, income abroad with a definite intention to reside
of whatever kind and character of the therein.
enumerated organizations from any of their (2) Leaves the Philippines during the taxable year
properties, real or personal, or from any of to reside abroad, either as an immigrant or for
their activities conducted for profit regardless employment on a permanent basis.
of the disposition made of such income, shall be (3) Works and derives income from abroad and
SUBJECT TO TAX. whose employment thereat requires him to be
National Power Corporation (NPC) in general is physically present abroad most of the time
subject to income tax. [RA 9337] during the taxable year.
(4) Has been previously considered as nonresident
Note: RA 9178 Barangay Micro Business Enterprises citizen and who arrives in the Philippines at any
(BMBEs) implemented by DO 17-04, April 20, 2004 time during the taxable year to reside
BMBEs shall be exempt from income tax for permanently in the Philippines shall likewise be
income arising from the operations of the treated as a non-resident citizen for the taxable
enterprise. year in which he arrives in the Philippines with
BMBE is any business entity or enterprise respect to his income derived from sources
engaged in the production, processing or abroad UNTIL the date of his arrival in the
manufacturing of products or commodities, Philippines.
including agro-processing trading and services, taxable for income derived within the
whose total assets including those arising from Philippines based on taxable (i.e., net) income
loans but exclusive of land on which the The phrase most of the time means at least
particular business entitys office, plant and 183 days. His presence abroad, however, need
equipment are situated, shall not be more than not be continuous.
P3M.
NOTES:
An OVERSEAS CONTRACT WORKER is taxable only
10. Taxation of Resident Citizens, on income from sources within the Philippines. (Sec.
Non-resident Citizens, and Resident 23 (c))
Aliens o NOTE FURTHER: A seaman who is a Filipino
citizen and who receives compensation for
a. General Rule: Resident citizens Taxable on services rendered abroad as member of the
income from all sources within and without the complement of a vessel engaged exclusively in
Philippines international trade is treated as an overseas
b. Taxation on Compensation Income contract worker.
c. Taxation on Business Income/Income from Length of stay is indicative of intention. A
Practice of Profession citizen of the Philippines who shall have stayed
d. Taxation on Passive income outside the Philippines for 183 days or more by
e. Taxation of capital gains the end of the year is a non-resident citizen.
His presence abroad, however, need not be
a. General rule: Resident citizens continuous.
Taxable on income from all sources Q: With regard to tax status, can a Filipino be a
within and without the Philippines resident and a non-resident citizen during
the same taxable year?
Citizens - Under Sec. 1, Art. IV of the Constitution, A: General rule: A citizen has only one tax status
the following are citizens of the Philippines: during the taxable year either as a resident or
a. Those who are citizens of the Philippines at a non-resident.
the time of the adoption of the 1987 Exception: If at the beginning of the year, he
Constitution citizen derives compensation and/or business
b. Those whose fathers or mothers are citizens or professional income, and sometime later
of the Philippines dring the same year, he departs from the
c. Those born before Jan. 17, 1973, of Filipino Philippines as an immigrant or a qualified non-
mothers, who elect Philippine citizenship resident citizen or vice versa.
upon reaching the age of majority.
d. Those who are naturalized in accordance 1. Alien
with law.
TAXATION LAW REVIEWER
RESIDENT residence is within the Philippines and non-resident alien engaged in business in the
who is not a citizen thereof (Sec. 22 (F), NIRC). An Philippines.
alien actually present in the Philippines who is not a
mere transient or sojourner is a resident of the 57
Philippines for income tax purposes. A mere floating b. Taxation on Compensation Income
intention, indefinite as to time, to return to another
country is not sufficient to constitute him a Income arising from an ER-EE relationship. It means
transient. all remuneration for services performed by an EE for
taxable for income derived within the his ER, including the cash value of all remuneration
Philippines based on taxable (i.e., net) income paid in any medium other than cash. [Sec. 78(A)]. It
Loss of residence by an alien An alien who includes, but is not limited to salaries and wages,
has axquired residence in the Philippines retains commissions, tips, allowances, bonuses, Fringe
his status as a resident until he abandons the Benefits of rank and file EEs and other forms of
same and actually departs from the Philippines. compensation.
MINIMUM WAGE EARNER shall refer to a worker in on any currency bank deposit, yield or any
the private sector paid the statutory minimum wage, other monetary benefit from deposit
60 or to an employee in the public sector with substitutes, trust funds and similar
compensation income of not more than the statutory arrangements - 20% final tax
minimum wage in the non-agricultural sector where under the expanded foreign currency
he/she is assigned. (Sec.22 HH, as amended by RA deposit system (EFCDS) - 7.5% final tax for
9504) residents, exempt if non-residents
on long-term deposit or investment
The minimum wage shall be exempt from the certificates (LTDIC) in banks (e.g., savings,
payment of income tax on their taxable common or individual trust funds, deposit
income: Provided, further, That the holiday substitutes, investment management
pay, overtime pay, night shift differential pay accounts and other investments, which have
and hazard pay received by such minimum wage maturity of 5 years or more) exempt
earners shall likewise be exempt from income Should LTDIC holder pre-terminate
tax LTDIC before the 5th year, a final tax
shall be imposed on the entire income
(3) Income also subject to tax exemption: holiday based on the remaining maturity:
pay, overtime pay, night shift differential, and
hazard pay 4 years to less than 5 years 5%
3 years to less than 4 years 12%
Compensation income including overtime pay, less than 3 years 20%
holiday pay and hazard pay, earned by MINIMUM
WAGE EARNERS who has no other returnable income
Summary Rules on Interest Income
are NOT taxable and not subject to withholding tax
Interest Income from: Tax Rate Payee
on wages [RA 9504]
Any currency deposit, 20% RC, NRC,
yield or any other RA
c. Taxation of Business monetary benefit from NRAETB
deposit substitutes ans
Income/Income from Practice of from trust funds and
Profession similar arrangements DC, RFC
derived from the Phils
All income obtained from doing business Long term investment or 4 less RC, NRC,
and/or engaging in the practice of a investment in the form of than 5 RA,
profession shall be included in the savings, common or yrs: 5% NRAETB
computation of taxable income. individual trust funds,
This shall be subject to the graduated rates substitute investment 3 less
of income. management accounts than 4
Not over P10,000 5% and other investments yrs: 12%
Over P10,000 but not over P500+10% of the evidenced by certificates
P30,000 excess over P10,000 in such form prescribed less than
by BSP 3 yrs:
Over P30,000 but not over P2,500+15% of the
20%
P70,000 excess over P30,000
Over P70,000 but not over P8,500+20% of the
EFCDS deposits 7.5% RC, NRC,
P140,000 excess over P70,000
RA
Over P140,000 but not P22,500+25% of the
over P250,000 excess over P140,000
DC, RFC
Over P250,000 but not P50,000+30% of the
Foreign currency loans 10% RC, RA
over P500,000 excess over P250,000
granted by FCDUs to
residents other than OBUs DC, RFC
Over P500,000 P125,000+32% of the
banks or other depositary
excess over P500,000
under the EFCDS
Foreign currency loans 10% RC, RA
d. Taxation of Passive Income granted by OBUs to
residents other than OBUs DC, RFC
or local commercial
1) Passive income subject to final tax banks, including braches
of foreign banks
Final tax means tax withheld from source, and the
authorized by BSP to
amount received by the income earner is net of the transact business with
tax already. The tax withheld by the income payor is
OBUS
remitted by him to the BIR. The income having been
Foreign currency loans 20% NRFC
tax-paid already, it need not be included in the
contracted on or after
income tax return at the end of the year. These
August 1, 1986
passive income items are as follows:
Transactions with EXEMPT NRC, NRA,
depositary banks under
a) Interest income
TAXATION LAW REVIEWER
deposit or investment before the the current fair market value at the time of
5th year, a final tax shall be the sale, whichever is higher. Any gain or
62 imposed on the entire income and loss on the sale is immaterial because there
shall be deducted and withheld by is a conclusive presumption by law that
the depository bank from the the sale resulted in a gain.
proceeds of the long-term deposit EXCEPTION: When sale of residence is not
or investment certificate based on liable for capital gains tax
the remaining maturity thereof: a. There is a sale or disposition of their
Four (4) years to less than principal residence by natural persons.
five (5) years - 5%;
Three (3) years to less b. The proceeds of the sale are fully utilized in
than four (4) years - 12%; acquiring or constructing a new principal
and residence within 18 calendar months from
Less than three (3) years - the date of sale or disposition.
20%. The Commissioner shall have been duly
e. Taxation of capital gains notified by the taxpayer within 30 days
from the date of sale or disposition through
a prescribed return of his intention to avail
When the asset sold was held as a capital asset, the
of the tax exemption.
gain or loss is called a capital gain or loss. When the
A deposit is made of the 6% capital gain
asset sold was not held as a capital asset (in other
tax otherwise due, in cash or managers
words, as an ordinary asset), the gain or loss is check, in an interest-bearing account with
called an ordinary gain or loss.
an Authorized Agent Bank (AAB), under an
Escrow Agreement between the taxpayer
1) Income from sale of shares of stock of a and the Bureau of Internal Revenue that the
Philippine corporation same shall be released to the taxpayer
when the proceeds of the sale shall have
a) Shares traded and listed in the stock exchange been utilized as intended.
The transaction is exempt from income tax The tax exemption can only be availed
regardless of the nature of business of the seller or of once every 10 years
transferor. However, it is subject to the one-half of
one percent (1/2 of 1%) stock transaction tax If there is no full utilization of the
imposed under Sec. 127(A) of the Tax Code based on proceeds of sale or disposition, the
the gross selling price or gross value in money of the portion of the gain presumed to have
shares of stock sold or transferred.\ been realized from the sale or
disposition shall be subject to capital
b) Shares NOT listed OR Listed but NOT traded in gains tax (CGT). The GSP or FMV at the
the stock exchange time of sale, whichever is higher, shall
On sale, barter, exchange or other disposition of be multiplied by a fraction which the
shares of stock of a domestic corporation not unutilized amount bears to the gross
listed and traded through a local stock exchange, selling price in order to determine the
held as a capital asset: taxable portion.
RESIDENT NON-RESIDENT
64 CITIZEN ALIEN CITIZEN NRAETB NRANETB
CATEGORY OF INCOME Within the Within the Within the Within the
All sources
Philippines Philippines Philippines Philippines
1. Compensation / Business / Profession
GIW 25%
2. Prizes of P10,000 or less Based on Taxable (i.e, Net) Income
Schedular Income Tax Rates (Sec. 24, NIRC)
(i.e, 5% to 32%) Not
Applicable
3. Interest from any currency bank
deposit , etc., Royalties (other than
from books, literary works and
Gross Income Within the Philippines (GIW) 20% Final
musical compositions), Winnings /
Withholding Tax
Prizes (except prizes P10,000 and
below)
stock exchange, and real properties shall be 13. Individual Taxpayers Exempt
subject to the similar tax prescribed on
from Income Tax
66 citizens and resident aliens.
o Sale, barter or exchange of Shares
of stock in domestic corporation a. Senior citizens
not traded The income of a qualified senior citizen is exempt
Net over P100,000 5% of from the payment of income tax provided his annual
net capital gains realized taxable income does not exceed the poverty level
On any amount in excess of P60,000 per year, except interest income. [BIR
of P100,000 10% of net Ruling 066-2000; R.A. 7432; BIR Ruling 15-98]
capital gains realized
o Sale, barter or exchange of real
properties 6% of gross selling b. Exemptions granted under
price or current FMV whichever is international agreements
higher
14. Taxation of Domestic
12. Exclude Non-resident Aliens Not Corporations
Engaged in Trade or Business a. Tax payable
b. Allowable deductions
1. Alien individuals employed by: c. Taxation of Passive Income
a. Regional or Area Headquarters (RAHQ) and d. Taxation of Capital Gains
Regional Operating Headquarters (ROHQ) f. Tax on government-owned or controlled
established in the Philippines by corporations, agencies or instrumentalities
multinational companies
o Multinational company, defined a
foreign firm or entity engaged in
a. Tax payable
international trade with affiliates or 1) Regular tax
subsidiaries or branch offices in the a. Normal Corporate Income Tax Rate: 30% of
Asia-Pacific Region and other foreign net taxable income
markets
b. Offshore Banking Units established in the Gross Income
Philippines Less Allowable Deductions
Taxable Income
2. Alien individuals who are permanent residents
of a foreign country but who are employed and NOTE: Tax rate of 30% starting January 1.
assigned in the Philippines by a foreign service 2009. Thus, read the facts and determine
contractor or by a foreign service subcontractor from what year the income is.
engaged in petroleum operations in the
Philippines
2) Minimum corporate income tax (MCIT)
Tax Rate and Base - 15% of gross income a) Imposition of MCIT
received as salaries, wages, annuities, Gross Sales
compensation, remuneration and other less Sales Returns
emoluments, such as honoraria and allowances Sales Returns & Allowances
Cost of Goods Sold
The same tax treatment shall apply to
Filipinos employed and occupying the same MCIT GI
positions as those of aliens employed by
these multinational companies, offshore MCIT is in the nature of a tax credit,
banking units and petroleum service not an allowable deduction. Its purpose
contractors and subcontractors. is to prevent corporations from
escaping being taxed by including
Note that the coverage of the special frivolous expenses in their statement of
classification (and the corresponding tax rate) is income.
limited to income received as wages. Hence, Is the Minimum Corporate Income Tax
any income earned from all other sources (MCIT) an addition to the regular or
within the Philippines by the alien employees normal income tax? No, the MCIT is
shall be subject to the pertinent income tax not an additional tax. The MCIT is
(example: sale of real property in the compared with the regular income tax,
Philippines is subject to 6% capital gain tax, which is due from a corporation. If the
imposed on the gross selling price or fair market regular income is higher than the MCIT,
value of the property at the time of the sale, then the corporation does not pay the
whichever is higher) MCIT.
Who are covered by MCIT? The MCIT
covers domestic and resident foreign
corporations which are subject to the
TAXATION LAW REVIEWER
regular income tax. The term regular MCIT (P300,000 x 2%) P6,000
income tax refers to the regular Normal income tax
income tax rates under the Tax Code. (P100,000 x 35%) P35,000
Thus, corporations which are subject to Income Tax to be paid for the year 67
a special corporate tax system do not (whichever is higher) P35,000
fall within the coverage of the MCIT.
NOTE: The effective rate now is no longer 35%,
Those are: but 30%.
a) Corporations that are subject to ten
percent (10%) preferential tax rate: b) Carry forward of excess minimum tax
Schools, hospitals and income of Offshore
Any excess of the minimum corporate
Banking Units (OBUs), and Foreign Currency
income tax over the normal income tax
Deposit Unit (FCDU) from foreign currency
shall be carried forward and credited
transactions; Regional Operating
against the NORMAL TAX for the three (3)
Headquarters
immediately succeeding taxable years.
b) Firms under special income tax regime
[Sec. 27(E)(2)] In the year to which carried
such as those under the PEZA law and the forward, the normal tax should be higher
Bases Conversion Development Act;
than the MCIT.
c) International carriers subject to tax at 2
% of their gross Philippine billings; Illustration:
d) Newly established corporations or firms
A domestic corporation had the following data
which are on their first 3 years of
on computations of the normal tax (NT) and the
operations are not covered by the MCIT.
minimum corporate income tax (MCIT) for five
years.
Note: For corporations whose operations or activities
are partly covered by the regular income tax and Yr 4 Yr 5 Yr 6 Yr 7 Yr 8
partly covered under special income tax system, the MCIT 80K 50K 30K 40K 35K
MCIT shall apply on operations by the regular income
NT 20K 30K 40K 20K 70K
tax system.
The excess MCIT over NT carry-forward is
shown below:
What is cost of goods sold? It Year 4 Year 5 Year 6 Year 7 Year 8
includes all business expenses
MCIT 80,000 50,000 30,000 40,000 35,000
DIRECTLY incurred to produce the NT 20,000 30,000 40,000 20,000 70,000
merchandise to bring them to their
present location and use. [Sec.
NT is n/a n/a 40,000 n/a 70,000
27(E)(4)]
higher
Less:
MCIT gross income differentiated from
MCIT >(40,000) > (20,000)
the normal tax gross income: the latter
carry- *
would include other incidental income
fwd
items, such as rent income, interest, >(20,000)
gain on sale of assets, certain tax
From
refunds, etc.
Year 4
When is the MCIT computed?
From
beginning of the fourth taxable year
Year 5
immediately following the year in
which such corporation commenced its From
Year 7
business operations, and after incurring
a net loss or zero taxable income, or a
normal income tax that is lesser than Tax 80,000 50,000 - 40,000 30,000
minimum income tax. Due
What amount of income tax is paid by Arrow pointing downward means that the
the corporation to the BIR? normal tax is higher so that there can be an
Whichever is HIGHER between the excess MCIT carry-forward against it.
normal tax and the minimum corporate
income tax. * Cannot carry forward an amount higher than
the NT, hence the excess of 60K from Year 4
Illustration: was reduced to 40K. The unused P20,000 cannot
E Co., a domestic trading corporation, in its be used in Year 8 because Year 8 was beyond
fourth year of operations had a gross profit from three years from Year 4.
sales of P300,000 and net taxable income of
P100,000. How much was the income tax paid
by the corporation for the year?
TAXATION LAW REVIEWER
a) Interest from deposits and yield or any other recommendation by the Monetary
monetary benefit from deposit substitutes and Board
from trust funds and similar arrangements and o BUT: Interest income from foreign
royalties currency loans granted by such 69
on any currency bank deposit, yield or depository banks under said
any other monetary benefit from expanded foreign currency deposit
deposit substitutes, trust funds and system to residents, other than
similar arrangements - 20% offshore banking units in the
Philippines shall be subject to a
b) Capital gains from the sale of shares of stock final tax at the rate of 10%.
not traded in the stock exchange Any income of nonresidents, whether
On sale, barter, exchange or other disposition of individuals or corporations, from
shares of stock of a domestic corporation not transactions with depository banks under
listed and traded through a local stock exchange, the expanded system shall be exempt from
held as a capital asset: income tax.
On the net capital gain:
Not over P100,000: Final Tax of 5% d. Taxation of Capital Gains
On any amount in excess of
P100,000: plus 10% Final tax on 1) Income from sale of shares of stock
the excess a. On sale, barter, exchange or other
disposition of shares of stock of a domestic
c) Income derived under the expanded foreign corporation not listed and traded through a
currency deposit system local stock exchange, held as a capital
under the expanded foreign currency asset:
deposit system (EFCDS) - 7.5% On the net capital gain:
Not over P100,000: Final Tax of 5%
On any amount in excess of
d) Inter-corporate dividends
P100,000: plus 10% Final tax on the
Dividends received from another domestic
excess
corporation - EXEMPT
e) Capital gains realized from the sale, exchange, 2) Income from the sale of real property
or disposition of lands and/or buildings situated in the Philippine and 3) Income
On the sale, exchange or disposition of lands from the sale, exchange, or other disposition
and/or buildings which are not actually used in the of other capital assets
business of a corporation and are treated as capital b. On the sale, exchange or disposition of
assets On the gross selling price, or the current lands and/or buildings which are not
fair market value at the time of the sale, whichever actually used in the business of a
is higher, a final tax of 6% corporation and are treated as capital
NOTE: Tax treatment is the same as assets On the gross selling price, or the
that of individuals. current fair market value at the time of the
The capital gains tax is applied on the sale, whichever is higher, a final tax of 6%
gross selling price, or the current fair NOTE: Tax treatment is the same as
market value at the time of the sale, that of individuals.
whichever is higher. Any gain or loss on The capital gains tax is applied on the
the sale is immaterial because there is gross selling price, or the current fair
a conclusive presumption by law that market value at the time of the sale,
the sale resulted in a gain. whichever is higher. Any gain or loss on
the sale is immaterial because there is
a conclusive presumption by law that
2) Passive income not subject to tax the sale resulted in a gain.
Income derived by a depository bank under
the expanded foreign currency deposit
system from foreign currency transactions e. Tax on proprietary educational
with nonresidents, offshore banking units in institutions and hospitals
the Philippines, local commercial banks, Tax Rate and Base 10% on net income (except
including branches of foreign banks that on income subject to capital gains tax and
may be authorized by the Bangko Sentral ng passive income subject to final tax) within and
Pilipinas (BSP) to transact business with without the Philippines
foreign currency depository system units CAVEAT: If gross income from unrelated trade
and other depository banks under the or business or other activity exceeds 50% of
expanded foreign currency deposit system total gross income derived from all sources, the
shall be exempt from all taxes tax rate of 35% shall be imposed on the entire
o EXCEPT: net income from taxable income.
transactions specified by the Unrelated trade, business or other activity-
Secretary of Finance upon any trade, business or other activity, the
TAXATION LAW REVIEWER
conduct of which is not substantially related tax on dividend income, would be the non-resident
to the exercise or performance by such foreign corporation itself and the dividend income
70 educational institution or hospital of its shall be subject to the tax similarly imposed on non-
primary purpose or function. resident foreign corporations.
Proprietary educational institution- any
private school maintained and administered Foreign Investment Act of 1991, Section 3.
by private individuals or groups with an Definitions.
issued permit to operate from the DECS,
CHED or TESDA. Xxx
under the same conditions as domestic irrespective of the place of sale or issue and
corporations. [Sec. 28(A)(2)] the place of payment of the ticket or
GROSS INCOME TAX (GIT) The President, passage document
upon the recommendation of the Secretary of gross revenue from tickets revalidated, 71
Finance, may allow resident foreign exchanged and/or indorsed to another
corporations the option to be taxed at fifteen international airline if the passenger boards
percent (15%) of gross income within the a plane in a port or point in the Philippines
Philippines, under the same conditions as for flights which originate from the
domestic corporations. [Sec. 28(A)(1)] Philippines, but transshipment of passenger
takes place at any port outside the
Philippines on another airline, the gross
d. Tax on certain income revenue consisting of only the aliquot
portion of the cost of the ticket
(1) Interest from deposits and yield or any corresponding to the leg flown from the
other monetary benefit from deposit Philippines to the point of transshipment
substitutes, trust funds and similar [RR 15-2002]
arrangements and royalties
on any currency bank deposit, yield or any Air Canada vs. CIR (CTA Case No. 6572):
other monetary benefit from deposit A foreign airline company selling tickets in the
substitutes, trust funds and similar Philippines through their local agents shall be
arrangements - 20% considered as resident foreign corporation
engaged in trade or business in the country.
