Donors Tax

4/12/10 9:01 AM

If an heir renounces his share

In favour of the estate no donors tax, because the renounced share reverts back to the estate

If in favour of a specific heir subject to donors tax

If a Surviving Spouse renounces her share in the conjugal properties

Since the spouse is not renouncing her share of the inheritance, it will be subject to donors tax
(since the share of the surviving spouse in the conjugal properties is not subject to estate tax)

Donor

B
Donee

If Donor reserved the power to revoke

Power to revoke, amendment will not subject it to donors tax

Upon relinquishment of the power to revoke (reckoning point) will it be subject to donors tax,
because thats when the donation becomes absolute.

If A donated to B, and then the following day, B accepted and then A died.

Look at the Requisites.

Requisites of a Valid Donation

1.

Capacity of Donor

2.

Donative intent

3.

Delivery

4.

Acceptance

Transfers constituted as donation

1.

Sale/exchange/transfer of property with insufficient consideration

If its a fictitious sale, entire amount will be subject to donors tax

If its for insufficient consideration, taxable amount will be the difference between the fair market
value and the insufficient consideration.

Example: In year 1, the FMV was P10million, subject to a Contract to Sell for P1 million. The deed of
absolute sale was finalised in year 3, the FMV was worth P12million. What will be the tax base?
o

P9 million, since the Revenue Regulation says the point of reckoning is the Contract to Sell
[But how can the BIR say this when the sale has not been absolute?]

When will the sale be subject to Final Capital Gains Tax (6%)? Only in sale of real property
classified as capital asset located in the Philippines [Sec. 24(D)]. Tax base will be Gross Selling
Price or Fair Market Value/Zonal Value whichever is higher.

If real property is located outside the Philippines, aliens will not be charged with tax, if
citizens, apply the schedular tax rates (5%-32%).

If domestic corporation, only land or building could be subject to FCGT [Sec. 27(D)(5)].
Location is not material.

For unlisted shares of stock, imposes Capital Gains Tax based on Selling Price or Book Value less
the Acquisition Cost. However now, the BIR charges donors tax for the difference between the
selling price and the book value since its treated as a gift.

2.

Condonation or Remission of Debt

a. If in consideration of a service income tax of debtor
b. If gratuitous donors tax
c.

If creditor is a corporation dividend (income tax) [RR 2]

o

Tax Rate: 10% for individuals [if it were a donation, you use the 30% rate, because its a
donation to a stranger]

Argument of BIR: But dividends come from unrestricted retained earnings, and should be
given to all the shareholders! Its a donation, subject to donors tax of 30%!

Composition of Gross Gift

Resident Citizens, Non-Resident Citizens and

Non-Resident Aliens

Resident Aliens
Properties within or without the Philippines

Properties within the Philippines; Apply the Rule on

Reciprocity

However, corporations could also donate since they are juridical persons.
Domestic Corporation

Resident Foreign Corporation or Non-Resident

Foreign Corporation

Properties within or without the Philippines (as

Properties within the Philippines, if its outside, we

reflected in their audited financial sheets)

have no jurisdiction (Tax Code is not clear since it

only says something about individuals, so we just
use common sense.

Exemptions of Gifts from Donation Tax

1.

2.

Dowries (exclusive to Residents)

made prior to the celebration of the marriage or one year thereafter

from parents to children

P10,000 limit

Gifts to the National Government or agencies/political subdivision

Also applies to Non-Resident Aliens to encourage donations to the government

3.

Gifts to accredited NGOs

Condition: not more than 30% of the gift will be used for administrative purposes

Who accredits these NGOs? [Important for regulation because its exempt from income tax, and
donor gets an exemption also] Previously, BIR accredits, but was abused and the credibility of
foundations were undermined. Philippine Council for NGO Certification (private entity).

Also applies to Non-Resident Aliens

Computation of Donors Tax

Tax Rates
1.

Schedular (2%-15%)

2.

30% if donee is a stranger

Donee is NOT a stranger if its a brother, sister, spouse, ancestor, lineal descendant; or a relative by
th

consanguinity until the 4 Civil Degree

All the gifts within the year is cumulated

Returns and Payments

Time of Filing 30 days after date of gift is made/completed

Estate Tax
I. BASIC PRINCIPLES OF ESTATE TAX

Discussed in the context of estate planning. Tax adviser must discuss various modes of transferring
property from the property-owner to the heirs.

Modes of Transferring Property (1-4 consists of tax-planning):

(1)

Sale or Assignment - Always for a consideration.

The transaction will be subject to income tax. The type of property will determine the tax
imposed
o

Examples:

Real property capital asset located in the Philippines, 6% capital gains tax on the
Gross Selling Price/Zonal Value whichever is higher;

If ordinary asset, 5%-32% of net income;

Shares of Stock: unlisted or listed and not traded, net capital gain 5%/10% rule;
listed of 1% on gross selling price

Property-for-shares Exchange

(2)

Capital Contribution

(3)

Tax-Free Exchange/Merger/Consolidation
o

Tax-Free Exchange: Property/Cash for controlling share of the corporation. 5 people, 51%
control.

(4)

Donation inter vivos Subjected to donors tax. If its a donation mortis causa, its
subject to estate tax.

(5)

Testamentary disposition (donation mortis causa)

Intestate succession
Transfer inter vivos (in the nature of testamentary dispositions)

Without tax/estate planning, definitely the BIR will impose an estate tax.

II. DETERMINATION OF THE GROSS ESTATE

Type of Taxpayer-Decedent

Properties Taxed with Estate Tax

Resident Citizens

All properties, within and without the Philippines.