The absence of flight operations within the
(2) Income derived under the expanded Philippine territory cannot alter the fact that
foreign currency deposit system the income received was derived from activities
under the expanded foreign currency within the Philippines.
deposit system (EFCDS) - 7.5% The test of taxability is the source, and the
source is that activity which produced the
income.
(3) Capital gain from sale of shares of stock
not traded in the stock exchange In the case of International Shipping, GPB
means:
On sale, barter, exchange or other disposition of
gross revenue whether for passenger, cargo
shares of stock of a domestic corporation not
or mail originating from the Philippines up
listed and traded through a local stock exchange,
to final destination, regardless of the place
held as a capital asset:
of sale or payments of the passage or
On the net capital gain:
freight documents.
Not over P100,000:
Final Tax of 5%
(2)Offshore banking units
On any amount in excess of P100,000: Coverage of the Rule: ONLY income derived by
plus Final Tax of 10% on the excess
offshore banking units from foreign currency
transactions with:
NOTE: Tax treatment is the same as that of nonresidents,
individuals and domestic corporations. other offshore banking units
The net taxable income from the sale of
local commercial banks including branches
real property realized by the resident foreign
of foreign banks that may be authorized by
corporation shall be subject to the normal corporate
the Bangko Sentral ng Pilipinas (BSP) to
income tax.
transact business with offshore banking
units
(4) Intercorporate dividends
Dividends received from a domestic TAX RATE: Exempt from all taxes, except net
corporation - EXEMPT income from such transactions as may be
specified by the Secretary of Finance, upon
recommendation by the Monetary Board to be
e. Exclude: subject to the regular income tax payable by
(1) International carrier banks
Tax Rate and Base 2.5% on Gross Philippine EXCEPTION: Interest income derived from
Billings (GPB) foreign currency loans granted to residents
other than offshore banking units or local
What is GPB? commercial banks, including local branches
In the case of International Air Carriers, GPB of foreign banks that may be authorized by
refers to the amount of: the BSP to transact business with offshore
gross revenue derived from carriage of banking units, shall be subject only to a
persons, excess baggage, cargo and mail final tax at the rate of 10%.
originating from the Philippines in a
continuous and uninterrupted flight,
(3)Branch profits remittances
TAXATION LAW REVIEWER
permitting the earnings and profits of the 2) at least 50% of the total combined voting
corporation to accumulate instead of dividing power of all classes of stock entitled to
74 them among or distributing them to the vote
shareholders. is owned directly or indirectly by or for not
b) Rationale It is a tax in the nature of a more than 20 individuals. Domestic
PENALTY to the corporation for the improper corporations not falling under the
accumulation of its earnings, and a DETERRENT aforesaid definition are, therefore,
to the avoidance of tax upon shareholders who publicly-held corporations.
are supposed to pay dividends tax on the
earnings distributed to them. To determine whether the corporation is
c) Exception The use of undistributed earnings closely held corporation, insofar as such
and profits for the reasonable needs of the determination is based on stock ownership, the
business would not generally make the following RULES shall be applied:
accumulated or undistributed earnings subject a. Stock Not Owned by Individuals. - Stock
to the tax. owned directly or indirectly by or for a
corporation, partnership, estate or trust
What is meant by reasonable needs of shall be considered as being owned
the business is determined by the IMMEDIACY proportionately by its shareholders,
TEST. partners or beneficiaries.
Immediacy Test - It states that the b. Family and Partnership Ownership. - An
reasonable needs of the business are individual shall be considered as owning the
the stock owned, directly or indirectly, by or
1) immediate needs of the business; and for his family, or by or for his partner.
2) reasonably anticipated needs. For purposes of this paragraph, the
How to prove the reasonable needs of family of an individual includes his
the business The corporation should brothers or sisters (whether by whole or
prove that there is half-blood), spouse, ancestors and lineal
1) an immediate need for the descendants.
accumulation of the earnings and c. Option to Acquire Stocks. - If any person
profits; or has an option to acquire stock, such stock
2) a direct correlation of anticipated shall be considered as owned by such
needs to such accumulation of profits. person.
d) Composition: The following constitute For purposes of this paragraph, an
accumulation of earnings for the reasonable option to acquire such an option and each
needs of the business: (ILL ABE) one of a series of option shall be
1) ALLOWANCE for the increase in the considered as an option to acquire such
accumulation of earnings up to 100% of the stock.
paid-up capital of the corporation as of d. Constructive Ownership as Actual
Balance Sheet date, inclusive of Ownership. - Stock constructively owned
accumulations taken from other years; by reason of the application of (a) or (c)
2) Earnings reserved for definite corporate shall, for purposes of applying (1) or (2), be
EXPANSION projects or programs requiring treated as actually owned by such person.
considerable capital expenditure as But stock constructively owned by the
approved by the Board of Directors or individual by reason of the application of
equivalent body; (b) shall NOT be treated as owned by him
3) Earnings reserved for BUILDING, PLANT or for purposes of again applying such
EQUIPMENT ACQUISITION as approved by paragraph in order to make another the
the Board of Directors or equivalent body; constructive owner of such stock.
4) Earnings reserved for compliance with any
LOAN COVENANT or pre-existing obligation BIR Ruling 025-02 The ownership of a domestic
established under a legitimate business corporation for purposes of determining whether it is
agreement; a closely held corporation or a publicly held
5) Earnings required by LAW or applicable corporation is ultimately traced to the individual
regulations to be retained by the shareholders of the parent company.
corporation or in respect of which there is Where at least 50% of the outstanding capital
legal prohibition against its distribution; stock or at least 50% of the total combined voting
6) In the case of subsidiaries of foreign power of all classes of stock entitled to vote in a
corporations in the Philippines, all corporation is owned directly or indirectly by at
undistributed earnings intended or reserved least 21 or more individuals, the corporation is
for INVESTMENTS WITHIN THE PHILIPPINES considered as publicly held corporation.
as can be proven by corporate records
and/or relevant documentary evidence.
e) Covered Corporations Only domestic and 18. Exemption from tax on
closely-held corporations are liable for IAET. corporations
Closely-held corporations are those: [Sec. 30]
1) at least 50% in value of the outstanding (CREB-CLEF-SMB)
capital stock; or
TAXATION LAW REVIEWER
year should no longer be liable to income tax. part of the income, be distributed to the
(Mamalateo) grantor, or
c. is, or in the discretion of the grantor or of
any person not having a substantial adverse 77
21. Taxation on Estates and Trusts interest in the disposition of such part of
the income may be applied to the payment
of premiums upon policies of insurance on
a) Application
the life of the grantor,
b) Exception such part of the income of the trust shall be
c) Determination of tax included in computing the taxable income of
1) Consolidation of income of two or more the grantor. (Sec. 64, NIRC)
trusts
Where, in the case of two or more trusts, the
creator of the trust in each instance is the same
5) Meaning of in the discretion of the
person, and the beneficiary in each instance is grantor
the same, NOTE: 'In the discretion of the grantor' means
the taxable income of all the trusts shall be in the discretion of the grantor, either alone or
consolidated and the tax computed on such in conjunction with any person not having a
consolidated income, and such proportion of substantial adverse interest in the disposition of
said tax shall be assessed and collected from the part of the income in question.
each trustee which the taxable income of the
trust administered by him bears to the
consolidated income of the several trusts. [Sec. 22. Withholding tax
60C(2), NIRC] a. Concept
b. Kinds
Requisites: c. Withholding on wages
(a) 2/more trusts exist d. Withholding of VAT
(b) creator of the trust in each instance is the same e. Filing of return and payment of taxes withheld
person f. Final withholding tax at source
(c) beneficiary in each instance is the same g. Creditable withholding tax
h. Fringe benefit tax
Trust as a Device to Lower Income Tax
Creating a trust could lower the income tax by
splitting the income between two taxpayers, a. Concept
and consequently lowering the taxable income
to lower tax bracket. Withholding tax is a method of collecting income tax
in advance from the taxable income of the recipient
of income.
2) Taxable income
3) Revocable trusts
REVOCABLE TRUSTS: Where at any time the Withholding Agent: any person or entity who is
power to revest in the grantor title to any required to deduct and remit the taxes withheld to
part of the corpus of the trust is vested the government.
a. in the grantor either alone or in conjunction a. In general, any juridical person, whether or
with any person not having a substantial not engaged in trade or business;
adverse interest in the disposition of such b. An individual, with respect to payments
part of the corpus or the income therefrom, made in connection with his trade or
or business. However, insofar as taxable sale,
b. in any person not having a substantial exchange or transfer of real property is
adverse interest in the disposition of such concerned, individual buyers who are not
part of the corpus or the income therefrom, engaged in trade or business are also
the income of such part of the trust constituted as withholding agents; and
shall be included in computing the c. All government offices, including GOCCs, as
taxable income of the grantor. [Sec. well as local government units. (Mamalateo)
63, NIRC]
Duties and Obligations of the Withholding Agent:
a. To Register - withholding agent is required
4) Income for benefit of grantor to register within ten (10) days after
Where any part of the income of a trust acquiring such status with the Revenue
a. is, or in the discretion of the grantor or of District office having jurisdiction where the
any person not having a substantial adverse business is located
interest in the disposition of such part of b. To Deduct and Withhold - withholding agent
the income may be held or accumulated for is required to deduct tax from all money
future distribution to the grantor, or payments subject to withholding tax
b. may, or in the discretion of the grantor or c. To Remit the Tax Withheld - withholding
of any person not having a substantial agent is required to remit tax withheld at
adverse interest in the disposition of such the time prescribed by law and regulations
TAXATION LAW REVIEWER
amount of tax as required to be withheld, such tax shall be made by the officer or employee having
shall be collected from the employer together with control of the payment of such wage, or by any
the penalties or additions to the tax otherwise officer or employee duly designated for the
applicable in respect to such failure to withhold and purpose. 79
remit.
2) Statements and returns
(B) Employee. - Where an employee fails or refuses
Every employer required to deduct and withhold a
to file the withholding exemption certificate or
tax shall:
willfully supplies false or inaccurate information
Furnish to each such employee in respect of
thereunder, the tax otherwise required to be
his employment a written statement
withheld by the employer shall be collected from
confirming the wages paid by the employer
him including penalties or additions to the tax from
to such employee during the calendar year,
the due date of remittance until the date of
and the amount of tax deducted and
payment. On the other hand, excess taxes withheld
withheld and such other information as the
made by the employer due to:
Commissioner may prescribe
(1) failure or refusal to file the withholding
o During the calendar year, on or
exemption certificate; or
before January thirty-first (31st) of
(2) false and inaccurate information shall
the succeeding yea; or
not be refunded to the employee but shall
o If his employment is terminated
be forfeited in favor of the Government.
before the close of such calendar
year, on the same day of which the
d. Withholding of VAT last payment of wages is made
- On gross payments for the purchase of goods Submit to the Commissioner an annual
- On gross payments for the purchase of services information return on or before January
- Payments made to government public works thirty-first (31st) of the succeeding year
contractors containing:
- Payments for lease or use of property or o A list of employees;
property rights to non-resident owners o The total amount of compensation
income of each employee;
e. Filing of return and payment of taxes o The total amount of taxes withheld
therefrom during the year,
withheld accompanied by copies of the
written statements furnished to
Where to file and pay: employees, and such other
Authorized agent bank; information as may be deemed
Collection Agent; necessary.
the duly authorized Treasurer of the city or
municipality where the employer has his legal The Commissioner may grant to any employer a
residence or principal place of business, or in reasonable extension of time to furnish and submit
case the employer is a corporation, where the the statements and returns required.
principal office is located; or
As Commissioner otherwise permits.
f. Final withholding tax at source
Period for filing and payment: Under the final withholding tax system, the
The return shall be filed and the payment amount of income tax withheld by the
made within twenty-five (25) days from the withholding agent is constituted as a full
close of each calendar quarter. and final payment of the income tax due
The Commissioner may, with the approval from payee on the said income. The liability
of the Secretary of Finance, require the for payment of the tax rests primarily on
employers to pay or deposit the taxes the payor as a withholding agent. Thus, in
deducted and withheld at more frequent case of the withholding agents failure to
intervals, in cases where such requirement withhold the tax or in case of under-
is deemed necessary to protect the interest withholding, the deficiency tax shall be
of the Government. collected from him. The payee is not
required to file an income tax return for the
Taxes as Special Fund in Trust: The taxes deducted particular income, nor is he liable for the
and withheld by employers shall be held in a special payment of the tax. (Sec. 2.57, RR No. 2-
fund in trust for the Government until the same are 98)
paid to the said collecting officers.
Income payments subject to Final Withholding
1) Return and payment in case of government Tax:
a) Income Payments to a Citizen or to a Resident
employees
If the employer is the Government of the Alien Individual:
Interest on any peso bank deposit
Philippines or any political subdivision, agency
or instrumentality thereof, the return of the Royalties
amount deducted and withheld upon any wage
TAXATION LAW REVIEWER
Prizes (except prizes amounting to P10,000 On capital gains presumed to have been
or less which is subject to tax under Sec. realized from the sale, exchange or other
80 25(A)(1) of the Tax Code disposition of real property located in the
Winnings (except from Philippine Charity Philippines classified as capital assets,
Sweepstake Office and Lotto) including pacto de retro sales and other
Interest income on foreign currency deposit forms of conditional sales based on the
Interest income from long term deposit gross selling price or fair market value as
Cash and/or property dividends determined in accordance with Sec. 6(E) of
Capital Gains presumed to have been the NIRC, whichever is higher
realized from the sale, exchange or other
disposition of real property h) Income Payments to a Resident Foreign
Corporation
b) Income Payments to a Non-Resident Alien Offshore Banking Units
Engaged in Trade or Business in the Philippines Tax on branch Profit Remittances
On Certain Passive Income Interest on any currency bank deposits and
- cash and/or property dividend yield or any other monetary benefit from
- Share in the distributable net income of a deposit substitute and from trust funds and
partnership similar arrangements and royalties derived
- Interest on any bank deposits from sources within the Philippines
- Royalties Interest income on FCDU
- Prizes (except prizes amounting to Income derived by a depository bank under
P10,000 or less which is subject to tax the expanded foreign currency deposits
under Sec. 25(A)(1) of the Tax Code. system from foreign currency transactions
- Winnings (except from Philippine Charity with local commercial banks
Sweepstake Office and Lotto)
Interest on Long Term Deposits i) Income Derived from all Sources Within the
Capital Gains presumed to have been Philippines by a Non-Resident Foreign Corporation
realized from the sale, exchange or other Gross income from all sources within the
disposition of real property Philippines such as interest, dividends,
rents, royalties, salaries, premiums (except
c) Income Derived from All Sources Within the re-insurance premiums), annuities,
Philippines by a Non-Resident Alien Individual Not emoluments or other fixed determinable
Engaged in Trade or Business annual, periodic or casual gains, profits and
On gross amount of income derived from all income or capital gains
sources within the Philippines Gross income from all sources within the
On Capital Gains presumed to have been Philippines derived by a non-resident
realized from the sale, exchange or cinematographic film owner, lessor and
disposition of real property located in the distributor
Philippines On the gross rentals, lease and charter fees
derived by a non-resident owner or lessor of
d) Income Derived by Alien Individual Employed by vessels from leases or charters to Filipino
a Regional or Area Headquarters and Regional citizens or corporations as approved by the
Operating Headquarters of Multinational Maritime Industry Authority
Companies On the gross rentals, charter and other fees
derived by a non-resident lessor of aircraft,
e) Income Derived by Alien Individual Employed by machineries and other equipment
Offshore Banking Unit Interest on foreign loans contracted on or
after August 1, 1986
f) Income of Aliens Employed by Foreign
Petroleum Service Contractors and Subcontractors j) Fringe Benefits Granted to the Employee
(except Rank and File)
g) Income Payment to a Domestic Corporation - Goods, services or other benefits furnished
or granted in cash or in kind by an employer
Interest from any currency bank deposits to an individual employee (except rank and
and yield or any other monetary benefit file) such as but not limited to the
from deposit substitutes and from trust following:
fund and similar arrangements derived from - Housing
sources within the Philippines - Vehicle of any kind
Royalties derived from sources within the - Interest on loans
Philippines - Expenses for foreign travel
Interest income derived from a depository - Holiday and vacation expenses
bank under the Expanded Foreign Currency - Educational assistance to employees or his
Deposit (FCDU) System dependents
Income derived by a depository bank under - Membership fees, dues and other expense
the FCDU from foreign transactions with in social and athletic clubs or other
local commercial banks - similar organizations
TAXATION LAW REVIEWER
De minimis benefits those which are of relatively benefit (i.e., there will be a 32% tax
small value are offered by the employer as a means imposed on the grossed-up monetary value
84 of promoting health, goodwill, contentment, or of the residual amount).
efficiency of his employees, such as the following: If given to rank-and-file employees The
(CLAMMP RUST) amount in excess of the ceiling prescribed is
taxable as salary or compensation income.
1. Monetized unused vacation leave credits of
private employees not exceeding ten (10) days Examples of Convenience of the Employer Rule:
during the year and the monetized value of
leave credits paid to government officials and The value of the meals given to the
employees; employee is not taxable, if the employer
provides the meals for a substantial non-
2. Medical cash allowance to dependents of compensatory business purpose (generally,
employees not exceeding P750 per semester or when employee is required to be on duty
P125 per month; during the meal period).
Lodging is not taxable if the employee must
BIR Ruling 019-02: To be considered de accept the lodging on the employers
minimis medical allowance, the following business premises as a condition of his
conditions must concur: employment
a. The amount given to the EE shall be for his
own medical expense;
b. The amount actually given and actually
spent shall not exceed P10, 000 in any given
calendar year;
c. The EE must fully substantiate with or in his
name the medical allowance to be granted.
OPERATIONS HEADS
Charles Icasiano Katrina Rivera |Hotel Operations
Marijo Alcala Marian Salanguit |Day-Operations
Jauhari Azis |Night-Operations
Vivienne Villanueva Charlaine Latorre |Food
Kris Francisco Rimban Elvin Salindo |Transpo
Paula Plaza |Linkages
86
Taxation Law 2 benefits and enjoyment of property from the
dead to the living.
TAXATION LAW
Taxation Law 1 1. Estate Tax Purpose:
Taxation Law 2 2. Donors Tax 1. Added income to the government
3. VAT 2. Benefit received theory for services that
4. Tax Remedies the government renders in the distribution
5. Organization and Function of BIR of the estate
6. Local Taxation 3. Privilege theory or state partnership not
7. Real Property Taxation a right but a privilege, acquired with the
8. Tariff and Customs Code protection of the state
9. Judicial Remedies
4. Ability to pay theory transfer assets and
makes the transferee able to
1. Estate Tax pay/contribute to the governmental income
I. Basic Principles 5. Redistribution of wealth theory receipt
II. Definition of inheritance is a contributing factor to the
III. Nature inequalities in wealth and income, mitigate
IV. Purpose or object the evils of inheritance in its original form
V. Time and transfer of property
VI. Classification of decedent IV. Time and Transfer of Properties
VII. Gross estate v. Net estate
VIII. Determination
IX. Composition The law in force at the time of death of the
X. Items to be included decedent governs.
XI. Deductions from estate The accrual of the inheritance tax is distinct
XII. Exclusions from estate from the obligation to pay the same. The tax
XIII. Tax credit therefore is upon transmission or the transfer or
XIV. Exemption devolution of property of a decedent, made
XV. Filing of notice of death effective by his death. It is in reality an excise
XVI. Estate tax return or privilege tax imposed on the right to succeed
to, receive, or take property by or under a will
or the intestacy law, or deed, grant, or gift to
I. Basic principles become operative at or after death. The time
when the heirs legally succeed to the
Estate tax laws rest in their essence upon the inheritance may differ from the time when the
principle that death of an individual is the heirs actually receive such inheritance. (Lorenzo
generating source from which the taxing power takes v. Posadas, 64 Phil 353)
its being, and that it is the power to transmit or the
transmission from the dead to the living on which TAXABLE TRANSFERS
the tax is more immediately based. (Lorenzo v. 1. Transfers Mortis Causa - Gratuitous transfers
Posadas, 64 Phil 353) after death, either testate or intestate.
facts and circumstances, in the sense that they VII. Determination of gross estate and
disclose intent. (Corre v. Tan Corre, 100 Phil
321) Net estate
It is, therefore, not necessarily the actual place 87
of residence. The term residence and Citizen or Non-resident
domicile are synonymous and are used Resident
interchangeably without distinction. (Collector
v. Lara, 102 Phil 813; Velilla v. Posadas, 62 Phil
624). 1. Real property in Included Included
the Philippines
2. Real property Included Not Included
VI. Gross estate v. Net estate outside the
Philippines
Gross Estate: includes all properties and 3. Tangible personal Included Included
interests in properties of the decedent at the property in the
time of his death Philippines
Net Estate: value of the estate after all 4. Tangible personal Included Not Included
deductions have been made against the gross property outside
estate; subject to the graduated tax rates the Philippines
5. Intangible Included Included*
VALUATION OF THE GROSS ESTATE (Sec. 88) personal
property in the
GENERAL RULE: The properties comprising the gross Philippines
estate shall be valued based on FAIR MARKET VALUE 6. Intangible Included Not Included
(FMV) as of the time of death. personal
property outside
Real property F MV as determined by the the Philippines
Commissioner OR FMV as shown in the schedule of * unless exempted on the basis of reciprocity
values fixed by the provincial and city assessors,
whichever is HIGHER. Reciprocity rule (Sec. 104, NIRC)
Note: must be TOTAL reciprocity
Shares of Stock There is reciprocity if the foreign country of which
Listed shares FMV is the arithmetic mean the decedent was a citizen and resident at the time
between the highest and lowest quotation at a of his death:
date of death, OR the date nearest the date of did not impose a transfer tax of any character,
death, if none is available on the date of death in respect of intangible personal property of
itself citizens of the Philippines not residing in that
Unlisted shares - COMMON shares are valued foreign country; or
based on BOOK VALUE; while PREFERRED shares allowed a similar exemption from transfer tax in
are valued at PAR VALUE respect of intangible personal property owned
Right to usufruct, use or habitation, annuity - by citizens of the Philippines not residing in that
the probable life of the beneficiary in country
accordance with the latest basic standard
mortality table is to be taken into account, to [In sum, both states must exempt nonresidents
be approved by the Secretary of Finance, upon (citizens of the other state) from transfer taxes in
recommendation of the Insurance respect of intangible personal property.]
Commissioner.
Note:
TAX RATES APPLICABLE:
For the reciprocity rule to apply, there must be
If the net estate is: TOTAL reciprocity. [For instance,] in the
OF THE Philippines, both estate and inheritance taxes
BUT NOT
OVER TAX IS PLUS EXCESS are imposed on the estate while in California
OVER
OVER only inheritance tax is imposed. The reciprocity
200,000 Exempt rule may not be availed of. Reciprocity has to be
200,000 500,000 0 5% 200,000 total. (CIR v. Fisher, 110 Phil 686)
500,000 2 million 15,000 8% 500,000
2 million 5 million 135,000 11% 2 million Reciprocity in exemption does not require the
5 million 10million 465,000 15% 5 million foreign country to possess international
10 million And Over 1,215,000 20% 10 million personality in the traditional sense (i.e.,
compliance with the requisites of statehood).
Thus, Tangier, Morroco (Collector v. Campos-
Rueda, 42 SCRA 23) and California, a state in
the American Union (Collector v. de Lara, 102
Phil 813) were held to be foreign countries
within the meaning of Section 104.
TAXATION LAW REVIEWER
CASE LAW: Collector v. Lara (102 Phil 813) When the Transfer with retention or reservation of certain
owner of personal property, during his lifetime, rights (Sec. 85B)
extended his activities with respect to his interests - It involves cases where the owner
so as to avail himself of the protection and transfers his property during life but
benefits of the laws of the Philippines, so as to still retains the economic benefits the
bring his person or property within the reach of the possession or enjoyment of the
Philippines, the reason for a single place of taxation property, or the power to designate the
no longer obtains. His property in the Philippines persons who may exercise such rights.
enjoys the protection of the government so that - By reason of the restriction the
the right to collect the estate tax cannot be transferee is incapable of freely
questioned. enjoying or disposing of the property
until the transferors death.
Q: What are the intangible properties which are - The transfer may be regarded as having
considered by law as situated in the Philippines? been intended to take effect in
Franchise which must be exercised in the possession or enjoyment at the
Philippines transferors death.
Obligations or bonds issued by any corporation
or sociedad anonima organized or constituted in Illustration:
the Philippines X transfers his property to Y in naked ownership
Shares, obligations or bonds issued by any and to Z in usufruct throughout Zs lifetime
foreign corporation 85% of the business of which subject to the condition that if Z predeceases X,
is located in the Philippines the property shall return to X. If X dies during
Shares, obligations or bonds issued by any Zs life, the value of the reversionary interest of
foreign corporation if such shares, obligations or X at death is includible in his gross estate (see
bonds have acquired a business situs in the Articles 756-757 of the Civil Code).
Philippines The transfer is taxable as intended to take
Shares or rights in any partnership, business or effect at or after death because the possibility
industry established in the Philippines (Sec. 104) of reversion to X makes Zs interest conditional
as long as X lives.
VIII. Composition of gross estate Note:
Transfer with retention or reservation of certain
COMPOSITION rights is grouped by the Tax Code under transfer
THE FOLLOWING PROPERTIES AND INTEREST THEREIN ARE in contemplation of death.
INCLUDED IN THE GROSS ESTATE AT THE TIME OF THE
DECEDENTS DEATH: 3. Revocable Transfers
1. As to resident (citizen or alien) or citizen Transfers where the transferor has reserved the
(resident or non-resident) right to alter, amend or revoke such transfer,
a. RP wherever situated regardless of WON the power is actually
b. Tangible PP wherever situated exercised during his lifetime, and WON the
c. Intangible PP wherever situated power should be exercised by him alone or in
conjunction with someone else.
2. As to non-resident alien
a. RP in the Philippines The power to alter, amend or revoke shall be
b. Tangible PP in the Philippines considered to exist on the date of the
c. Intangible PP in the Philippines subject to decedents death EVEN THOUGH:
rule of reciprocity - the exercise of the power is subject to a
precedent giving of notice, or
IX. Items to be included in gross
estate - the alteration, amendment or revocation
takes effect only on the expiration of a
stated period after the exercise of the
Decedents gross estate (Sec. 85): power,
whether or not on or before the date of the
TAXATION LAW REVIEWER
decedents death notice has been given or appoint in the gross appointed
the power has been exercised. successor estate of property
o If notice has not been given or the to the the DONEE in trust,
power has not been exercised before property when he or under 89
the date of his death, such notice shall only dies the
be considered to have been given, or within a concept
the power exercised, on the date of his limited of trustee
death. group or
class of
4. Property passing under general power of persons
appointment
5. Proceeds of life insurance
Required: Amount receivable by the estate of the
1. Existence of general power of appointment deceased, executor or administrator under
2. Exercise of such power by the decedent by policies TAKEN OUT BY THE DECEDENT
will or deed in certain cases 1. upon his OWN LIFE (WON insured retained
3. Passing of property by virtue of such the power of revocation)
exercise 2. receivable by ANY BENEFICIARY (Except:
designation is irrevocable)
Gross estate shall include any property passed or
transferred under a general power of appointment 6. Prior interests
exercised by the decedent: Apply to transfers, trusts, estates, interests,
by will, or rights, powers and relinquishment of powers
by deed executed in contemplation of, or whether made, created, arising, existing,
intended to take effect in possession or exercised or relinquished BEFORE or AFTER
enjoyment at, or after his death, or effectivity of the code
by deed under which he has retained (for
his life or any period not ascertainable without 7. Transfers for insufficient consideration
reference to his death or for any period which Transfers that are not bona fide sales of
does not in fact end before his death): property for an adequate and full consideration
- the possession or enjoyment of, or the right in money or moneys worth.
to the income from, the property, or If bona fide sale no value shall be included in
- the right, either alone or in conjunction the gross estate [Case A]
with any person, to designate the persons If not a bona fide sale - the excess of the fair
who shall possess or enjoy the property or market value at the time of death over the
the income therefrom value of the consideration received by the
decedent shall form part of his gross estate.
Q: What is a power of appointment? [Case B]
The power or right to designate by will or by deed If inter vivos transfer is proven
the person(s) who shall succeed to, possess or enjoy fictitious/simulated total value of the property
the property, or the income therefrom, received at the time of death included in the gross
from the estate of the prior decedent. It involves estate.[Case C]
the person creating the power (donor) and the The transfer of property must fall under any of
person to whom is given the right to exercise the the following:
power (donee). - transfer in contemplation of death;
- revocable transfer;
Two Kinds of Appointment and their Effects: - property passing under a GPA;
Kind of Tax Otherwise the tax imposed is donors tax.
Appointmen Nature Implication Effects Case Case Case
t s A B C
DONEE Makes DONEE FMV, transfer 2,000 1,500 2,500
has appointed holds the FMV, death 2,500 2,000 2,000
power to property, appointed Consideration 2,000 800 0
appoint for all legal property Received
any intents, the with all Value Included in 0 1,200 2,000
person he property of the the Gross Estate
chooses the DONEE attributes
General
who shall (includible of 8. Capital of the surviving spouse
possess or in his ownership NOT part of the gross estate of the deceased
enjoy the estate) , under spouse
property the
without concept
restrictio of owner X. Deductions from estate
n
DONEE Not DONEE QUICK GLANCE:
Special Resident or citizen Non-resident alien
must includible holds the
decedent decedent
TAXATION LAW REVIEWER
GROSS ESTATE all GROSS ESTATE includes ** Not available to the estate of non-resident, aliens
property at the time of only that part of gross in the Philippines.
90 death, wherever estate located in the
situated Philippines 1. Ordinary Deductions
DEDUCTIONS DEDUCTIONS
funeral expenses funeral expenses
judicial expenses judicial expenses a. Expenses, Losses, Indebtedness and Taxes
claims against the claims against the [ELIT] [fjc cult]
estate estate
claims against claims against FUNERAL EXPENSES (86-A1) (max. P200K)
insolvents insolvents Allowable deduction is whichever is lower
unpaid mortgage unpaid mortgage and of
and debt debt the actual funeral expenses (WON paid)
taxes and losses taxes and losses up to the time of interment, or
transfers for public transfers for public use an amount equal to 5% of the gross
use vanishing deductions estate, but in no case to exceed
vanishing deductions share in conjugal P200,000.
family home property Note: The unpaid portion of the funeral
standard deduction expenses incurred which is in excess of the
medical expenses NOTE: To compute for P200,000 threshold is NOT allowed to be
amounts received total allowable deductions claimed as a deduction under claims
under R.A. 4917 of the first six items against the estate (see 1(c) below). (Sec.
share in conjugal above, this formula is 6(A)(1) of RR 02-2003)
property used:
Examples of funeral expenses (RR 2-2003, Sec.
Gross World 6-A1)
Estate, expenses, o The MOURNING APPAREL of the surviving
Phils. losses, spouse and unmarried minor children of the
X
Gross indebted- deceased, bought and used on the occasion
Estate, ness, taxes of the burial
World etc. o EXPENSES for the deceaseds WAKE,
including food and drinks
o PUBLICATION CHARGES for death notices
Note: o TELECOMMUNICATIONS EXPENSES incurred
No deduction shall be allowed in the case of a non- in informing relatives of the deceased
resident decedent not a citizen of the Philippines, o Cost of BURIAL PLOT, TOMBSTONES,
unless the executor, administrator, or anyone of the MONUMENT or MAUSOLEUM but not their
heirs, as the case may be, includes in the return upkeep. In case the deceased owns a
required to be filed under Section 90 of the Code the family estate or several burial lots, only the
value at the time of the decedents death of that value corresponding to the plot where he is
part of his gross estate NOT situated in the buried is deductible
Philippines. (Section 86, NIRC) o INTERMENT and/or CREMATION FEES and
CHARGES
The deductions from the gross estate are: o All other expenses incurred for the
1. Ordinary Deductions performance of the RITES and CEREMONIES
a. Expenses, losses, indebtedness, taxes, etc. incident to interment
(ELIT)
Funeral expenses; Expenses NOT deductible as funeral expenses
Judicial expenses of testamentary or o Expenses incurred AFTER INTERMENT, such
intestate proceedings; as for prayers, masses, entertainment, or
Claims against the estate; the like
Claims against insolvent persons; o Any portion of the funeral and burial
Unpaid mortgage or indebtedness on expenses BORNE or DEFRAYED by RELATIVES
property, and FRIENDS of the deceased
Taxes;
Losses Illustrations:
b. Vanishing Deduction o If five percent (5%) of the gross estate is
c. Transfer for public use P220,000 and the amount actually incurred
is P215,000, the maximum amount that may
be deducted is only P200,000;
2. Special Deductions** o If five percent (5%) of the gross estate is P
a. Family home; 100,000 and the total amount incurred is
b. Standard deduction; P150,000 where P20,000 thereof is still
c. Medical Expenses; unpaid, the only amount that can be
d. Amount received by heir under RA 4917 claimed as deduction for funeral expenses is
P100,000. The entire P50,000 excess
TAXATION LAW REVIEWER
(a) Mr. A paid P70,000 of the mortgage. subdivision thereof, for exclusively public
Thus, P870,000 less 70,000 is P800,000 purposes shall be deductible from gross
(b) The P800,000 is known as the INITIAL estate, provided such amount or value had
BASIS been included in the gross estate. 93
3) The INITIAL BASIS shall be FURTHER 2. Special Deductions (FSMA)
REDUCED by an amount equal to:
INITIAL BASIS X Total amount of
Gross Estate a. FAMILY HOME (maximum of P1m)
deductions* It is the dwelling house, including the land
* excluding family home, medical expenses, on which it is situated, where the husband
standard deduction and amounts received and wife, or a head of the family, and
under RA 4917 members of their family reside, as certified
(a) 800/3200 x 600,000 equals 150,000. to by the Barangay Captain of the locality.
This will be deducted from P800,000, It is deemed constituted on the house and
which gives a balance of P650,000 lot from the time it is actually occupied as
(b) The 650,000 is known as the FINAL the family residence and considered as such
BASIS. for as long as any of its beneficiaries
actually resides therein. (Arts. 152 and
4) Finally, the remaining balance shall be 153, Family Code) Temporary absence from
multiplied by the corresponding the constituted family home due to travel
percentage: or studies or work abroad, etc. does not
% If received by inheritance or gift: interrupt actual occupancy. The family
within one (1) year prior to the home is generally characterized by
100% permanency, that is, the place to which,
death of the present decedent
More than one year but not more whenever absent for business or pleasure,
80% than two years prior to the death of one still intends to return. (RR 2-2003, Sec.
the decedent 6D)
More than two years but not more
60% than three years prior to the death Requisites for Deductibility
of the decedent 1) The family home must be the actual
residential home of the decedent and his
More than three years but not more
40% than four years prior to the death of family at the time of his death, as certified
the decedent by the barangay captain of the locality.
2) The total value of the family home must be
More than four years but not more
included as part of the gross estate of the
20% than five years prior to the death of
decedent
the decedent
3) Allowable deduction must be in an amount
(a) Since Mr. A received the inheritance in
equivalent to the current FMV of the family
March 2003 (within 1 year from his
home as declared or included in the gross
death in December 2003), the balance
estate but in no case shall the deduction
of P650,000 shall be multiplied by
exceed P1,000,000
100%. Thus, the allowable vanishing
deduction is P650,000
b. STANDARD DEDUCTION (86-A5) (P1m)
An amount equivalent to One million pesos
FORMULA:
1) VALUE TAKEN FOR PPT (always the lower (P1,000,000) shall be deducted from the gross
values) estate without need of substantiation.
LESS: MORTGAGE (OR LIEN) PAID IF ANY (1ST
deduction)
2) INITIAL BASIS (IB) c. MEDICAL EXPENSES (86-A6) (max. of P500K)
LESS: 2ND deduction = IB/GE x Total Deductions less All medical expenses (cost of medicine, hospital
Those exclusions bills, doctors fees, etc.) incurred (whether paid
3) FINAL BASIS or unpaid)
X RATES IN s86A-2
4) VANISHING DEDUCTION in an Estate Tax
Return, this is deducted from the Exclusive Requisites for Deductibility:
Properties of the decedent which form part of 1. The expenses were incurred by the
the gross estate. decedent within one (1) year prior to his
death
2. The expenses are duly substantiated with
receipts
b. Transfers for Public Purpose
The whole amount of all the BEQUESTS,
PROVIDED, that in no case shall the deductible
LEGACIES, DEVISES or TRANSFERS to or for
medical expenses exceed Five Hundred
the use of the Government of the Republic
Thousand Pesos (P500,000).
of the Philippines, or any political
TAXATION LAW REVIEWER
d. AMOUNTS RECEIVED BY HEIRS UNDER RA 4917 9. Net estates which are not in excess of P200,000
(86-A7) are exempt from estate tax. (Sec. 84, NIRC)
Any amount received by the heirs from the
decedents employer as a consequence of the XII. Tax credit for estate tax paid in a
death of the decedent-employee in accordance foreign country
with RA No. 4917 (this law provides that
retirement benefits of private employees shall
not be subject to attachment, levy execution or Tax Credit
any tax), PROVIDED that such amount is It is a remedy against international double taxation.
included in the gross estate of the decedent. To minimize the onerous effect of taxing the same
property twice, tax credit against Philippine estate
tax is allowed for estate taxes paid to foreign
XI. Exclusions from estate countries.
Excluded Properties Who may avail of tax credit?
1. CAPITAL of surviving spouse Only the estate of a decedent who was a citizen or a
2. PROCEEDS of: resident of the Philippines at the time of his death
a. Life insurance policy taken out can claim tax credit for any estate tax paid to a
by the decedent upon his own life, foreign country.
when beneficiary is OTHER THAN the
estate, executor or administrator, Amount Allowable as tax credit
and designation is IRREVOCABLE
(Sec. 85E) General Rule:
NOTE: The presumption is that the The estate tax imposed by the Philippines shall be
designation is REVOCABLE. credited with the amounts of any estate tax imposed
by the authority of a foreign country.
b. Group life insurance policy taken out
by a company for its employees, (law only Limitations:
speaks of policies taken out by the a. The amount of the credit in respect to
decedent upon his own life) the tax paid to any country shall not
exceed the same proportion of the tax
c. Life insurance policies-issued by the GSIS to against which such credit is taken,
government officials or employees, as they which the decedent's net estate
are exempt by law from taxes of all kinds situated within such country taxable
(PD 1146, as amended) under the NIRC bears to his entire net
Thus, the proceeds of insurance under estate; (PER COUNTRY BASIS) and
policies taken out by the decedent b. The total amount of the credit shall not
upon his life shall constitute part of the exceed the same proportion of the tax
gross estate if the beneficiary is: against which such credit is taken,
a. The estate of the decedent, which the decedent's net estate
his executor or administrator, situated outside the Philippines taxable
or under the NIRC bears to his entire net
b. A third person (i.e., a person estate. (OVERALL BASIS)
other than the estate,
executor or administrator), Illustration:
AND the designation of the Assume:
beneficiary is revocable. Net Estate Philippines (reduced P 1,050,000
by all allowable deductions,
3. Death benefits received from the SSS, accruing except standard deduction)
by reason of death (RA 1161, as amended) Country G Net Estate 300,000
Country H Net Estate 150,000
4. Amounts received from the Philippine and the Tax paid/incurred: Philippines
U.S. Governments from the damages suffered Country G 15,000
during the last war (RA 227) Country H 5,000
1,400
5. Benefits received by beneficiaries residing in
the Philippines under laws administered by the
U.S. Veterans Administration (RA 360) (b) Net taxable estate is P500,000 (1,050,000 +
300,000 + 150,000 1,000,000 standard
6. Properties held in Trust by the decedent
TAXATION LAW REVIEWER
deduction). The Philippine estate tax on To get the tax credit allowable, use the formula
P500,000 is P15,000 in Limitation A.
The resulting amount will be compared to the
actual tax paid to the foreign country. The 95
Solution Limitation A: lower amount will be the final allowable tax
(c) To get tax credit per country under Limitation credit.
A, this formula is followed: (Source: Reyes, Income Tax Law and Accounting)
The executor, or the administrator, or any of the Where the taxes are assessed by reason of
legal heirs, as the case may be, shall file a return negligence, intentional disregard of rules and
96 under oath in duplicate, setting forth: regulations, or fraud on the part of the taxpayer, no
a. The value of the gross estate of the decedent at extension will be granted by the Commissioner.
the time of his death, or in case of a
nonresident, not a citizen of the Philippines, of If extension granted, the Commissioner may require
that part of his gross estate situated in the the executor, or administrator, or beneficiary, as
Philippines; the case may be, to furnish a BOND in such amount,
b. The deductions allowed from gross estate in not exceeding DOUBLE the amount of the tax and
determining the net taxable estate; and with such sureties as the Commissioner deems
c. Such part of such information as may at the time necessary, conditioned upon the payment of the said
be ascertainable and such supplemental data as tax in accordance with the terms of the extension.
may be necessary to establish the correct taxes.
d. For estate tax returns showing a gross value 3. Effects of granting an extension
exceeding Two million pesos (P2,000,000) - Payment of the amount in respect of which the
there must be a statement duly certified to by a extension is granted on or before the date of the
Certified Public Accountant containing the expiration of the period of the extension
following: Suspension of the running of statute of
Itemized assets of the decedent with their limitations for deficiency assessment for the
corresponding gross value at the time of his period of any extension
death, or in the case of a nonresident, not a Any amount paid after the statutory due date of
citizen of the Philippines, of that part of his the tax, but within the extension period, shall
gross estate situated in the Philippines; be subject to interest but not to surcharge.
Itemized deductions from gross estate
allowed in Section 86; and Q: CAN ESTATE TAX BE PAID IN INSTALLMENTS?
The amount of tax due whether paid or still Yes. In case the available cash of the estate is not
due and outstanding. sufficient to pay its total estate tax liability, the
estate may be allowed to pay the tax by installment
and a clearance shall be released only with respect
2. When filed to the property the corresponding/computed tax on
General Rule: Filed within six (6) months from the which has been paid. (RR 2-2003)
decedent's death.
Q: Who are liable for the payment of estate taxes?
Exception: The Commissioner shall have authority to
grant, in meritorious cases, a reasonable extension Primarily, the estate, through the executor or
not exceeding thirty (30) days for filing the return administrator.
Payment shall be made before the delivery of
3. Where filed the distributive share in the inheritance to any
Except in cases where the Commissioner otherwise heir or beneficiary.
permits, the return shall be filed with: If there are two or more executors or
(a) an authorized agent bank (AAB), administrators, all of them are severally liable
(b) or Revenue District Officer (RDO), for the payment of the tax.
(c) Collection Officer, or The estate tax clearance issued by the
(d) duly authorized Treasurer of the city or Commissioner or the Revenue District Officer
municipality in which the decedent was (RDO) having jurisdiction over the estate, will
domiciled at the time of his death, or serve as the authority to distribute the
(e) if there be no legal residence in the Philippines, remaining properties/share in the inheritance to
with the Office of the Commissioner. the heir or beneficiary.
Deductions
Thus, the Government has two ways of Funeral
collecting the taxes in question: expenses 200,000
Other 97
(a) One by going after all the heirs and deductions 1,300,000
collecting from each one of them the Total
amount of the tax proportionate to the Conjugal
inheritance received. deductions (1,500,000) (1,500,000)
Net estate
(b) Another remedy (pursuant to the lien before share
created by Section 315 of the Tax Code of spouse 3,500,000 4,500,000 8,000,000
upon all property and rights to property Less Share of surviving
belong to the taxpayer for unpaid income spouse
tax) is by subjecting said property of the 1/2 of 3,500,000 (1,750,000)
estate which is in the hands of an heir or Net Estate before special
transferee to the payment of the tax due deductions 6,250,000
the estate. Less: Special Deductions
Family Home (1,000,000)
The approval of the court, sitting in probate, or Standard Deduction (1,000,000)
as a settlement tribunal over the deceased is not a Medical Expenses (500,000)
mandatory requirement in the collection of estate Net Taxable Estate 3,750,000
taxes.
assets under the Tax Code are excepted 3. Shares, obligations or bonds issued by any
from this rule. (Sec 100 in relation to Sec foreign corporation 85% of the business of which
24(d)) is located in the Philippines.
Under Section 24(d), the fair market 4. Shares, obligations or bonds issued by any 99
value itself, if higher than the gross selling foreign corporation if such shares, obligations or
price, is the base for computing the capital bonds have acquired a business situs in the
gains tax imposed upon the sale of such Philippines.
capital assets. 5. Shares or rights in any partnership, business or
Thus, what the seller avoids in the payment industry established in the Philippines.
of the donors tax, it pays for in the capital
gains tax.
Rule on Reciprocity (Sec 104, NIRC)
c. Gifts given out of gratitude where the
consideration is not money or anything of economic There is reciprocity if the foreign country of which
value the decedent was a citizen and resident at the time
of his death:
d. Renunciation in favor of other heirs
1. Did not impose a transfer tax of any character,
Renunciation by the surviving spouse of in respect of intangible personal property of
his/her share in the ACP/CPG after the citizens of the Philippines not residing in that
dissolution of the marriage in favor of heirs foreign country; or
of the deceased spouse or any other
person/s SUBJECT to donors tax. 2. Allowed a similar exemption from transfer tax in
respect of intangible personal property owned
General renunciation by an heir, including by citizens of the Philippines not residing in that
the surviving spouse, of his/her share in the country.
hereditary estate left by the decedent -
NOT subject to donors tax. This rule applies to the transmission by gift of
intangible personal property located or with a situs
Renunciation specifically and categorically within the Philippines of a nonresident alien.
in favor of identified heir/s to the exclusion
or disadvantage of the other co-heirs in the
hereditary estate SUBJECT to donors
IX. Determination of gross gift
estate. (RR 2-2003).
Gifts of real property and personal property
VII. Transfer for less than adequate wherever situated belonging to the donor who is
either a resident or citizen at the time of the
and full consideration donation; and
Where property, other than real property under Sec. Gifts of real and tangible personal property
24(D), is transferred for less than an adequate and situated in the Philippines, and intangible
full consideration in money or moneys worth, then personal property with a situs in the Philippines
the amount by which the fair market value of the unless exempted on the basis of reciprocity,
property exceeded the value of the consideration belonging to the donor who is a non-resident
shall be deemed a gift, and shall be included in alien at the time of the donation
computing the amount of gifts made during the
calendar year. X. Composition of gross gift
VIII.Classification of donor Gross gift shall pertain to all donations inter vivos:
(1) Whether the transfer is in trust or otherwise;
1. Citizens or Residents of the Philippines all (2) Whether the gift is direct or indirect;
properties located not only within the (3) Whether the property is real or personal,
Philippines but also in foreign countries. tangible or intangible.
2. Nonresident Alien all real and tangible
properties within the Philippines, and intangible Resident or Citizen Non resident Alien
personal property, unless there is reciprocity, in Real property in the Real Property in the
which case it is not taxable Philippines Philippines
Tangible or Intangible Tangible or Intangible
Q: What are the intangible properties which are Personal Properties Personal Properties
considered by law as situated in the Philippines? (Within or without the (Within the Philippines)
1. Franchise which must be exercised in the Philippines) Except: Reciprocity
Philippines.
2. Obligations or bonds issued by any corporation or
sociedad anonima organized or constituted in
the Philippines.
XI. Valuation of gifts made in property
TAXATION LAW REVIEWER
If the gift is made in property, the fair market In the case of gifts made by a RESIDENT:
value at that time will be considered the 1. Dowries or donations made:
100 amount of gift. a. On account of marriage
b. Before its celebration or within one year
Real Property thereafter
- taxable base = FMV as determined by the c. By parents to each of their legitimate,
Commissioner of BIR (Zonal Value) or FMV as recognized natural, or adopted children
shown in the latest schedule of values of d. To the extent of the first P10,000.
the provincial and city assessor (Market e. However, this exemption may not be
Value per Tax Declaration), whichever is availed of by a non-resident not a citizen of
higher. the Philippines.
- If there is no zonal value, the taxable base Can both parents making a donation to a child in
is the FMV that appears in the latest tax consideration of marriage avail of the P10,000
declaration. deduction?
Yes. If both spouses made the gift, then the
Improvement gift is taxable one-half to each donor
Value of improvement is the construction cost spouse.
per building permit and/or occupancy permit Separate donors tax returns must be filed;
plus 10% per year after year of construction, or husband and wife are considered as
the FMV per latest tax declaration. separate and distinct taxpayers for purposes
of donors tax. (Section 12, RR 2-2003)
XII. Tax credit for donors taxes paid However, where there is failure to prove
that the donation was actually made by
in a foreign country both spouses, the donation is taxable as an
exclusive act of the husband (Tang Ho v.
A situation may arise when the property given as BTA, 97 Phil 890), without prejudice to the
a gift is located in a foreign country and the right of the wife to question the validity of
donor may be subject to donors tax twice on the donation without her consent pursuant
the same property: first, by the Philippine to the provisions of the Civil Code and the
government and second, by the foreign Family Code. (Section 12, supra)
government where the property is situated.
2. Gifts made to or for the use of the National
The remedy of claiming a tax credit is, Government or any entity created by any of its
therefore, aimed at minimizing the burdensome agencies which is not conducted for profit, or to
effect of double taxation by allowing the any political subdivision of the said Government
taxpayer to deduct his foreign tax from his
Philippine tax, subject to the limitations 3. Gifts in favor of an educational and/or
provided by law. charitable, religious, cultural or social welfare
corporation, institution, accredited non-
Who may claim tax credit? government organization, trust or philanthropic
Tax credit for donors tax may be claimed only organization or research institution or
by a resident citizen, non-resident citizen and organization, Provided not more than 30% of
resident alien. said gifts will be used by such donee for
administration purposes.
Q: What are the limitations on the tax credit?
1. NET GIFT PHIL What is a non-profit educational and/or
(foreign country) x DONORScharitable corporation, etc?
TAX It is a school, college or university and/or
ENTIRE NET GIFTS
charitable corporation, accredited NGO, trust or
philanthropic organization and/or research
2. NET GIFT(all foreign institution or organization:
countries) PHIL DONORS
x Incorporated as a non-stock entity,
TAX
ENTIRE NET GIFTS Paying no dividends,
Note: The computation of the donors tax credit is Governed by trustees who receive no
the same as the computation for estate tax credit. compensation, and
Devoting all its income, whether students
XIII. Exemptions of gifts from donors fees or gifts, donations, subsidies or other
forms of philanthropy, to the
tax accomplishment and promotion of the
purposes enumerated in its Articles of
Deductible from gross gifts in order to arrive at Incorporation
the taxable net gifts.
Not to be treated as exclusions from the gross In the case of gifts made by a NONRESIDENT:
gifts of the donor. 1. Gifts made to or for the use of the National
Government or any entity created by any of its
TAXATION LAW REVIEWER
agencies which is not conducted for profit, or to Gross gifts made on this date
any political subdivision of the said Government Less: Deductions from the gross gifts
Net gifts made on this date
2. Gifts in favor of an educational and/or Add: all prior net gifts during the year 101
charitable, religious, cultural or social welfare Aggregate net gifts
corporation, institution, accredited non- Multiplied by applicable rate
government organization, trust or philanthropic Donors tax on the aggregate net gifts
organization or research institution or Less: donors tax paid on prior net gifts
organization, provided not more than 30% of Donors tax due on the net gifts to date
said gifts will be used by such donee for
administration purposes TAX RATES APPLICABLE
The applicable donors tax rate is dependent upon
Other Exemptions common to both the relationship between the donor and the donee.
1. Encumbrances on the property donated if
assumed by the donee in the deed of donation 1. If the donee is a stranger to the donor, the tax
2. Donations made to entities exempted under rate is equivalent to 30 % of the net gifts.
special laws, e.g.: A stranger for purposes of the donors tax
o Aquaculture Department of the Southeast a. a person who is not a brother, sister
Asian Fisheries Development Center of the (whether by whole or half-blood),
Philippines spouse, ancestor or lineal descendant,
o Development Academy of the Philippines or
o Integrated Bar of the Philippines b. a person who is not a relative by
o International Rice Research Institute consanguinity in the collateral line
o National Museum within the fourth degree of
o National Library relationship. (Sec. 99(B))
o National Social Action Council
o Ramon Magsaysay Foundation Note that donations made between business
o Philippine Inventors Commission organizations and those made between an
o Philippine American Cultural Foundation individual and a business organization shall
o Task Force on Human Settlement on the be considered as donations made to a
donation of equipment, materials and stranger (RR 2-2003)
services
3. Donations to persons not strangers where the 2. If the donee is not a stranger to the donor, the
total of such net gifts for the calendar year is tax for each calendar year shall be computed on
not more than P100,000.00 the basis of the total net gifts made during the
calendar year:
Net Gifts
The net economic benefit from the transfer
Over But not Tax Is Plus Of the
that accrues to the donee.
Over Excess
Accordingly, if a mortgaged property is
Over
transferred as a gift, but imposing upon the
donee the obligation to pay the mortgage 0 100,000 Exempt
liability, then the net gift is measured by 100,000 200,000 0 2% 100,000
deducting from the fair market value of the 200,000 500,000 2,000 4% 200,000
property the amount of the mortgage 500,000 1M 14,000 6% 500,000
assumed. (Section 11, RR 2-2003) 1M 3M 44,000 8% 1M
3M 5M 204,000 10% 3M
XIV. Computation of Donors Tax 5M 10M 404,000 12% 5M
10M 1,004,000 15% 10M
How is donors tax computed?
Note: A legally adopted child is entitled to all
This general formula shall be followed: the rights and obligations provided by law to
legitimate children, and therefore, a donation
Gross gifts made to him shall not be considered as a donation
Less: Deductions from the gross gifts made to a stranger.
Net gifts made
Multiplied by applicable rate XV. Person liable
Donors tax on the net gifts
Every person, whether natural or juridical,
resident or non-resident, who transfers or
If there were several gifts made during the year, this
causes to transfer property by gift, whether in
formula is followed: trust or otherwise, whether the gift is direct or
indirect and whether the property is real or
personal, tangible or intangible.
TAXATION LAW REVIEWER
Input tax on purchases of goods, properties or Provided that export sales of registered
services related to such zero-rated sale shall be export traders may include commission
available as tax credit or refund. (RR 16-2005) income, and that exportation of goods on
consignment shall not be deemed export 107
Export sales (IF-GONE) ( 106, (2)) sales until the export products consigned
1) The sale and actual shipment of goods from are in fact sold by the consignee, and
the Philippines to a Foreign country AND
paid for in acceptable foreign currency or Provided finally that sales by a VAT-
its equivalent in goods or services, AND registered supplier to a
accounted for in accordance with the rules manufacturer/producer whose products are
and regulations of the BSP; 100% exported are considered export sales.
2) Sale of raw materials or packaging materials
to a Nonresident buyer for delivery to a A certification to his effect must be issued
resident local export-oriented enterprise to by the Board of Investment which shall be
be used in manufacturing, processing, good for 1 year unless subsequently re-
packing or repacking in the Philippines of issued. (RR 16-2005)
the said buyer's goods AND paid for in
acceptable foreign currency AND accounted 6) The sale of goods, supplies, equipment and
for in accordance with the rules and fuel to persons engaged in International
regulations of the BSP shipping or international air transport
3) Sale of raw materials or packaging materials operations. (added by RA 9337)
to Export-oriented enterprise whose export
sales exceed seventy percent (70%) of total Provided, that the same is limited to goods,
annual production. supplies, equipment and fuel pertaining to
Any enterprise whose export sales or attributable to the transport of goods
exceed 70% of the total annual and passengers from a port in the Phil.
production of the preceding taxable directly to a foreign port without docking or
year shall be considered an export- stopping at any other port in the Phil., and
oriented enterprise upon accreditation that if any portion of such fuel, goods, or
under the rules & regulations of Export supplies is used for purposes other than that
Development Act, RA 7844 (RR 7-95) mentioned here, such portion of fuel,
4) Sale of Gold to the Bangko Sentral ng goods, and supplies shall be subject to 12%
Pilipinas (BSP); VAT.
5) Those considered export sales under the
Omnibus Investment Code of 1987, and Foreign Currency Denominated Sale
other special laws (ex. Bases Conversion & (FCDS)
Development Act of 1992) 1) Sale to a nonresident of goods, except
Under Omnibus Investment Code: those mentioned in Sections 149 and 150
a) Phil. port FOB value of export (automobiles and non-essential goods like
products exported directly by a jewelry, perfume, and yachts), assembled
registered export producer; or manufactured in the Philippines for
b) Net selling price of export products delivery to a resident in the Philippines paid
sold by a registered export for in acceptable foreign currency AND
producer to another export accounted for in accordance with the rules
producer, or to an export trader and regulations of the BSP.
that subsequently exports the
same (only when actually exported 2) Sales of locally manufactured or
by the latter). assembled goods for household and
Constructive Exports: personal use to Filipinos abroad and other
b) sales to bonded manufacturing non-residents of the Philippines as well as
warehouses of export-oriented returning Overseas Filipinos under the
manufacturers; Internal Export Program of the government
c) sales to export processing zones; paid for in convertible foreign currency AND
d) sales to registered export traders accounted for in accordance with the rules
operating bonded trading and regulations of the BSP shall also be
warehouses supplying raw considered export sales.
materials in the manufacture of
export products; Effectively zero-rated sales Sales to
e) sales to diplomatic missions and persons or entities whose exemption
other agencies and/or under special laws or international
instrumentalities granted tax agreements to which the Philippines is a
immunities, of locally signatory effectively subjects such sales
manufactured, assembled or to zero rate.
repacked products, whether paid Examples:
for in foreign currency or not. a) sales to enterprises duly registered
& accredited with the
TAXATION LAW REVIEWER
Note: RR 4-2007 removed the distinction between a. Transfer, use or consumption not in the course
automatic and effectively zero-rated transactions of business of goods or properties originally
found in prior Revenue Regulations (including RR 16- intended for sale or for use in the course of
2005) with respect to prior application. business (e.g. when a VAT-registered person
withdraws goods from his business for his personal
The following line in RR 16-2005 has been DELETED use.- RR 16-2005)
by RR 4-2007: Other cases of zero-rated sales shall
require prior application with the appropriate BIR b. Distribution or transfer to:
office for effective zero-rating. Without an
approved application for effective zero-rating, the (a) Shareholders or investors as share in the
transaction otherwise entitled to zero-rating shall be profits of the VAT-registered persons; or
considered exempt. The foregoing rule (b) Creditors in payment of debt;
notwithstanding, the Commissioner may prescribe
such rules to effectively implement the processing of Note: Property dividends which constitute stocks in
applications for effective zero-rating. trade or properties primarily held for sale or lease
declared out of retained earnings on or after Jan. 1,
CIR vs. Seagate Technology (Philippines) February 1996 and distributed by the company to its
11, 2005: shareholders shall be subject to VAT based on the
The BIR regulations additionally requiring an zonal value or FMV at the time of the distribution,
approved prior application for effective zero whichever is applicable. (RR 16-2005)
rating cannot prevail over the clear VAT nature
of Seagates transactions (subject to zero- c. Consignment of goods if actual sale is not made
rating, as an entity registered with the PEZA). within 60 days following the date such goods were
Other than the general registration of a
consigned
taxpayer the VAT status of which is aptly
determined, no provision under our VAT law
requires an additional application to be made Note: Consigned goods returned by the consignee
for such taxpayers transactions to be within the 60-day period are not deemed sold.
considered effectively zero-rated. - RR 16-2005)
An effectively zero-rated transaction does not
and cannot become exempt simply because an d. Retirement from or cessation of business, with
application therefor was not made or, if respect to inventories of taxable goods existing as
made, was denied. of such retirement or cessation.
RMC 74-99: Tax Treatment of Sales of Goods
and Services Made by Suppliers from Western With respect to ALL goods on hand, whether
Territory to a PEZA registered enterprise and capital goods, stock-in-trade, supplies or
Sale Transactions made by PEZA registered materials, as of the date of such retirement
enterprises Within and Without the Zone or cessation, whether or not the business is
continued by the new owner or successor.
CIR v. American Express (2005): Examples are change of ownership of the
The court enumerated the exceptions to the business (e.g. when a sole proprietorship
destination principle. incorporates, or the proprietor sells his
As a general rule, the value-added tax (VAT) entire business) and dissolution of a
system uses the destination principle. partnership and creation of a new
However, our VAT law itself provides for a clear partnership which takes over the business. -
exception, under which the supply of service shall be RR 16-2005)
zero-rated when the following requirements are
met:
TAXATION LAW REVIEWER
XI. Change or cessation of status as Basis: total value used by the Bureau of Customs in
determining tariff and customs duties, plus customs
VAT-registered person (Sec. 106(C)) duties, excise taxes, if any, and other charges,
Where the customs duties are determined on 109
Rate: 12% (as amended) the basis of the quantity or volume of the goods,
Basis: the acquisition cost or the current market the value-added tax shall be based on the
price of the goods or properties, whichever is landed cost plus excise taxes, if any.
LOWER.
Landed Cost = invoice amount + customs duties +
VAT shall apply to goods disposed of or freight + insurance + other charges + excise tax (if
existing as of a certain date if under the any)
circumstances to be prescribed in rules and
regulations to be promulgated by the Secretary Who Pays: Paid by the importer prior to the release
of Finance, upon recommendation of the of such goods from customs custody (107, A)
Commissioner, the status of a person as a VAT-
registered person changes or is terminated a. Transfer of goods by tax exempt persons
(107, B)
Under RR 16-2005 4.106, B:
a. Subject to VAT - applicable to goods/properties If importer is tax-exempt, the subsequent
originally intended for sale or use in business and purchasers, transferees or recipients of such
capital goods which are existing as of the occurrence imported goods shall be considered as importers
of the following: who shall be liable for the tax on importation.
1. Change of business activity from VAT The tax due on such importation shall constitute
taxable status to VAT-exempt status a lien on the goods superior to all charges or
2. Approval of request for cancellation of a liens on the goods, irrespective of the possessor
registration due to reversion to exempt thereof. (as amended by RA 9337)
status
3. Approval of request for cancellation of
registration due to desire to revert to XIII. VAT on sale of service and use or
exempt status after lapse of 3 consecutive lease of properties
years from the time of registration by a
person who voluntarily registered despite Rate: 12% (as amended)
being exempt under Sec. 109 (2) Basis: Gross receipts derived from the sale or
4. Approval of request for cancellation of exchange of services, including the use of lease of
registration of one who commenced properties. (108, A)
business with the expectation of gross
sales/receipts exceeding P1.5M (P1,919,500 Gross Receipts: the total amount of money or its
per RR 16-2011) but who failed to exceed equivalent representing the contract price,
this amount during the first 12 months of compensation, service fee, rental or royalty,
operation including the amount charged for materials supplied
with the services and deposits and advanced
b. Not subject to VAT payments actually or constructively received during
1. Change of control of a corporation by the the taxable quarter for the services performed or to
acquisition of the controlling interest of be performed for another person, excluding value-
such corporation by another stockholder added tax xxx (as amended by RA 9337, underscored
(individual or corporate) or group of parts amended or added by RA 9337)
stockholders. Constructive receipt occurs when the money
Note: Exchange of goods or properties consideration or its equivalent is placed at the
including the real estate properties used in control of the person who rendered the service
business or held for sale or for lease by the without restrictions by the payor. Examples:
transferor, for shares of stocks, whether 1) deposit in banks which are made available
resulting in corporate control or not, is to the seller of services without restrictions
SUBJECT TO VAT (RR 10-11) 2) issuance by the debtor of a notice to offset
any debt or obligation and acceptance
2. Change in the trade or corporate name of thereof by the seller as payment for
the business services rendered
3. Merger or consolidation of corporations. 3) transfer of the amounts retained by the
The unused input tax of the dissolved contractee to the account of the
corporation, as of the date of merger or contractor.
consolidation, shall be absorbed the
surviving or new corporation. Requisites for taxability
1. The service must be performed or is to be
XII. VAT on importation of goods performed in the course of trade or
business in the Philippines;
2. For a valuable consideration actually or
Rate: 12% (as amended)
constructively received; and
TAXATION LAW REVIEWER
3. The service is not exempt under the Tax All receipts from service, hire, or operating
Code, special law or international lease of transportation equipment not
110 agreement subject to the percentage tax on domestic
4. Person selling or rendering service is liable common carriers and keepers of garages
to VAT shall be subject to VAT.
A zero-rated sale by a VAT-registered person is a found in prior Revenue Regulations (inc. RR 16-2005)
taxable transaction for VAT purposes, but shall with respect to prior application.
not result in any output tax.
Input tax on purchases of goods, properties or
111
XIV. VAT exempt transactions
services related to such zero-rated sale shall be
available as tax credit or refund. (RR 16-2005)
a. VAT exempt transactions, in general
1) Processing, manufacturing or repacking goods Refer to sale of goods or properties and/or
for other persons doing business outside the services and the use or lease of properties
Philippines which goods are subsequently that is NOT subject to VAT (output tax) and
exported, where the services are paid for in the seller is not allowed any tax credit of
acceptable foreign currency AND accounted for VAT (input tax) on purchases. The person
in accordance with the rules and regulations of making the exempt sale of goods,
the BSP properties or services shall not bill any
2) Services other than those mentioned in the output tax to his customers because the
preceding paragraph rendered to a person said transaction is not subject to VAT.
engaged in business conducted outside the But, the VAT-registered person may elect
Philippines OR a nonresident person not the exemption not to apply to its sale of
engaged in business who is outside the goods or properties or services; provided
Philippines when the services are performed, that the election made shall be irrevocable
the consideration for which is paid for in for a period of three (3) years from the
acceptable foreign currency AND accounted for quarter the election was made. (109(2))
in accordance with the rules and regulations of
the BSP b. Exempt transaction, enumerated
3) Services rendered to persons or entities whose 1. Sale/ import of agricultural, marine food products
exemption under special laws or international in original state; of livestock and poultry
agreements to which the Philippines is a - Original state even if they have undergone
signatory effectively subjects the supply of such the simple processes of preparation or
services to zero percent (0%) rate [as amended preservation for the market, such as
by RA 9337] freezing, drying, salting, broiling, roasting,
4) Services rendered to persons engaged in smoking or stripping.
international shipping or international air - Polished and/or husked rice, corn grits, raw
transport operations, including leases of cane sugar and molasses, ordinary salt, AND
property for use thereof [as amended by RA COPRA shall be considered in their original
9337]; state;
Provided, however, that the services referred to Livestock or poultry does not include
herein shall not pertain to those made to fighting cocks, race horses, zoo animals and
common carriers by air and sea relative to their other animals generally considered as pets.
transport of passengers, goods or cargoes from [RR 16-2005]
one place in the Phil. to another place in the Original state including preservation using
Phil. (the same being subject to 12% VAT under advanced technological means of
Sec. 108) packaging, such as shrink wrapping in
5) Services performed by subcontractors and/or plastics, vacuum packing, tetra-pack, and
contractors in processing, converting, or other similar packaging methods. [RR 16-
manufacturing goods for an enterprise whose 2005]
export sales exceed seventy percent (70%) of 2. Sale/ import of fertilizers; seeds, seedlings and
total annual production. fingerlings; fish, prawn, livestock and poultry
6) Transport of passengers and cargo by air or sea feeds
vessels from the Philippines to a foreign country 3. Import of personal and household effects of Phil
[as added by RA 9337]; (pls see table on page resident returning from abroad and nonresident
29) and; citizens coming to resettle in the Philippines
7) Sale of power or fuel generated through 4. Import of professional instruments and
renewable sources of energy such as, but not implements, wearing apparel, domestic animals,
limited to, biomass, solar, wind, hydropower, and personal household effects belonging to
geothermal, ocean energy, and other emerging persons coming to settle in the Philippines, for
energy sources using technologies such as fuel their own use and not for sale, barter or
cells and hydrogen fuels. [as added by RA 9337] exchange
Zero-rating shall apply strictly to the sale 5. Services subject to percentage tax
of power or fuel generated through renewable 6. Services by agricultural contract growers and
sources of energy, and shall not extend to the milling for others of palay into rice, corn into
sale of services related to the maintenance or grits and sugar cane into raw sugar
operation of plants generating said power. 7. Medical, dental, hospital and veterinary services
except those rendered by professionals:
RR 4-2007 removed the distinction between Laboratory services are exempted. If the
automatic and effectively zero-rated transactions hospital or clinic operates a pharmacy or drug
TAXATION LAW REVIEWER
store, the sale of drugs and medicine is subject VAT being a transaction incidental to the
to VAT. [RR 16-2005] taxpayers main business. [RR 16-2005]
112
8. Educational services rendered by private CS Garments, Inc. v. CIR (CTA Case No. 6520, Jan.
educational institutions, duly accredited by 4, 2007)- Transactions that are made incidental to
DEPED, CHED, TESDA, and those rendered by the pursuit of a commercial or economic activity are
government educational institutions; considered as entered into in the course of trade or
Educational services does not include business.
seminars, in-service training, review classes and
other similar services rendered by persons who CIR v. CA (329 SCRA 237, Mar. 30, 2000): Even a non-
are not accredited by the DepED, CHED, and/or stock, non-profit, organization or government
TESDA. [RR 16-2005] entity, is liable to pay VAT, even in the absence of
profit attributable thereto. The term in the course
9. Services rendered by individuals pursuant to an of trade or business requires the regular conduct or
employer-employee relationship pursuit of a commercial or an economic activity,
10. Services rendered by regional or area regardless of WON the entity is profit-oriented.
headquarters established in the Philippines by
multinational corporations which act as Hence, it is immaterial whether the primary purpose
supervisory, communications and coordinating of a corporation indicates that it receives payments
centers for their affiliates, subsidiaries or for services rendered to its affiliates on a
branches in the Asia-Pacific Region and do not reimbursement-on-cost basis only, without realizing
earn or derive income from the Philippines profit, for purposes of determining liability for VAT
11. Transactions which are exempt under on services rendered. As long as the entity provides
international agreements to which the service for a fee, remuneration or consideration,
Philippines is a signatory or under special laws, then the service rendered is subject to VAT.
except those under Presidential Decree No., 529
[Petroleum Exploration Concessionaires under (2) Sale of real properties utilized for low-cost
the Petroleum Act of 1949] housing as defined by RA No. 7279,
12. Sales by agricultural cooperatives duly otherwise known as the "Urban
registered with the Cooperative Development Development and Housing Act of 1992" and
Authority to their members as well as sale of other related laws, such as RA No. 7835 and
their produce to non-members. Exemption RA No. 8763.
includes importation of direct farm inputs, Low-cost housing" refers to housing
machineries and equipment, including spare projects intended for homeless low-income
parts thereof, to be used directly and family beneficiaries, undertaken by the
exclusively in the production and/or processing Government or private developers, which
of their produce. may either be a subdivision or a
Sale by agricultural cooperatives to non- condominium registered and licensed by the
members can only be exempted from VAT if the Housing and Land Use Regulatory
producer of the agricultural products sold is the Board/Housing (HLURB) under BP Blg. 220,
cooperative itself. If the cooperative is not the PD No. 957 or any other similar law,
producer (e.g., trader), then only those sales to wherein the unit selling price is within the
its members shall be exempted from VAT. [RR selling price ceiling per unit of P750,000.00
16-2005] under RA No. 7279, and other laws, such as
RA No. 7835 and RA No. 8763.
13. Gross receipts from lending activities by credit
or multi-purpose cooperatives duly registered (3) Sale of real properties utilized for
with the Cooperative Development Authority socialized housing as defined under RA No.
14. Sales by non-agricultural, non- electric and non- 7279, and other related laws, such as RA
credit cooperatives duly registered with the No. 7835 and RA No. 8763, wherein the
Cooperative Development Authority are exempt price ceiling per unit is P225,000.00 or as
BUT their importation of machineries and may from time to time be determined by
equipment, including spare parts thereof, to be the HUDCC and the NEDA and other
used by them are SUBJECT to VAT. related laws.
15. Export sales by persons who are not VAT-
registered "Socialized housing" refers to housing
16. Sale of real properties the ff. sales are programs and projects covering houses and
exempt: lots or home lots only undertaken by the
(1) Sale of real properties NOT primarily held Government or the private sector for the
for sale to customers or held for lease in underprivileged and homeless citizens
the ordinary course of trade or business. which shall include sites and services
However, even if the real property is not development, long-term financing,
primarily held for sale to customers or held for liberated terms on interest payments, and
lease in the ordinary course of trade or business such other benefits in accordance with the
but the same is used in the trade or business of provisions of RA No. 7279and RA No. 7835
the seller, the sale thereof shall be subject to and RA No. 8763.
TAXATION LAW REVIEWER
"Socialized housing" shall also refer to The term 'residential units' shall refer to
projects intended for the underprivileged apartments and houses & lots used for
and homeless wherein the housing package residential purposes, and buildings or parts
selling price is within the lowest interest or units thereof used solely as dwelling
113
rates under the Unified Home Lending places (e.g., dormitories, rooms and bed
Program (UHLP) or any equivalent housing spaces) except motels, motel rooms, hotels
program of the Government, the private and hotel rooms.
sector or non-government organizations. The term 'unit' shall mean an
apartment unit in the case of apartments,
(4) Sale of residential lot valued at P1.5M and house in the case of residential houses; per
below, or house & lot and other residential person in the case of dormitories, boarding
dwellings valued at P2.5M and below, where houses and bed spaces; and per room in
the instrument of sale/transfer/disposition case of rooms for rent. [RR 16-2005]
was executed on or after July 1, 2005; [to
be adjusted every 3 years from Jan 31, 18. Sale, importation, printing or publication of
2009]; books and any newspaper, magazine review or
If two or more adjacent residential lots bulletin which appears at regular intervals with
are sold or disposed in favor of one fixed prices for subscription and sale and which
buyer, for the purpose of utilizing the is not devoted principally to the publication of
lots as one residential lot, the sale shall paid advertisements;
be exempt from VAT only if the 19. Sale, importation or lease of passenger or cargo
aggregate value of the lots does not vessels and aircraft, including engine,
exceed P1.5M. equipment and spare parts thereof for domestic
Adjacent residential lots, although or international transport operations;[added by
covered by separate titles and/or RA 9337]
separate tax declarations, when sold or
disposed to one and the same buyer, The exemption from VAT on the importation
whether covered by one or separate and local purchase of passenger and/or
Deed of Conveyance, shall be presumed cargo vessels shall be limited to those of
as a sale of one residential lot. [RR 16- 150 tons and above, including engine and
2005] spare parts of said vessels;
Provided, further, that the vessels to
17. Lease of residential units with a monthly rental be imported shall comply with the age limit
per unit not exceeding P10K, regardless of the requirement, at the time of acquisition
amount of aggregate rentals received by the counted from the date of the vessel's
lessor during the year. original commissioning, as follows:
(i) for passenger and/or cargo vessels, the
Lease of residential units where the age limit is 15 years old,
monthly rental per unit exceeds 10K but the (ii) for tankers, the age limit is 10 years
aggregate of such rentals of the lessor old, and
during the year do not exceed One Million (iii) for high-speed passenger crafts, the
Five Hundred Pesos P1.5M shall likewise be age limit is 5 years old [RR 16-2005]
exempt from VAT, however, the same shall
be subjected to three percent (3%) 20. Importation of fuel, goods, and supplies by
percentage tax. persons engaged in international shipping or air
In cases where a lessor has several transport operations; [added by RA 9337]
residential units for lease, some are leased Provided, that the said fuel, goods and
out for a monthly rental per unit of not supplies shall be used exclusively or shall
exceeding P10K while others are leased out pertain to the transport of goods and/or
for more than P10K per unit, his tax liability passenger from a port in the Philippines
will be as follows: directly to a foreign port without stopping
d. The gross receipts from rentals not at any other port in the Philippines;
exceeding P10K per month per unit Provided, further, that if any portion of
shall be exempt from VAT regardless of such fuel, goods or supplies is used for
the aggregate annual gross receipts. purposes other than that mentioned in this
e. The gross receipts from rentals paragraph, such portion of fuel, goods and
exceeding P10K per month per unit supplies shall be subject to 12% VAT starting
shall be subject to VAT IF the aggregate Feb. 1, 2006. [RR 16-2005]
annual gross receipts from said units
only (not including the gross receipts 21. Services of banks, non-bank financial
from units leased for not more than intermediaries performing quasi-banking
P10K) exceeds P1.5M. Otherwise, the functions and other non-bank financial
gross receipts will be subject to the 3% intermediaries; and
tax imposed under Section 116 of the 22. Sale or lease of goods or properties or the
Tax Code. performance of services other than the
transactions mentioned in the preceding
TAXATION LAW REVIEWER
INPUT TAX the VAT due from or paid by a VAT- XVII. Persons who can avail of input
registered person in the course of his trade or tax credit
business on importation of goods or local purchase of
goods or services, including lease or use of property, a. Creditable Tax (110(A(2))) -
from a VAT-registered person. Input tax on domestic purchase or importation of
It includes the transitional input tax determined goods or properties shall be creditable:
in accordance with Section 111 of this Code. (a) To the purchaser upon consummation of
It includes input taxes which can be directly sale and on importation of goods or
attributed to transactions subject to the VAT properties; and
plus a ratable portion of any input tax which (b) To the importer upon payment of the
cannot be directly attributed to either the value-added tax prior to the release of the
taxable or exempt activity. goods from the custody of the Bureau of
Input tax must evidenced by a VAT invoice or Customs.
official receipt issued by a VAT-registered Provided, That the input tax on goods
person in accordance with Secs. 113 and 237 of purchased or imported in a calendar
the Tax. [RR 16-2005] month for use in trade or business for
which deduction for depreciation is
OUTPUT TAX the VAT due on the sale or lease of allowed under this Code, shall be
taxable goods or properties or services by any person spread evenly over the month of
registered or required to register under Section 236 acquisition and the fifty-nine (59)
of this Code. succeeding months if the aggregate
acquisition cost for such goods,
XVI. Sources of input tax excluding the VAT component thereof,
exceeds One million pesos
(P1,000,000):
a. Purchase or importation of goods
(i) For sale; or
Provided, however, That if the
(ii) For conversion into or intended to form estimated useful life of the capital
part of a finished product for sale good is less than five (5) years, as used
including packaging materials; or for depreciation purposes, then the
(iii) For use as supplies in the course of input VAT shall be spread over such a
business; or shorter period:
(iv) For use as materials supplied in the
sale of service; or
Provided, finally, that in the case of
(v) For use in trade or business for which purchase of services, lease or use of
deduction for depreciation or
properties, the input tax shall be
amortization is allowed under this creditable to the purchaser, lessee or
Code.
licensee upon payment of the
b. Purchase of real properties for which a VAT compensation, rental, royalty or fee.
has actually been paid
c. Purchase of services in which VAT has actually b. Transitional Tax (111(A))
been paid
Any person liable for VAT or who elects to be a
d. Transactions deemed sale VAT-registered person shall be allowed INPUT
TAX in his beginning inventory of goods,
e. Transitional input tax
materials and supplies
TAXATION LAW REVIEWER
equivalent to TWO PERCENT (2%) of the GOCCs shall not be credited against output
value of such inventory; OR taxes arising from sales to non-Government
the actual VAT paid on such goods, entities; and
materials and supplies, whichever is higher, 115
which shall be creditable against the 24. If any input tax cannot be directly
OUTPUT TAX. attributed to either a VAT taxable or VAT-
exempt transaction, the input tax shall be
c. Presumptive Input Tax (111(B)) pro-rated to the VAT taxable and VAT-
Persons or firms engaged in the processing of exempt transactions and only the ratable
sardines, mackerel and milk, and in manufacturing portion pertaining to transactions subject to
refined sugar and cooking oil and packed noodle VAT may be recognized for input tax credit.
based instant meals, shall be allowed a presumptive
input tax, creditable against the output tax, Illustration: ERA Corporation has the following sales
equivalent to FOUR PERCENT (4%) of the gross value during the month:
in money of their purchases of primary agricultural Sale to private entities subject to 12% 100,000.00
products which are used as inputs to their Sale to private entities subject to 0% 100,000.00
production. Sale of exempt goods 100,000.00
Sale to gov't. subjected to 5% final VAT
"Processing" shall mean pasteurization, canning and w/holding 100,000.00
activities which through physical or chemical process Total sales for the month 400,000.00
alter the exterior texture or form or inner substance The following were its input taxes (or passed on by
of a product in such manner as to prepare it for its VAT suppliers):
special use to which it could not have been put in its Input tax on taxable goods (12%) 5,000.00
original form or condition. [RR 16-05] Input tax on zero-rated sales 3,000.00
Input tax on sale of exempt goods 2,000.00
XVIII. Determination of output/input Input tax on sale to government 4,000.00
tax; VAT payable; Excess input tax Input tax on depreciable capital good
not attributable to any specific activity
credits (monthly amortization for 60 months) 20,000.00
a. Determination of output tax Step 1: The creditable input tax for the month shall
If at the end of any taxable quarter, the be computed as follows:
output tax exceeds the input tax, the Input tax on sale subject to 12% P5,000.00
excess shall be paid by the VAT-registered Input tax on zero-rated sale 3,000.00
person. Ratable portion of the input tax not directly
attributable to any activity, computed below
b. Determination of input tax creditable ( 110, C) Taxable sales Amount of input tax
The sum of the excess input tax carried over (0% and 12%) x not directly
from the preceding month or quarter and the Total Sales attributable
input tax creditable to a VAT-registered person
during the taxable month or quarter shall be P200,000.00
reduced by the amount of claim for refund or x P20,000.00 = P10,000.00
P400,000.00
tax credit for value-added tax and other
adjustments, such as purchase returns or
Total creditable input tax for the month:
allowances and input tax attributable to exempt
P18,000.00 (P5,000+P3,000+P10,000)
sale.
The claim for tax credit referred to includes not
Step 2: The input tax attributable to sales to
only those filed with the BIR but also those filed government for the month shall be computed as
with other government agencies, such as the
follows:
Board of Investments the Bureau of Customs. Input tax on sale to gov't. P4,000.00
Ratable portion of the input tax not directly
c. Allocation of input tax on mixed transactions
attributable to any activity, computed as
A VAT-registered person who is also engaged in
follows:
transactions not subject to VAT shall be allowed
Taxable sales Amount of input tax
to recognize input tax credit on transactions
not directly
subject to VAT as follows: Total Sales x
attributable
23. All the input
taxes that can be directly attributed to
P100,000.00
transactions subject to VAT may be
recognized for input tax credit; P400,000.00 x P20,000.00 = P5,000.00
Provided, that input taxes that can be Total input tax attributable to sales to
government: P9,000.00 (P4,000 + P5,000)
directly attributable to VAT taxable sales of
goods and services to the Government or
These amounts are not available for input tax credit
any of its political subdivisions, but may be recognized as cost or expense. That is
instrumentalities or agencies, including because as far as sales to government are
TAXATION LAW REVIEWER
concerned, there is a VAT that is finally withheld (at official receipt showing the
5%). information required under Secs. 113
116 and 237 of the Tax Code.
Step 3: The input tax attributable to VAT-exempt
sales for the month shall be computed as follows:
Input tax on VAT-exempt sales P2,000.00 A cash register machine tape issued to a
Ratable portion of the input tax not directly registered buyer shall constitute valid proof of
attributable to any activity, computed below: substantiation of tax credit only if it shows the
VAT-exempt sales Amount of input tax information required under Secs. 113 and 237 of
not directly the Tax Code.
Total Sales x
attributable
paid cannot be directly and entirely The destination of the goods determines
attributed to any one of the transactions, it taxation or exemption from tax. Export
shall be allocated proportionately on the sales of goods are subject to zero percent
basis of the volume of sales. (0%) rate while imports of goods are subject 117
Provided, finally, that for a person making to 12% value added tax.
sales that are zero-rated under section 108
(b)(6), the input taxes shall be allocated XXI. Invoicing requirements
ratably between his zero-rated and non-
zero-rated sales.
a. Invoicing requirements in general
2. Cancellation of VAT Registration. ( 112, C) A VAT-registered person shall issue:
A person whose registration has been (1) A VAT invoice for every sale, barter or
cancelled due to retirement from or exchange of goods or properties; and
cessation of business, or due to changes in (2) A VAT official receipt for every lease of
or cessation of status under Section 106(C) goods or properties, and for every sale,
of this Code may, within two (2) years from barter or exchange of services.
the date of cancellation, apply for the Only VAT-registered persons are required to print
issuance of a tax credit certificate for any their TIN followed by the word VAT in their invoice
unused input tax which may be used in or ORs. All purchases covered by invoices/receipts
payment of his other internal revenue other that VAT Invoice/VAT OR shall not give rise to
taxes. any input tax. [RR 16-05]
fact by proof of other facts which have lapse due principally to the taxpayers
a legitimate tendency to lead the mind fault.
120 to a conclusion that the fact exists
which is sought to be established. e) Tax delinquency and tax deficiency
(INDIRECT METHOD) Deficiency is the amount still due and
Expenditure Method It proceeds on collectible from a taxpayer upon audit
the theory that where the amount of or investigation.
money which a taxpayer spends during Delinquency is the failure of the
a given year exceeds his reported taxpayer to pay the tax due on the
income, and the source of such money date fixed by law or indicated in the
is otherwise unexplained, it may be assessment notice or letter of demand.
inferred that such expenditures
represent unreported income. 2) Power of the Commissioner to make
Percentage Method This method is a assessments and prescribe additional requirements
computation whereby determinations for tax administration and enforcement
are made by the use of percentages or
ratios considered typical of the 1. EXAMINE RETURNS and DETERMINE TAX DUE
business under investigation. By (5)
reference to similar business or Authorizing the examination of any
situations, percentage computations taxpayer and the assessment of the
are secured to determine sales, gross correct amount of tax, WON a return
profit or even net profit. has been filed by such taxpayer.
Unit and value Method The Note: Any return filed with the
determination of gross receipts may be Commissioner shall not be withdrawn, BUT
computed by applying price and profit the taxpayer may MODIFY, CHANGE or
figures to the known ascertainable AMEND such return within three (3) years
quality of business done by taxpayer from the date of filing, provided that no
notice for audit or investigation of such
c) Inventory method for income determination return has been actually served on the
(Net worth method) taxpayer.
This method of reconstructing income 2. Conduct INVENTORY-TAKING, SURVEILLANCE
based on the theory that if the and to PRESCRIBE presumptive gross sales
taxpayers net worth has increased in a and receipts (6C)
given year in an amount larger than his Inventory-taking at any time during
reported income, he had understated the taxable year, for the purpose of
his income for that year. determining the correct tax liabilities.
Surveillance done if there is reason
Formula: to believe that the taxpayer is not
Increase in Net worth declaring his correct income, sales or
Add: Non-deductible Item receipts for tax purposes.
Less: Non-taxable income or receipts Prescribe presumptive gross sales and
subjected to final tax transfer taxes receipts if:
Taxable Net Income - It is found that the taxpayer has
Less: Personal and additional failed to issue receipts and
exemptions invoices, or
NET INCOME SUBJECT TO TAX - When there is reason to believe
that the books of accounts or other
d) Jeopardy assessment records do not correctly reflect
A tax assessment made by an the declarations made by the
authorized Revenue Officer without the taxpayer
benefit of complete or partial audit, 3. TERMINATE Taxable Period (6D)
in light of the ROs belief that the Terminating taxable period and
assessment and collection of the ordering the immediate payment of the
deficiency tax will be jeopardized by tax for the terminated period and any
delay caused by the taxpayers failure remaining tax that is unpaid, when the
to: taxpayer is:
i. Comply with audit and - retiring from business subject to
investigation requirements to tax, or
present his books of accounts - intending to leave the Philippines
and/or pertinent records or to remove his property
ii. Substantiate all or any of the therefrom or to hide or conceal his
deductions, exemptions or credits property;
claimed in his return. - performing any act tending to
It is usually issued when statutory obstruct the proceedings for the
prescriptive periods for the assessment collection of the tax for the past
or collection of taxes are about to or current quarter or year or to
render the same totally or
TAXATION LAW REVIEWER
tax fraud division of the Enforcement against the estimated tax liabilities for
Services, and the taxable quarter or quarters of the
124 Policy cases under audit by the special succeeding taxable year; or
teams in national offices (d) The EXCISE TAX due on excisable
articles has not been paid; or
b) Notice of informal conference (e) An article locally purchased or
A written notice informing a taxpayer that imported by an exempt person, such
the findings of the audit conducted on his as, but not limited to, vehicles, capital
books of accounts and accounting records equipment, machineries and spare
indicate that additional taxes or deficiency parts, has been sold, traded or
assessments have to be paid. transferred to a non-exempt person.
The taxpayer shall then have fifteen (15) (Sec. 228, NIRC)
days from the date of his receipt of the
Notice for Informal Conference to explain e) Reply to PAN
his side. A reply is to contest in writing the findings
of the revenue officers contained in a PAN.
What matters are taken up during the - It is filed within fifteen days from
informal conference? the date of receipt of the PAN.
1. Discussion on the merits of the - A taxpayer generally does not
assessment respond in an adequate manner to
2. Attempt of taxpayer to convince the the specific findings of the revenue
examiner to conduct a re-investigation officer.
and/or re-examination - Failure to reply to a PAN makes the
3. Evaluate if submission of the waiver of taxpayer in default and authorizes
the statute of limitations is the revenue officials to issue the
necessary because evaluation may FAN.
extend beyond three years
4. Taxpayer to advise the examiner if
position paper will be submitted The regulations use the term reply to
distinguish the written objection(s) against
c) Issuance of preliminary assessment notice a FAN issued by the BIR, where the generic
(PAN) term protest or the specific term
A communication issued by the request for reconsideration or request
Regional Assessment Division or any other for reinvestigation is utilized.
concerned BIR office, informing a taxpayer
who has been audited of the findings of the f) Issuance of formal letter of demand and
Revenue Officer, following the review of assessment notice/final assessment notice
these findings. A Final Assessment Notice (FAN) is a
The assessment shall be: declaration of deficiency taxes issued to a
- in writing, and taxpayer who fails to respond to a pre-
- should inform the taxpayer of the law assessment notice within the prescribed
and the facts on which the assessment period of time, or whose reply to the PAN
is made; was found to be without merit.
- Otherwise, the assessment shall be - An assessment contains not only a
void. (Sec. 228, NIRC) computation of tax liabilities, but
If the taxpayer disagrees with the also a demand for payment within
findings in the PAN, he has fifteen (15) days a prescribed period.
from his receipt of the PAN to file a written - The ultimate purpose of
reply contesting the proposed assessment. assessment is to ascertain the
amount that each taxpayer is to
d) Exceptions to Issuance of PAN pay.
The formal letter of demand shall be issued
PAN no longer required when: by the Commissioner or his duly authorized
(a) The finding for any deficiency tax is the representative.
result of MATHEMATICAL ERROR in the The letter of demand calling for the
computation of the tax as appearing on payment of the taxpayers deficiency taxes
the face of the return; or shall state the FACTS, the LAW, RULES and
(b) A DISCREPANCY has been determined REGULATIONS or JURISPRUDENCE on which
between the TAX WITHHELD and the the assessment is based, OTHERWISE, the
amount ACTUALLY REMITTED by the formal letter of demand or assessment
withholding agent; or notice shall be VOID. (RR 12-99)
(c) A taxpayer who opted to claim a
refund or tax credit of excess
creditable withholding tax for a Note:
taxable period was determined to A follow-up letter/demand letter for
have carried over and automatically payment of taxes is considered a notice
applied the same amount claimed
TAXATION LAW REVIEWER
b) In case of inaction by Commissioner within Note: A court MAY NOT GRANT AN INJUNCTION
180 days from submission of documents to restrain the collection of any national
126 If the Commissioner did NOT ACT UPON THE internal revenue tax, fee or charge imposed
PROTEST within one hundred and eighty under the NIRC. (Sec. 218, NIRC)
days from the time the documents were Exception: Under Section 11 of RA 1125, as
submitted, the taxpayer may either: amended by RA 9282, suspension is
Appeal to the CTA within thirty days allowed when the following conditions
from the lapse of the 180-day period concur:
OR 1. it is an appeal to the CTA from a
Wait until the Commissioner decides decision of the Commissioner of
before he elevates the case to the CTA. Internal Revenue or Commissioner of
Customs or the Regional Trial Court,
provincial, city or municipal treasurer
RCBC v. CIR (2007): In case the Commissioner or the Secretary of Finance, the
failed to act on the disputed assessment within Secretary of Trade and Industry and
the 180-day period from date of submission of Secretary of Agriculture, as the case
documents, a taxpayer can either: may be, and
1) file a petition for review with the Court of 2. in the opinion of the Court of Tax
Tax Appeals within 30 days after the Appeals, the collection may jeopardize
expiration of the 180-day period; OR the interest of the Government and/or
2) await the final decision of the the taxpayer.
Commissioner on the disputed assessments
and appeal such final decision to the Court Q: In case of suspension, what may the
of Tax Appeals within 30 days after receipt taxpayer be required to do?
of a copy of such decision. Either to deposit the amount claimed or to
However, these options are mutually file a surety bond for not more than double
exclusive, and resort to one bars the the amount with the Court.
application of the other.
2) Prescriptive periods
If the taxpayer is not satisfied with the CTA
Divisions ruling, what is his REMEDY? No return filed, or the
Return filed was NOT
FIRST, he may file a motion for return was false or
false or fraudulent
reconsideration before the same Division of fraudulent.
the CTA within fifteen (15) days from notice Collection with PRIOR Collection with PRIOR
thereof. (Sec. 11, RA 1125 as amended by ASSESSMENT - should be ASSESSMENT - should be
RA 9282 [2004]) made within five years made within five years
THEN, a party adversely affected by a from the date of from the date of
resolution of a Division of the CTA on a assessment of the tax. assessment (based on
motion for reconsideration may file a by distraint or levy, 222c)
petition for review with the CTA en banc. or by judicial by distraint or levy, or
(Sec. 18, RA 1125 as amended by RA 9282 proceedings by judicial proceedings
[2004]) Collection WITHOUT Collection WITHOUT
PRIOR ASSESSMENT PRIOR ASSESSMENT
If the taxpayer is not satisfied with the should be made within should be made within
decision of the CTA en banc, what is his three years from the ten years after the
REMEDY? date of filing of return discovery of the falsity,
A party adversely affected by a decision or or date return is due, fraud or omission to file a
ruling of the CTA en banc may file with the whichever is LATER return.
Supreme Court a verified petition for (based on 203) by judicial proceedings
review on certiorari pursuant to Rule 45 of by judicial
the 1997 Rules of Court. (Sec. 19, RA 1125 proceedings
as amended by RA 9282 [2004])
c) Effect of failure to appeal If tax was assessed within the different period
If the taxpayer fails to file an appeal, the agreed upon by the Commissioner and the
assessment shall become final, executor taxpayer, it may be collected by distraint or
and demandable. levy or by a proceeding in court within the
period agreed upon in writing before the
B. COLLECTION expiration of the 5-yr period.(Sec. 222d, NIRC)
involves the SEIZURE by the What is the remedy of the taxpayer once
Government of PERSONAL the Commissioner or other proper officer
PROPERTY, tangible or intangible, issues the warrant of distraint?
to enforce the payment of taxes; The taxpayer may request that the 127
followed by the PUBLIC SALE of warrant be lifted. The commissioner
such property, if the taxpayer fails may, in his discretion, allow the lifting
to pay the taxes voluntarily. of the order of distraint. He may ask
What are the kinds of distraint? for a bond as a condition for the
a. Actual Distraint resorted to when cancellation of the warrant. (Sec. 207,
there is ACTUAL delinquency in tax NIRC)
payment
b. Constructive Distraint is a (2) Sale of property distrained and
preventive remedy which aims at disposition of proceeds
forestalling a possible dissipation If the taxpayer does not ask for the
of the taxpayers assets when lifting of the warrant, what shall be
delinquency sets in. Hence, no done with the seized properties?
actual delinquency in payment is The properties will be SOLD in a
necessary. PUBLIC SALE, and the procedure
shall be as follows:
(1) Procedure for distraint and
garnishment
Upon failure to pay the delinquent tax (1) The Revenue District Officer or
at the time required, the proper officer his duly authorized
shall SEIZE and DISTRAINT any GOODS, representative (not the officer
CHATTELS, or EFFECTS, and the who served the warrant), shall
PERSONAL PROPERTY, including STOCKS cause a notification of the
and other SECURITIES, DEBTS, CREDITS, public sale to be posted in not
BANK ACCOUNTS and INTERESTS in and less than two (2) public places
RIGHTS to personal property of the in the municipality or city (one
taxpayer in sufficient quantity to of which is the Office of the
satisfy the tax, expenses of distraint Mayor) where the distraint was
and the cost of the subsequent sale. made.
The notice shall specify
How are different kinds of personal the time and place of the
property distrained? sale. The time of sale
1. Stocks and other securities: by shall not be less than
serving a copy of the warrants of twenty (20) days after
distraint on the taxpayer, AND notice to the owner and
upon the president, manager, the publication or posting
treasurer or other responsible of such notice.
officer of the corporation, (2) At the time of the public sale,
company or association which the revenue officer shall sell
issued the stocks or securities. the goods, chattels, or effects,
2. Debts and credits: by leaving with or other personal property,
the person owing the debts or including stocks and other
having in his possession or under securities so distrained at a
his control such credits, or with his PUBLIC AUCTION, to the
agent, a copy of the warrant of HIGHEST BIDDER for CASH or
distraint. The person owing the with the approval of the
debts shall then pay the Commissioner, through a DULY
Commissioner instead of his LICENSED COMMODITY or
creditor (taxpayer) on the strength STOCK EXCHANGES.
of such warrant. (3) Any residue over and above
3. Bank accounts: by serving a what is required to pay the
warrant of garnishment upon the entire claim, including
taxpayer AND upon the president, expenses of sale and distraint,
manager, treasurer or other shall be RETURNED to the
responsible officer of the bank. owner of the property sold.
The bank shall then turn over to Expenses shall be limited to
the Commissioner so much of the actual expenses of SEIZURE
bank accounts as may be sufficient and PRESERVATION of the
to satisfy the claim of the property pending the sale, no
Government. (NOTE: distraint of charge shall be imposed for
bank accounts is called the services of the local
GARNISHMENT) internal revenue officer or his
deputy. (209)
TAXATION LAW REVIEWER
1. Compromise (to reduce the amount of No civil or criminal action for the
tax payable) recovery of taxes or the enforcement of any
fine, penalty or forfeiture under the NIRC
Grounds for a compromise: shall be filed in court without the
The Commissioner may compromise APPROVAL OF THE COMMISSIONER approval
the payment of any internal revenue of the Commissioner. (Sec. 220, NIRC)
tax in the following cases:
1) A REASONABLE DOUBT as to the
validity of the claim against the Q: How is a criminal action a collection
taxpayer exists; or remedy?
2) The financial position of the The judgment in the criminal case
taxpayer demonstrates a clear shall:
inability to pay the assessed tax. impose the penalty; and
(FINANCIAL INCAPACITY)
order payment of the taxes subject of
the criminal case as finally decided by
What are the limits of the
the Commissioner. (Sec. 205, NIRC)
Commissioners power to compromise?
For cases of financial incapacity: a
minimum compromise rate equivalent
to ten percent (10%) of the basic Q: Is an assessment necessary before filing a
criminal charge for tax evasion?
assessed tax;
For other cases: a minimum No, an assessment is not necessary
before a criminal charge can be filed. The
compromise rate equivalent to forty
percent (40%) of the basic assessed tax criminal charge need only be proved by a
prima facie showing of a wilful attempt to
Note: When the basic tax involved exceeds file taxes, such as failure to file a required
One Million Pesos (P1,000,000), or where tax return. [CIR v. Pascor Realty (June 29,
the settlement offered is less than the 1999)]
prescribed minimum rates, the compromise
must be approved by the Evaluation Board a) Suit to recover tax based on false or
(composed of the Commissioner and 4 fraudulent returns
deputy commissioners)
A proceeding in court for the
collection of the tax assessed
May the Commissioner compromise cases may be filed without
of criminal violations? assessment at any time within
Generally, ALL CRIMINAL VIOLATIONS ten (10) years after the
may be compromised, EXCEPT: discovery of the falsity, fraud
a) those cases already filed in court or omission
b) those involving fraud
TAXATION LAW REVIEWER
4) Statutory basis for tax refund under the Tax administrative requirements to be entitled
Code to the tax refund.
Under Sec. 204(C), the Commissioner may
d) Nature of erroneously paid tax/illegally 133
Credit or refund taxes erroneously or illegally assessed collected
received or penalties imposed without authority, Q: When are there erroneously paid, or
refund the value of internal revenue stamps when illegally assessed or collected taxes?
they are returned in good condition by the Taxes are erroneously paid when a
purchaser, and, in his discretion, redeem or change taxpayer pays under a mistake of fact,
unused stamps that have been rendered unfit for use such as, he is not aware of an existing
and refund their value upon proof of destruction. No exemption in his favor at the time that
credit or refund of taxes or penalties shall be payment is made. Taxes are illegally
allowed unless the taxpayer files in writing with the collected when payments are made under
Commissioner a claim for credit or refund within two duress.
(2) years after the payment of the tax or penalty:
Provided, however, That a return filed showing an e) Tax refund vis--vis tax credit
overpayment shall be considered as a written claim Q: What is the difference between a tax credit
for credit or refund. and refund?
REFUND takes place when there is actual
a) Scope of claims for refund reimbursement.
Credit or refund taxes erroneously or TAX CREDIT takes place upon the issuance
illegally received or penalties imposed of a tax certificate or tax credit memo,
without authority; which can be applied against any sum that
Refund the value of internal revenue may be due and collected from the
stamps when they are returned in good taxpayer.
condition by the purchaser; and
In the Commissioners discretion, redeem or f) Essential requisites for claim of refund
change unused stamps that have been The grant of a refund is founded on the
rendered unfit for use and refund their assumption that the tax return is valid, that
value upon proof of destruction. is, the facts stated therein are true and
correct. The deficiency assessment,
b) Necessity of proof for claim or refund although not yet final, created a doubt as
No credit or refund of taxes or penalties to and constitutes a challenge against the
shall be allowed unless the taxpayer files in truth and accuracy of the facts stated in
writing with the Commissioner a claim for said return which, by itself and without
credit or refund within two (2) years after unquestionable evidence, cannot be the
the payment of the tax or penalty. basis for the grant of the refund.
A return filed showing an overpayment shall
be considered as a written claim for credit To grant the refund without determination
or refund. of the proper assessment and the tax due
would inevitably result in multiplicity of
c) Burden of proof for claim of refund proceedings or suits. If the deficiency
Refunds are in the nature of tax exemptions assessment should subsequently be upheld,
and are construed strictly against the the Government will be forced to institute
person claiming the same. anew a proceeding for the recovery of
o Tax refunds, like tax exemptions, erroneously refunded taxes which recourse
are construed strictly against the must be filed within the prescriptive period
taxpayer and liberally in favor of of ten years after discovery of the falsity,
the taxing authority. In any event, fraud or omission in the false or fraudulent
petitioner has not discharged its return involved. This would necessarily
burden of proof in establishing the require and entail additional efforts and
factual basis for its claim for a expenses on the part of the Government,
refund and we find no reason to impose a burden on and a drain of
disturb the ruling of the CTA. It has government funds, and impede or delay the
been a long-standing policy and collection of much-needed revenue for
practice of the Court to respect governmental operations.
the conclusions of quasi-judicial
agencies such as the CTA, a highly Thus, to avoid multiplicity of suits and
specialized body specifically unnecessary difficulties or expenses, it is
created for the purpose of both logically necessary and legally
reviewing tax cases. (United appropriate that the issue of the deficiency
Airlines, Inc. v. CIR, G.R. No. tax assessment against Citytrust be resolved
178788, Sept. 29, 2010) jointly with its claim for tax refund, to
The taxpayer is charged with the heavy determine once and for all in a single
burden of proving that he has complied with proceeding the true and correct amount of
and satisfied all the statutory and tax due or refundable. (Comm. v. CA and
Citytrust, G.R. No. 106611, July21, 1994 as
TAXATION LAW REVIEWER
cited in United Airlines, Inc. v. CIR, G.R. otherwise it shall be forfeited in favor of
No. 178788, Sept. 29, 2010) the government and the amount thereof
134 shall revert to the general fund.
5) Who may claim/apply for tax refund/tax credit
The proper person to claim refund or tax What can be done with a Tax Credit
credit is the person on whom the tax is Certificate?
imposed by the statute. Tax credit certificates (TCCs) can be
applied against all internal revenue taxes,
a) Taxpayer/withholding agents of non- excluding withholding tax. TCCs which
resident foreign corporation remain unutilized after five years from
The withholding agent is the date of issue shall be considered as
directly and independently invalid, unless revalidated.
liable for the correct If not revalidated, the amount covered
amount of tax that should by the TCC shall revert to the general fund.
be withheld and for
deficiency assessments, II. Government Remedies
surcharges and penalties.
Sec. Offense Who is liable Penalty Sec. Offense Who is liable Penalty
payment other of distilling, Imprisonme
136 thereof. penalties rectifying, nt - 1 to 2
255 Failure to File Any person Fine - repacking, years
Return, required to P10,000 or compounding
Supply pay any tax, more; and or
Correct and make a Imprisonme manufacturin
Accurate return, keep nt - 1 to 10 g any article
Information, any record, years; Plus subject to
Pay Tax, or supply other excise tax.
Withhold and correct and penalties 259 Illegal Any person Fine -
Remit Tax accurate Collection of who P20,000 -
and Refund information Foreign knowingly 50,000; and
Excess Taxes Payments undertakes Imprisonme
Withheld on the nt - 1 to 2
Compensation collection of years
Any person Fine - foreign
who P10,000 - payments
attempts to 20,000; and under Sec.
make it Imprisonme 67 without a
appear for nt - 1 to 3 license or
any reason years; Plus without
that he or other complying
another has penalties with the
in fact filed implementin
a return or g rules and
statement, regulations.
or actually 260 Unlawful Any person, Fine -
files a return Possession of manufacture P20,000 -
or statement Cigarette r or importer 100,000;
and Paper in of cigar or and
subsequently Bobbins or cigarettes Imprisonme
withdraws Rolls, Etc. nt - 6 years
the same 1 day to 12
return or years
statement 261 Unlawful Use Any person Fine -
257 Making false Any financial Fine - of Denatured who for the P20,000 -
entries, officer or P50,000 - Alcohol purpose of 100,000;
records, or Independent 100,000; manufacturin and
reports, or CPA engaged and g any Imprisonme
using falsified to examine Imprisonme beverage, nt - 6 years
or fake and audit nt - 2 to 6 uses 1 day to 12
accountable books of years denatured years
forms. accounts of alcohol or
taxpayers alcohol
under specially
Sec.232 (A) denatured to
and any be used for
person under motive
his direction. power or
258 Unlawful Any person Fine - withdrawn
pursuit of who carries P5,000 - under bond
business on any 20,000; and for industrial
business for Imprisonme uses or
which in nt - 6 alcohol
annual months to 2 knowingly
registration years misrepresent
fee is ed to be
imposed denatured to
without be unfit for
paying the oral intake or
tax as who
required by knowingly
law. sells or
A person Fine - offers for
engaged in P30,000 - sale such
the business 50,000; and preparations
TAXATION LAW REVIEWER
Sec. Offense Who is liable Penalty Sec. Offense Who is liable Penalty
containing as Value of
an ingredient goods >
such alcohol. P50,000, 137
not > than
Any person P150,000:
who Fine not <
unlawfully than
recovers or P30,000 not
attempt to > P60,000,
recover by imprisonme
distillation or nt of not < 4
other process years, not >
any 6 years
denatured Value of
alcohol or goods >
who P150,000:
knowingly Fine not <
sells or than
offers for P50,000 not
sale, > P100,000,
conceals or imprisonme
otherwise nt of not <
disposes of 10 years,
alcohol as not > 12
recovered or years
redistilled 264 Failure or Any person Fine - P
262 Shipment or Any person Fine - Refusal to who, being 1,000 -
Removal of who ships, P20,000 - Issue Receipts required 50,000; and
Liquor/Tobac transports or 100,000; or Sales or under Imprisonme
co Products removes and Commercial Section 237 nt - 2 to 4
under False Imprisonme Invoices, to issue years
Name or nt - 6 years Violations receipts or
Brand or as 1 day to 12 Related to sales or
an Imitation years the Printing commercial
of any of Such invoices
Existing or Receipts or
Known Invoices and
Product Name Other
or Brand Violations
263 Unlawful Any person Value of 265 Offenses Fine - P
Possession or who owns or goods not > Relating to 20,000 -
Removal of is found in P1,000: Stamps 50,000; and
Articles possession of Fine not < Imprisonme
Subject to these articles than P1,000 nt 4-8 years
Excise Tax not > 266 Failure to Any person Fine - P
W/o Payment P2,000, Obey who being 5,000 -
of the Tax imprisonme Summons duly 10,000; and
nt of not < summoned to Imprisonme
60 days, not appear to nt - 1 to 2
> 100 days testify, or to years
appear and
Value of produce
goods > books of
P1,000, not accounts,
> than records,
P50,000: memoranda
Fine not < or other
than papers, or to
P10,000 not furnish
> P20,000, information
imprisonme as required
nt of not < 2 under the
years, not > pertinent
4 years provisions of
this Code.
TAXATION LAW REVIEWER
Sec. Offense Who is liable Penalty Sec. Offense Who is liable Penalty
267 Declaration Any person Perjury proper place,
138 under who willfully under the or removes
Penalties of files a Revised goods
Perjury declaration, Penal Code without
return or payment of
statement excise tax
containing 274 Penalty for Maximum of
information Second and the penalty
which is not Subsequent prescribed
true and Offenses for the
correct as to offense
every 275 Violation of Any person Fine: not
material Other who violates more than P
matter Provisions of any provision 1,000 or
268 Misdeclaratio Any Summary the Tax Code of this Code Imprisonme
n or manufacture cancellation or Rules or or any rule nt: not more
Misrepresenta r subject to or Regulations in or regulation than 6
tion of excise tax withdrawal General promulgated months, or
Manufacturer of the by the both
s Subject to permit to Department
Excise Tax engage in of Finance
business as for which no
a specific
manufactur penalty is
er of provided by
articles law
subject to 276 Penalty for Any Fine: not
excise tax Selling, taxpayer, less than
Forfeiture of Any person Forfeiture Transferring, whose twice the
Property Used who Encumbering property has value of the
in Unlicensed conducts an or in any way been placed property but
Business or unlicensed disposing of under not less
Dies Used for business property constructive than P 5,000
Printing False Placed under distraint or
Stamps, Etc. Constructive Imprisonme
Forfeiture of Any person Forfeiture Distraint nt: 2 years 1
Goods subject to day - 4
Illegally excise tax years or
Stored or who fails to both
Removed store the 277 Failure to Any person Fine: P
goods in Surrender having in his 5,000 or
proper place, Property possession or more or
or removes Placed under under his Imprisonme
goods Distraint and control any nt: 6
without Levy property or months 1
payment of rights to day - 2
excise tax property, years, or
274 Penalty for Maximum of upon which a both
Second and the penalty warrant of
Subsequent prescribed constructive
Offenses for the distraint or
offense actual
Forfeiture of Any person Forfeiture distraint and
Property Used who levy has
in Unlicensed conducts an been issued
Business or unlicensed 278 Procuring Any person Fine: not
Dies Used for business Unlawful procures an more than P
Printing False Divulgence of officer or 2,000 or
Stamps, Etc. Trade Secrets employee of Imprisonme
Forfeiture of Any person Forfeiture the BIR to nt: 6
Goods subject to divulge any months - 5
Illegally excise tax confidential years, or
Stored or who fails to information both
Removed store the regarding the
goods in business,
income or
TAXATION LAW REVIEWER
Sec. Offense Who is liable Penalty making by them of such entry, certificate or
inheritance return;
of any h) having knowledge or information of a
taxpayer, violation of any provision of the Code or of 139
knowledge of any fraud committed on the revenues
which was collectible by the BIR, fail to Report such
acquired by knowledge or information to their superior
him in the officer, or to report as otherwise required
discharge of by law; or
his official i) without the authority of law, demand or
duties, and Accept or attempt to collect, directly or
which it is indirectly, as payment or otherwise, any
unlawful for sum of money or other thing of value for
him to the compromise, adjustment or settlement
reveal, and of any charge or complaint for any violation
any person or alleged violation of law. (235)
who
publishes or Informers Reward (Sec. 282, NIRC)
prints in any To whom given: persons instrumental in the
manner discovery of violations of the NIRC and in
whatever, discovery and seizure of smuggled goods.
not provided Conditions to qualify for the reward:
by law, any 1. Person is not an internal revenue official or
income, employee, public official, or employee or
profit, loss or relative within 6th degree of consanguinity
expenditure 2. Voluntarily gives definite and sworn
appearing in information:
any income a) Not yet in the possession of BIR
tax return b) Leading to discovery of frauds
c) Resulting in:
i. the recovery of revenues,
2. Penalties Imposed on Public Officers surcharges and fees and/or
ii. conviction of the guilty party.
d) Not refer to a case already pending
The law imposes a fine of not less than or previously investigated or examined
P50,000 nor more than P100,000 or by the Commissioner or his agents or
imprisonment for not less than 10 years nor the SOF or his agents.
more than fifteen years on every official, agent Amount of reward: 10% of the revenues,
or employee of the BIR or of any agency or surcharges or fees recovered and/or
employee of the Government charged with the fine/penalty imposed, or P1,000,000, whichever
enforcement of the Tax Code, who shall: is LOWER.
(CONED- FRAP) - The same amount shall be given if the
a) Extort or willfully oppress under color of offender offered to compromise and such
law; offer has been accepted and collected by
b) knowingly Demand other or greater sums the Commissioner.
than are authorized by law or receive any - If no revenue, surcharge or fees be actually
fee, compensation or reward, except as by collected, such person is not entitled to a
law prescribed, for the performance of any reward
duty; - For discovery and seizure of SMUGGLED
c) willfully Neglect to give receipts, as by law GOODS: The cash reward is 10% of the FMV
required, for any sums collected in the of the smuggled and confiscated goods, or
performance of duty, or who willfully P1,000,000, whichever is LOWER.
neglect to perform any of the duties The cash rewards shall be subject to income TAX
enjoined by law; at the rate of 10%.
d) Conspire or collude with another or others Rule of construction: Statutes offering rewards
to defraud the revenues or otherwise must be liberally construed in favor of informers
violate the law; and with regard to the purpose for which they
e) willfully make Opportunity for any person are intended, with mere technicality yielding to
to defraud the revenues, or who do or omit the substantive purpose of the law.[Penid v.
to do any act with intent to enable any Virata]
other person to defraud the revenues;
f) negligently or by design Permit the violation
of the law by any other person; III. Statutory Offenses and Penalties
g) make or sign any False certificate or return
in any case where the law requires the
A. CIVIL PENALTIES
TAXATION LAW REVIEWER
For cases of financial incapacity: a the compromise must be approved by the Evaluation
minimum compromise rate equivalent to ten Board (composed of the Commissioner and 4 deputy
percent (10%) of the basic assessed tax; commissioners)
For other cases: a minimum compromise 141
rate equivalent to forty percent (40%) of the May the Commissioner compromise cases of
basic assessed tax criminal violations?
Generally, ALL CRIMINAL VIOLATIONS may be
compromised, EXCEPT:
Note: When the basic tax involved exceeds One c) those cases already filed in court
Million Pesos (P1,000,000), or where the settlement d) those involving fraud
offered is less than the prescribed minimum rates,
B. ABATEMENT
Regional
Send Formal Letter Assessment
Is response w/n Taxpayer
of demand and Final NO to Division issues a
15 days? Is it responds w/in
Assessment Notice either Preliminary
meritorious? 15 days
(FAN) is issued Assessment Notice
(PAN)
Yes to ASSESSMENT
both ENDS
Assessment becomes
NO to
Final, Warrant of Distraint
either
& Levy Issued
Decision Commissioner
YES favorable to YES decides w/n
taxpayer? 180 days?
ASSESSMENT
ENDS NO NO
If MR is denied, appeal to
the CTA within remainder
of the 30 days
Assessment
CTA decides on Appeal made becomes Final,
YES NO
the appeal on time? Warrant of Distraint
& Levy Issued
W/in 5 days after sale, W/in 2 days after Excess of proceeds over the Officer sells the goods to the
distraining officer shall enter the sale, officer entire claim, shall be returned highest bidder for cash or
return of proceedings in the shall report to the to the owner. No charge shall with the Commissioners
records of RCO, RDO and Commissioner. be imposed for the services of approval, through commodity/
RRD (Sec. 213) (Sec. 211) the officer (Sec. 209) stock exchanges. (Sec. 209)
No, bid ok
W/n 1 year from sale, the W/n 5 days after the sale, Excess of proceeds
The Commissioner may, owner may redeem, by paying levying officer shall enter of the sale over claim
after 20 days notice, sell to the RDO the amount of the return of the proceedings and cost of sale shall
property at public auction taxes, penalties, and interest upon the records of the RCO, be turned over to the
or at private sale with thereon from the date of RDO and RRD (Sec. 213) owner (Sec. 213)
approval of the SoF. delinquency to the date of sale,
Proceeds shall be and 15% per annum interest on
deposited with the National purchase price from the date
Treasury (Sec. 216) Owner shall not be
of purchase to the date of Levy and distraint
deprived of the
redemption. (Sec. 214) may be repeated until
possession and shall
the full amount due,
be entitled to the
and all expenses are
fruits until 1 year
collected. (Sec. 217)
expires (Sec. 214)
TAXATION LAW REVIEWER
returns, papers and statements that of filing of returns and payments of taxes by
may be filed by the taxpayers in large taxpayers.
connection with the payment of the
tax. Provided, however, That c. Non-retroactivity of rulings (Sec. 246, NIRC) 145
notwithstanding the other provisions of Any revocation, modification or reversal of any of
this Code prescribing the place of filing the rules and regulations promulgated or any of the
of returns and payment of taxes, the rulings or circulars promulgated by the Commissioner
Commissioner may, by rules and shall not be given retroactive application if the
regulations require that the tax revocation, modification or reversal will be
returns, papers and statements and prejudicial to the taxpayers, except in the following
taxes of large taxpayers be filed and cases:
paid, respectively, through collection a) Where the taxpayer deliberately
officers or through duly authorized misstates or omits material facts from
agent banks: Provided, further, That his return or any document required of
the Commissioner can exercise this him by the Bureau of Internal Revenue;
power within six (6) years from the b) Where the facts subsequently gathered
approval of Republic Act No. 7646 or by the Bureau of Internal Revenue are
the completion of its comprehensive materially different from the facts on
computerization program, whichever which the ruling is based; or
comes earlier: Provided, finally, That c) Where the taxpayer acted in bad faith.
separate venues for the Luzon, Visayas
and Mindanao areas may be designated
for the filing of tax returns and II. Power of the Commissioner to
payment of taxes by said large suspend the business operation of a
taxpayers. taxpayer
For the purpose of this Section, 'large
taxpayer' means a taxpayer who satisfies The Commissioner or his authorized representative is
empowered to suspend the business operations and
any of the following criteria:
temporarily close the business establishment of any
1. Value-Added Tax (VAT) - Business
person for any of the following violations:
establishment with VAT paid or
payable of at least One hundred
thousand pesos (P100,000) for any (a) In the case of a VAT-registered Person.
-
quarter of the preceding taxable
year; (1) Failure to issue receipts or
invoices;
2. Excise tax - Business establishment
with excise tax paid or payable of (2) Failure to file a value-added
tax return as required under
at least One million pesos
(P1,000,000) for the preceding Section 114; or
(3) Understatement of taxable
taxable year;
sales or receipts by thirty percent
3. Corporate Income Tax - Business
(30%) or more of his correct
establishment with annual income
taxable sales or receipts for the
tax paid or payable of at least One
million pesos (P1,000,000) for the taxable quarter.
preceding taxable year; and
4. Withholding tax - Business (b) Failure of any Person to Register as
Required under Section 236. -
establishment with withholding tax
payment or remittance of at least The temporary closure of the establishment
One million pesos (P1,000,000) for shall be for the duration of not less than
the preceding taxable year. five (5) days and shall be lifted only upon
compliance with whatever requirements
Provided, however, That the Secretary of prescribed by the Commissioner in the
Finance, upon recommendation of the closure order. (Sec. 115, NIRC)
Commissioner, may modify or add to the
above criteria for determining a large 6. Local Taxation
taxpayer after considering such factors as
inflation, volume of business, wage and I. Fundamental principles
employment levels, and similar economic II. Nature and source
factors. III. Local taxing authority
IV. Scope of taxing power
The penalties prescribed under Section 248 V. Specific taxing power
shall be imposed on any violation of the VI. Common limitations
rules and regulations issued by the VII. Collection of business tax
Secretary of Finance, upon recommendation
VIII. Taxpayers remedies
of the Commissioner, prescribing the place
TAXATION LAW REVIEWER
The veto doesn't affect items not 1. A public hearing must be conducted prior
objected to. (Sec 55(b), LGC) to the enactment of a tax ordinance.
Vetoed items shall not take effect
unless the sanggunian overrides the 2. Within ten (10) days after the approval of 147
veto. If vetoed, corresponding item the ordinance, certified true copies of all
or items in the appropriations tax ordinances or revenue measures shall be
ordinance of the previous year published in full for three (3) consecutive
shall be deemed reenacted. The days in a newspaper of local circulation. In
veto doesn't affect items not provinces, cities and municipalities where
objected to. (Sec 55(b), LGC) there are no newspapers of local
circulation, it must be posted in at least
b. Procedure for approval and effectivity of tax two (2) conspicuous and publicly accessible
ordinances places. (Sec. 188, LGC)
Capital investment
Not more than In the succeeding
1/20 of 1% calendar year,
regardless of when
business started
operating, tax shall
be based on gross
b. Newly-started business receiptsfor
preceding calendar
year, or any fraction
thereof.
TAXATION LAW REVIEWER
Employers shall
require payment of
professional tax as a
condition for
employment.
6) Amusement Tax. Levied Not more than Gross receipts from Holding of operas, In case of theaters
from proprietors lessees, 30% admission fees concerts, dramas, or cinemas, tax
or operators of theaters, recitals, painting, shall first be
cinemas, concert halls, and art exhibitions, deducted and
circuses, boxing stadia, flower shows, withheld by their
and other places of musical programs, proprietors, lessees
amusement literary and and operators
oratorical
presentations
Proceeds to be
Exception to shared equally by
exemption: Pop, the province and
rock, or similar municipality where
concerts amusement places
are located.
7) Annual Fixed Tax For Every Amount not Manufacturers,
Delivery Truck or Van of exceeding P500 producers,
Manufacturers or wholesalers, dealers
Producers, Wholesalers of, and retailers
TAXATION LAW REVIEWER
b. Taxing powers of cities Rates on levy made by the city may exceed the
maximum rates allowed for the province or
The City may levy taxes, fees, charges which municipality by not more than50%
the province or municipality may impose. Exception: Rates of professional and
Those levied and collected by highly urbanized amusement taxes. (Sec. 151, LGC)
and independent component cities shall accrue Cities have the broadest taxing powers,
to them and distributed in accordance with the embracing both specific and general powers
provisions of LGC. as provinces and municipalities may impose
(Vitug)
Extension cannot exceed 6 months. Within sixty (60) days from the receipt
(Sec. 167, LGC) of the notice of assessment, the
taxpayer may file a written protest
d. Penalties on unpaid taxes, fees or with the local treasurer contesting the 155
charges assessment; otherwise it shall become
Surcharge not exceeding 25% on final and executory. (Sec. 195, LGC)
taxes, fees or charges NOT paid on
time; and c. Claim for refund of tax credit for
Interest not exceeding 2% per erroneously or illegally collected tax, fee
month of the unpaid taxes, fees or or charge
charges INCLUDING surcharges, Requires a written claim for refund or
until the amount is fully paid credit to be filed with local treasurer
In no case shall the total interest before protest is entertained
exceed 36 months. (Sec. 168, LGC) Must be brought within 2 years from
payment of tax or from the date the
e. Authority of treasurer in collection and taxpayer became entitled to refund or
inspection of books credit (Sec. 196, LGC)
All local taxes, fees and charges shall
be collected by the local treasurer or VI. Civil remedies by the LGU for
their duly authorized deputies (Sec.
170, LGC)
collection of revenues
The local treasurer may, by himself or
through his deputies duly authorized in a. Local governments lien for delinquent
writing, examine the books, accounts, taxes, fees or charges
and other pertinent records of any Non-payment of a tax, fee or charge
person subject to local taxes, fees and creates a lien superior to all liens or
charges in order to ascertain, assess encumbrances in favor of any other
and collect the correct amount of the person, enforceable by administrative
tax, fee or charge. or judicial action
o Examination must be done The lien may only be extinguished upon
during business hours, only full payment of the delinquent local
once for every tax period and taxes, fees, and charges including
shall be certified to by the related surcharges and interests. (Sec.
examining official. (Sec. 171, 173, LGC)
LGC)
b. Civil remedies, in general
V. Taxpayers remedies 1) Administrative action
2) Judicial action
a. Periods of assessment and collection of c. Procedure for administrative action
local taxes, fees or charges 1) Distraint of personal property
Assessment: Within 5 years from the Distraint - of goods, chattels or
date they become due effects and other personal
In case of Fraud or Intent to Evade Tax: property of whatever character,
Within 10 years from discovery of fraud including stocks and other
or intent to evade payment. (Sec. 194, securities, debts, credits, bank
LGC) accounts, and interest in and rights
Collection: 5 years from the date of to personal property
assessment by administrative or PROCEDURE: (Sec. 175, LGC)
judicial action. b. Seizure of personal
property
Instances When Running of Prescription Periods c. Accounting of distrained
is Suspended goods
1. When the treasurer is legally prevented d. Publication of time and
from making the assessment or collection place of sale and the
2. When taxpayer requests for reinvestigation articles distrained
and executes a waiver in writing before e. Release of distrained
lapse of the period for assessment or property upon payment
collection. prior to sale
3. When the taxpayer is out of the country or f. Procedure of sale
otherwise cannot be located (Sec. 194 (d), g. Disposition of proceeds
LGC)
2) Levy of real property, procedure
b. Protest of assessment
TAXATION LAW REVIEWER
LT decides on
Is protest made Assessment
LT decides w/in protest w/in 60
Yes w/in prescribed No becomes
60 days? days from filing of
period? final
protest
No
Yes
If Division decides against
Taxpayer appeals to taxpayer file MR w/in 15 with
court of competent the same division.
LT grants jurisdiction (regular
No
protest? courts) w/in 30 days
from receipt of notice or
from lapse of 60 days
If MR is denied, file Petition
Yes for review with CTA en banc
LT Issues notice
canceling Appeal to CTA Division but
partially/wholly Appeal to
If the decision is from an
the assessment Supreme Court
RTC exercising appellate
jurisdiction, appeal should
be made directly no CTA en
banc under Rule 43 of ROC End
End
TAXATION LAW REVIEWER
Flowchart IV: Procedure for Distraint and Levy for Purposes of Satisfying
158 Local Taxes-Local Govt Code
START
Procedure for levying real properties to satisfy local taxes is the same as levy
procedure for satisfying real property taxes (Sec. 258-266) (See Flowchart VII)
Except for the following:
1. Publication is once a week for 3 weeks for local taxes (Sec. 178) and once a
week for 2 weeks for real property taxes (Sec. 260)
2. For local taxes, LGU may purchase levied property if there is no bidder or if
the highest bid is insufficient to cover the taxes and other charges (Sec. 181)
while for real property taxes the LGU may purchase levied property if there is no
bidder (Sec. 263)
TAXATION LAW REVIEWER
The local assessor must furnish the local delinquent tax shall have been fully paid.
treasurer on or before the 31st of December But the total interest on the unpaid tax
162 each year an assessment roll containing a shall not exceed thirty-six (36) months.
list of all persons whose real properties (Sec. 255, LGC)
have been newly assessed or reassessed and
the value of such properties. (Sec. 248, 3) Condonation of real property tax
LGC) By SANGGUNIAN: in case of general failure
of crops or substantial decrease in the
3) Notice of time for collection of tax price of agricultural or agri-based
On or before the 31st of January or on any products or calamity in any LGU (Sec.
date prescribed, the local treasurer shall 276, LGC)
post the notice of the dates when the tax By the PRESIDENT of the Philippines: when
may be paid without interest at a public interest so requires (Sec. 277,
conspicuous and publicly accessible place LGC)
at the city or municipal hall. The notice
shall also be published in a newspaper of e. Remedies of LGUs for collection of real
general circulation in the locality once a
week for two (2) consecutive weeks. (Sec.
property tax
1) Issuance of notice of delinquency for real
249, LGC)
property tax payment
Upon the failure to pay the tax when
c. Periods within which to collect real due, the local treasurer shall issue a
property tax warrant levying the real property
within five (5) years from the date they subject to tax. The warrant shall
become due include a duly authenticated certificate
within ten (10) years from discovery of showing the name of the owner or
fraud, in case there is fraud or intent person having legal interest therein,
to evade description of the property, amount of
the tax due and interest thereon.
Instances for suspension of prescription o Warrant must be mailed or
periods served to owner or person
1. local treasurer is legally prevented to having legal interest in the
collect tax. property
2. the owner or property requests for o Written notice of levy must be
reinvestigation and writes a waiver mailed or served to the
before expiration of period to collect. assessor and the Register of
3. the owner of property is out of the Deeds where the property is
country or cannot be located located
o The Register of Deeds must
d. Special rules on payment annotate the levy on the tax
1) Payment of real property tax in installments declaration and certificate of
Payment of real property tax and the title (Sec. 258, LGC)
additional tax for the Special Education Failure to issue or execute the warrant
Fund, without interest, may be made in of levy within one year from the time
four (4) equal instalments: the tax becomes delinquent or within
o 1st : March 31st thirty days from the date of the
o 2nd : June 30th issuance thereof shall be dismissed
o 3rd : September 30th from service (Sec. 259, LGC)
o 4th : December 31st
This shall not apply to special levies which 2) Local governments lien
shall be governed by ordinance of the The basic real property tax shall
sanggunian concerned. constitute a lien on the property
Payments of real property taxes shall first subject to tax, superior to all liens,
be applied to prior years delinquencies, charges or encumbrances in favour of
interests and penalties, if any, and only any person, irrespective of the owner
after the delinquencies are settled may tax or possessor thereof, enforceable by
payments be credited for the current administrative or judicial action and
period. (Sec. 250, LGC) may only be extinguished upon
payment of the tax and the related
2) Interests on unpaid real property tax interests and expenses. (Sec. 257, LGC)
In case of failure to pay the basic real
property tax or any other tax when due 3) Remedies in general
shall subject the taxpayer to the The LGU may avail of the remedies by
payment of interest at the rate of two administrative action thru levy on real
(2%) percent per month on the unpaid property or by judicial action. (Sec.
amount or a fraction thereof until the 256, LGC)
TAXATION LAW REVIEWER
5) Appeal to the CA
Appeal must be filed within 30 days
from receipt of decision of the CTA
(Rule 43)
TAXATION LAW REVIEWER
Flowchart V: Procedure for Assessment of Land Value for Real Property Tax
Purposes-Local Govt Code
165
For purposes of this flowchart owner means owner or administrator of real property or any person having legal interest thereto
Assessor prepares
Owner declares real Assessor declares
assessment rolls
property once every 3 real property if owner/
START wherein real property
years (sec. 202) w/n administrator fails to
shall be listed, valued
Jan 1 to June 30 do so (sec. 204)
and assessed (sec. 205)
Submit documents
Owner may claim
supporting exemption w/ Is real property
for tax exemption Yes
in 30 days from tax exempt?
Required (sec. 206)
declaration (sec. 206)
Documents
submitted w/in
30 days? Property shall be
Property dropped from
Yes proven as tax Yes
assessment roll
No exempt? (sec. 206)
Property shall be
listed as taxable in
No
the assessment
roll (sec. 206) END
Amount of tax
LT must decide w/
protested shall be
LT grants LT decides w/in in 60 days from
refunded or Yes Yes
protest? 60 days? receipt of protest
applied as tax
(sec. 252)
credit (Sec. 252)
No
For purposes of this flowchart owner means owner or administrator of real property or any
START person having legal interest thereto
LT returns to the
Sanggunian concerned
purchaser/bidder the
may, by ordinance sell
price paid + interest
and dispose of the real
of 2% per month
LT shall deliver to property acquired under
(sec. 261)
purchaser certificate the preceding section at
of sale public auction. (sec. 264)
If property is not
redeemed, the local Levy may be repeated
Proceeds of sale in treasurer shall until the full amount due,
excess of delinquent execute a deed of including all expenses, is
tax, interest & conveyance to the collected. (sec. 265)
expenses of sale purchaser (sec. 262)
remitted to the owner
(sec. 260)
END
TAXATION LAW REVIEWER
(6) months shall be subject to fifty (50)per cent ad arriving within a reasonable time, in the discretion
valorem duty across the board, the total dutiable of the Collector of Customs, before or after the
value of which does not exceed two thousand pesos arrival of their owners, which shall not be later than
(P2,000.00); any excess shall be subject to the February 28, 1979 upon the production of evidence 173
corresponding duty provided in this Code; satisfactory to the Collector of Customs that such
persons are actually coming to settle in the
g. Wearing apparel, articles of personal adornment, Philippines, that change of residence was bona fide
toilet articles, portable tools and instruments, and that the privilege of free entry was never
theatrical costumes and similar effects granted to them before or that such person qualifies
accompanying travelers, or tourists. or arriving under the provisions of Letters of Instructions 105,
within a reasonable time before and after their 163 and 210, and that the articles are brought from
arrival in the Philippines, which are necessary and their former place of abode, shall be exempt from
appropriate for the wear and use of such persons the payment of customs duties and taxes: Provided,
according to the nature of the journey, their That vehicles, vessels, aircrafts, machineries and
comfort and convenience: Provided, That this other similar articles for use in manufacture, shall
exemption shall not apply to articles intended for not be classified hereunder;
other persons or for barter, sale or hire: Provided,
further, That the Collector of Customs may, in his i. Articles used exclusively for public entertainment,
discretion, require either a written commitment or a and for display in public expositions, or for
bond in an amount equal to one and one-half times exhibition or competitionfor prizes, and devices for
the ascertained duties, taxes and other charges projecting pictures and parts and appurtenances
conditioned for the exportation thereof or payment thereof, upon identification, examination, and
of the corresponding duties, taxes and other charges appraisal and the giving of a bond in an amount
within three (3) months from the date of acceptance equal to one and one-half times the ascertained
of the import entry: And Provided finally, That the duties, taxes and other charges thereon, conditioned
Collector of Customs may extend the time for for exportation thereof or payment of the
exportation or payment of duties, taxes and other corresponding duties, taxes and other charges within
charges for a term not exceeding three (3) months six (6) months from the date of acceptance of the
from the expiration of the original period; import entry; Provided, That the Collector of
Customs may extend the time for exportation or
g-1. Personal and household effects and vehicles payment of duties, taxes and other charges for a
belonging to foreign consultants and experts hired term not exceeding six (6) months from the
by, and/or rendering service to, the government, expiration of the original period; and technical and
and their staff or personnel and families, scientific films when imported by technical, cultural
accompanying them or arriving within a reasonable and scientific institutions, and not to be exhibited
time before or after their arrival in the Philippines, for profit: Provided, further, That if any of the said
in quantities and of the kind necessary and suitable films is exhibited for profit, the proceeds therefrom
to the profession, rank or position of the person shall be subject to confiscation, in addition to the
importing them, for their own use and not for penalty provided under Section Thirty-six hundred
barter, sale or hire provided that, the Collector of and ten as amended, of this Code;
Customs may in his discretion require either a
written commitment or a bond in an amount equal j. Articles brought by foreign film producers directly
to one and one-half times the ascertained duties, and exclusively used for making or recording motion
taxes and other charges upon the articles classified picture films on location in the Philippines, upon
under this subsection; conditioned for the their identification, examination and appraisal and
exportation thereof or payment of the corresponding the giving of a bond in an amount equal to one and
duties, taxes and other charges within six (6) months one-half times the ascertained duties, taxes and
after the expiration of their term or contract; And other charges thereon, conditioned for exportation
Provided, finally, That the Collector of Customs may thereof or payment of the corresponding duties,
extend the time for exportation or payment of taxes and other charges within six (6) months from
duties, taxes and other charges for term not the date of acceptance of the import entry, unless
exceeding six (6) months from the expiration of the extended by the Collector of Customs for another six
original period; (6) months; photographic and cinematographic films,
undeveloped, exposed outside the Philippines by
h. Professional instruments and implements, tools of resident Filipino citizens or by producing companies
trade, occupation or employment, wearing apparel, of Philippine registry where the principal actors and
domestic animals, and personal and household artists employed for the production are Filipinos,
effects belonging to persons coming to settle in the upon affidavit by the importer and identification
Philippines or Filipinos and/or their families and that such exposed films are the same films
descendants who are now residents or citizens of previously exported from the Philippines. As used in
other countries, such parties hereinafter referred to this paragraph, the terms "actors" and "artists"
as Overseas Filipinos, in quantities and of the class include the persons operating the photographic
suitable to the profession, rank or position of the cameras or other photographic and sound recording
persons importing them, for their own use and not apparatus by which the film is made;
for barter or sale, accompanying such persons, or
TAXATION LAW REVIEWER
k. Importations for the official use of foreign merchandise) of the deceased person, except
embassies, legations, and other agencies of foreign vehicles, the value of which does not exceed ten
174 governments: Provided, That those foreign countries thousand pesos (P10,000.00), upon identification as
accord like privileges to corresponding agencies of such;
the Philippines;
q. Samples of the kind, in such quantity and of such
Articles imported for the personal or family use of dimension or construction as to render them
the members and attaches of foreign embassies, unsalable or of no appreciable commercial value;
legations, consular officers and other models not adapted for practical use; and samples of
representatives of foreign governments: Provided, medicines, properly marked "sample-sale punishable
That such privilege shall be accorded under special by law," for the purpose of introducing a new article
agreements between the Philippines and the in the Philippine market and imported only once in a
countries which they represent: And Provided, quantity sufficient for such purpose by a person duly
further, That the privilege may be granted only upon registered and identified to be engaged in that
specific instructions of the Secretary of Finance in trade: Provided, That importations under this
each instance which will be issued only upon request subsection shall be previously authorized by the
of the Department of Foreign Affairs; Secretary of Finance: Provided, however, That
importation of sample medicine shall be previously
l. Imported articles donated to, or for the account authorized by the Secretary of Health that such
of, any duly registered relief organization, not samples are new medicines not available in the
operated for profit, for free distribution among the Philippines: Provided, finally, That samples not
needy, upon certification by the Department of previously authorized and/or properly marked in
Social Services and Development or the Department accordance with this section shall be levied the
of Education, Culture and Sports, as the case may corresponding tariff duty.
be;
Commercial samples, except those that are not
m. Containers, holders and other similar receptacles readily and easily identifiable (e.g., precious and
of any material including kraft paper bags for locally semi-precious stones, cut or uncut, and jewelry set
manufactured cement for export, including with precious stones), the value of any single
corrugated boxes for bananas, mangoes, pineapples importation of which does not exceed ten thousand
and other fresh fruits for export, except other pesos (P10,000.00) upon the giving of a bond in an
containers made of paper, paperboard and textile amount equal to twice the ascertained duties, taxes
fabrics, which are of such character as to be readily and other charges thereon, conditioned for the
identifiable and/or reusable for shipment or exportation of said samples within six (6) months
transportation of goods shall be delivered to the from the date of the acceptance of the import entry
importer thereof upon identification, examination or in default thereof, the payment of the
and appraisal and the giving of a bond in an amount corresponding duties, taxes and other charges. If the
equal to one and one-half times the ascertained value of any single consignment of such commercial
duties, taxes and other charges within six (6) months samples exceeds ten thousand pesos
from the date of acceptance of the import entry; (P10,000.00),the importer thereof may select any
portion of same not exceeding in value of ten
n. Supplies which are necessary for the reasonable thousand pesos (P10,000.00) for entry under the
requirements of the vessel or aircraft in hervoyage provision of this subsection, and the excess of the
or flight outside the Philippines, including articles consignment may be entered in bond, or for
transferred from a bonded warehouse in any consumption, as the importer may elect;
collection district to any vessel or aircraft engaged
in foreign trade, for use or consumption of the r. Animals (except race horses), and plants for
passengers or its crew on board such vessel or scientific, experimental, propagation, botanical,
aircrafts as sea or air stores; or articles purchased breeding, zoological and national defense purposes:
abroad for sale on board a vessel or aircraft as Provided, That no live trees, shoots, plants, moss,
saloon stores or air store supplies: Provided, That and bulbs, tubers and seeds for propagation purposes
any surplus or excess of such vessel or aircraft may be imported under this section, except by order
supplies arriving from foreign ports or airports shall of the Government or other duly authorized
be dutiable; institutions: Provided, further, That the free entry
of animals for breeding purposes shall be restricted
o. Articles and salvage from vessels recovered after to animals of recognized breed, duly registered in
a period of two (2) years from the date of filing the the book of record established for that breed,
marine protest or the time when the vessel was certified as such by the Bureau of Animal Industry:
wrecked or abandoned, or parts of a foreign vessel Provided, furthermore, That certificate of such
or her equipment, wrecked, abandoned in Philippine record, and pedigree of such animal duly
waters or elsewhere: Provided, That articles and authenticated by the proper custodian of such book
salvage recovered within the said period oftwo (2) of record, shall be produced and submitted to the
years shall be dutiable; Collector of Customs, together with affidavit of the
owner or importer, that such animal is the animal
p. Coffins or urns containing human remains, bones described in said certificate of record and pedigree:
or ashes, used personal and household effects (not And Provided, finally, That the animals and plants
TAXATION LAW REVIEWER
are certified by the National Economic and the proper operation of the scheduled airline
Development Authority as necessary for economic importing the same;
development;
v. Machineries, equipment, tools for production, 175
s. Economic, technical, vocational, scientific, plants to convert mineral ores into saleable form,
philosophical, historical, and cultural books and/or spare parts, supplies, materials, accessories,
publications: Provided, That those which may have explosives, chemicals, and transportation and
already been imported but pending release by the communication facilities imported by and for the use
Bureau of Customs at the effectivity of this Decree of new mines and old mines which resume
may still enjoy the privilege herein provided upon operations, when certified to as such by the
certification by the Department of Education, Secretary of Agriculture and Natural Resources upon
Culture and Sports that such imported books and/or the recommendation of the Director of Mines, for a
publications are for economic, technical, vocational, period ending five (5) years from the first date of
scientific, philosophical, historical or cultural actual commercial production of saleable mineral
purposes or that the same are educational, scientific products: Provided, That such articles are not locally
or cultural materials covered by the International available in reasonable quantity, quality and price
Agreement on Importation of Educational Scientific and are necessary or incidental in the proper
and Cultural Materials signed by the President of the operation of the mine; and aircrafts imported by
Philippines on August 2, 1952, or other agreements agro-industrial companies to be used by them in
binding upon the Philippines. their agriculture and industrial operations or
activities, spare parts and accessories thereof;
Educational, scientific and cultural materials
covered by international agreements or w. Spare parts of vessels or aircraft of foreign
commitments binding upon the Philippine registry engaged in foreign trade when brought into
Government so certified by the Department of the Philippine exclusively as replacements or for the
Education, Culture and Sports. emergency repair thereof, upon proof satisfactory to
the Collector of Customs that such spare parts shall
Bibles, missals, prayer books, Koran, Ahadith and be utilized to secure the safety, seaworthiness or
other religious books of similar nature and extracts airworthiness of the vessel or aircraft, to enable it
therefrom, hymnal and hymns for religious uses; to continue its voyage or flight;
t. Philippine articles previously exported from the x. Articles of easy identification exported from the
Philippines and returned without having been Philippines for repair and subsequently reimported
advanced in value or improved in condition by any upon proof satisfactory to the Collector of Customs
process of manufacture or other means, and upon that such articles are not capable of being repaired
which no drawback or bounty has been allowed, locally: Provided, That the cost of the repairs made
including instruments and implements, tools of to any such article shall pay a rate of duty of thirty
trade, machinery and equipment, used abroad by per cent ad valorem;
Filipino citizens in the pursuit of their business,
occupation or profession; and foreign articles y. Trailer chassis when imported by shipping
previously imported when returned after having companies for their exclusive use inhandling
been exported and loaned for use temporarily containerized cargo, upon posting a bond in an
abroad solely for exhibition, testing and amount equal to one and one-half times the
experimentation, for scientific or educational ascertained duties, taxes and other charges due
purposes; and foreign containers previously imported thereon to cover a period of one year from the date
which have been used in packing exported Philippine of acceptance of the entry, which period for
articles and returned empty if imported by or for the meritorious reasons may be extended by the
account of the person or institution who exported Commissioner of Customs from year to year, subject
them from the Philippines and not for sale, barter or to the following conditions:
hire subject to identification: Provided, That any
Philippine article falling under this subsection upon 1. That they shall be properly identified and
which drawback or bounty has been allowed shall, registered with the Land Transportation Commission;
upon re-importation thereof, be subject to a duty 2. That they shall be subject to customs supervision
under this subsection equal to the amount of such fee to be fixed by the Collector of Customs and
drawback or bounty. subject to the approval of the Commissioner of
Customs;
u. Aircraft, equipment and machinery, spare parts 3. That they shall be deposited in the Customs zone
commissary and catering supplies, aviation gas, fuel when not in use; and
and oil, whether crude or refined, and such other 4. That upon the expiration of the period prescribed
articles or supplies imported by and for the use of above, duties and taxes shall be paid, unless
scheduled airlines operating under Congressional otherwise re-exported
franchise: Provided, That such articles or supplies
are not locally available in reasonable quantity, VIII. Classification of duties
quality and price and are necessary or incidental for
TAXATION LAW REVIEWER
Yes
Yes
No Customs Commissioners
Commissioners
Commissioner decision made
decision in favor of
decides within 30 days Yes
taxpayer/adverse
from receipt of
to govt?
record?
no
No
No Yes
Decision becomes
final and executory
(sec. 2313)
No
Appeal to the CTA Division END
within 30 days from receipt of
No
decision of Commissioner/
SOF (Sec.2401/RA9282)
Appeal to CTA en
MR within 15 days Appeal to the
banc 15 days from
from receipt of Supreme Court
receipt of decision
decision w/in 15 days
denying MR
END
TAXATION LAW REVIEWER
182 Flowchart IX: Remedies from Seizure and Forfeiture Cases-Tariffs and
Customs Code
START
Collectors Amount
decision favorable Automatic review* by Customs
Yes involved less Yes
to taxpayer/ Commisioner (Sec. 2313)
than 5M?
adverse to govt?
Is
Does
No Commissioners
commissioner
Yes decision favorable
decide w/in 30
Taxpayer appeals to taxpayer/
days?
to Customs adverse to govt?
Commissioner 15
days from receipt No
of notice
Inaction construed as affirmation
of Collectors decision
Does
Commissioner
Yes No, amount is at least
decide w/n 30
Is 5M
days?
Commissioners Yes
Automatic Review* by
decision
the Secretary of
favorable to Yes
Finance (SOF) (Sec.
taxpayer/
2313, CMO 3-2002)
adverse to
govt?
Is SOFs
decision Does SOF
No favorable to Yes decide within
No No taxpayer/adverse 30 days?
to govt?
No
Yes
Inaction construed as
affirmation of
Decision becomes
commissioners decision No
END final &
(or of collectors decision Appeal
unappealable
in case of inaction by to CTA
commissioner)
Appeal to the
Inaction construed
Court of Tax
as affirmation of
Appeals within 30
Collectors
days from notice
decision
of decision
Appeal to CTA en
MR within 15 days
banc 15 days from Appeal to the
from receipt of END
receipt of decision Supreme Court
decision
denying MR
*Automatic review is intended to protect the interest of the Government. W/o auto review, the Commissioner and SoF would not know
about the decision laid down by the Collector favoring the taxpayer. Automatic review is necessary because nobody is expected to appeal
the decision of the Collector which is favorable to the taxpayer & adverse to the Government. (Yaokasin v. Commissioner 180 SCTA 591
Section 2315 of the Tariff and Customs
9. Judicial Remedies Code;
claimed is one million pesos or separately from the criminal action will be
more; and recognized.
2. Appellate jurisdiction over appeals
from the judgments, resolutions or b. Exclusive appellate jurisdiction in 185
orders of the Regional Trial Courts criminal cases
in their original jurisdiction in a. Over appeals from the judgments,
criminal offenses arising from resolutions or orders of the Regional Trial
violations of the National Internal Courts in tax cases originally decided by
Revenue Code or Tariff and them, in their respected territorial
Customs Code and other laws jurisdiction.
administered by the Bureau of
Internal Revenue or Bureau of b. Over petitions for review of the
Customs, where the principal judgments, resolutions or orders of the
amount of taxes and fees, Regional Trial Courts in the exercise of their
exclusive of charges and penalties, appellate jurisdiction over tax cases
claimed is less than one million originally decided by the Metropolitan Trial
pesos or where there is no Courts, Municipal Trial Courts and Municipal
specified amount claimed; Circuit Trial Courts in their respective
(c) Exclusive jurisdiction over tax jurisdiction.
collections cases, to wit:
1. Original jurisdiction in tax
collection cases involving final and
II. Judicial Procedures
executory assessments for taxes,
fees, charges and penalties, where 1. Judicial action for collection of taxes
the principal amount of taxes and
fees, exclusive of charges and a. Internal revenue taxes
penalties, claimed is one million The remedies for the collection of internal
pesos or more; and revenue taxes, fees or charges, and any
2. Appellate jurisdiction over appeals increment thereto resulting from
from the judgments, resolutions or delinquency can be through the institution
orders of the Regional Trial Courts of a civil or criminal action.
in tax collection cases originally
decided by them within their The judgment in the criminal case shall not
respective territorial jurisdiction. only impose the penalty but shall also order
payment of the taxes subject of the
2. Criminal cases (Sec. 7, RA 1125 as criminal case as finally decided by the
amended) Commissioner.
The Bureau of Internal Revenue shall
advance the amounts needed to defray
a. Exclusive original jurisdiction
Exclusive original jurisdiction over all costs of collection by means of civil or
criminal action, including the preservation
criminal offenses arising from violations of
the National Internal Revenue Code or or transportation of personal property
distrained and the advertisement and sale
Tariff and Customs Code and other laws
administered by the Bureau of Internal thereof, as well as of real property and
Revenue or the Bureau of Customs: improvements thereon. (Sec. 205, NIRC)
Provided, however, That offenses or NOTE: Please refer to Taxpayers Remedies
(B. Collection))
felonies mentioned in this paragraph where
the principal amount o taxes and fees,
The Court of Tax Appeals has:
exclusive of charges and penalties, claimed
is less than One million pesos EXCLUSIVE ORIGINAL JURISDICTION in tax
(P1,000,000.00) or where there is no collection cases involving final and
specified amount claimed shall be tried by 185xecutor assessments for taxes, fees,
the regular Courts and the jurisdiction of charges and penalties.
the CTA shall be appellate. Any provision of Exception: Collection cases where
law or the Rules of Court to the contrary the principal amount of taxes and
notwithstanding, the criminal action and fees, exclusive of charges and
the corresponding civil action for the penalties, claimed is less than One
million pesos (P1,000,000.00)
recovery of civil liability for taxes and
penalties shall at all times be shall be tried by the proper
Municipal Trial Court,
simultaneously instituted with, and jointly
determined in the same proceeding by the Metropolitan Trial Court and
Regional Trial Court.
CTA, the filing of the criminal action being
deemed to necessarily carry with it the
filing of the civil action, and no right to EXCLUSIVE APPELLATE JURISDICTION in
tax collection cases:
reserve the filling of such civil action
b. Over appeals from the judgments,
resolutions or orders of the
TAXATION LAW REVIEWER