Non-resident Citizens

Real properties, tangible personal properties, and

Resident Aliens

intangible properties

Non-Resident Aliens

Properties within the Philippines. Only for real

properties, tangible personal properties. Intangible
properties are included, EXCEPT when reciprocity
rule applies

Situs
* Situs is only important for Non-Resident Aliens
Intangible personal properties: credits, bills, receivables, bank deposits, bonds, promissory notes, judgements
and corporate stocks.
General Rule: Situs follows the domicile of the owner
Exception(s):
(1) When it is inconsistent with express provisions of statute

Examples:
o

For franchise, where the franchise is to be exercised;

For accounts/trade receivables, if the obligation is from a business established in the

Philippines, then the situs is in the Philippines;

For bank deposits, its actually a tangible (in financial accounting); since de Leon said its an
intangible, it follows the nationality of the bank. Even if its cash on hand but physically
located in the Philippines and even if it belongs to the non-resident alien, then it should be
included in the gross estate of that non-resident alien. (Therefore, the appropriate advice is
to move to cash to a bank in his domicile);

For patents and copyrights, situs is where it is used (not necessarily where it is registered
because individuals register their patent/copyrights in several jurisdictions)

(2) Considerations of Equity and Justice

For Situs and Valuation, look at the following documents:

Real Property: Transfer certificates or Original certificates of title; Photocopies of the tax declarations

Shares of Stocks: Certificate of stocks and audited financial statements to determine valuation

Bank Deposits: Bank books, certificates of time deposits

Note that this important since the properties that form part of the gross estate must be OWNED by the
decedent at the time of death.

Exception: Transfers in contemplation of death, Revocable Transfers/Transfers with Retained Rights, Transfer
for insufficient consideration

1. Transfers in Contemplation of Death

Normally a donation (without any consideration), so donors tax is paid. However, if it was in
contemplation of death and the tax declaration was misappreciated, there will be a refund of the
donors tax.

It could be a sale for insufficient consideration in contemplation of death. Property should be

included in gross estate. If its a sale for insufficient consideration NOT in contemplation of death, it
will be subject to donors tax.

Fictitious sale is also included in the gross estate of the decedent, provided also that it is in
contemplation of death of the vendor.

2. Revocable Transfers (Transfers with retained Rights)

There is a transfer from transferor to transferee

Transferor retains the power to alter, amend, revoke or terminate the transfer or the terms of transfer

Since the transfer is not absolute and the transferor could revoke at any time, the property could
reverberate to his estate. So if he keeps the power to revoke, then its as if the property is part of his
estate, even if such power was not exercised.

3. Transfers Under a General Power of Appointment

Power of appointment refers to the right to appoint who will be the beneficiaries of the decedent.
o

In General Power of Appointment, appointee can appoint himself, but not in a Special Power
of Appointment, where the appointment is for a restricted or designated class of persons
OTHER THAN the appointee.

It is a source of wealth for the appointee-decedent in a General Power of Appointment.

In GPA: There is a (1) prior donor/testator who gives property to a trustee/appointee and (2) assigns
the property through a will or deed (in the nature of a testamentary disposition), and that there will be
(3) actual passing of property from the appointee to the assignee.
o

Important to look at the nature of the transfer, is it contemplation of death, revocable transfer
or transfer for insufficient consideration?

Usually, retention of power until death.

The General Power of Appointment MUST BE EXERCISED for it to form part of the
appointees estate. If power is not exercised, then there will be no passing of property, but
there is a gap in the law. We dont know what will happen to the property if the GPA is not
exercised.

The prior donor/testator is subject to estate tax, and the property also forms part of the estate of the
trustee, which is subject to estate tax.

4. Transfers for Insufficient Consideration

Selling Price: P1M
FMV at the time of sale: P10M
FMV at the time of death: P7M
*P6M will be included in the gross estate.

Look at the FMV at the time of death.

Example: Property owner is already dying. FMV is P10M, sold it to P9.5M to pay for his medical expenses. It is
not a sale for insufficient consideration, it is a bona fide sale. The selling price might be less than P10M, but its
not insufficient. The deficiency could be attributed to a discount or other factors in the market. Therefore, it does
not have to be subject to an estate or donors tax.

Estate Tax

Donors Tax

Transfer for Insufficient Consideration in

Transfer for Insufficient Consideration

Contemplation of Death
Revocable Transfer / Transfer with Retained Rights
Property Passing Under GPA
EXAMPLE:
Property has a FMV of P10,000,000 but the owner sold it for P1,000,000, theres intent to donate P9,000,000 to
the transferee. So the seller must pay the donors tax on the P9,000,000. But it is also possible that the
motivation of the seller is to avoid estate tax. Or it could be a transfer that is revocable or retention of certain
rights. Therefore, it will be considered as part of the gross estate and it will be subject to estate tax.

5. Proceeds in Life Insurance

Two instances when proceeds will be included:
(1) Decedent must be the policy-owner + insured
o

Beneficiary must be the decedents estate / administrator / executor (designation may be

revocable or irrevocable)

(2) Decedent must be the policy-owner + insured

o

Beneficiary can be other than the estate, provided the designation is revocable.

If insurance policy does not specify, the presumption is the designation of the beneficiary is
revocable.

If the person who took the policy was not the decedent (i.e., an airline company for a flight), then the
proceeds will not form part of the gross estate.

If the designation of the beneficiary was not the estate and was irrevocable, it also do not form part
of the gross estate.

EXEMPT TRANSACTIONS (87)

1. Merger of Usufruct in the Owner of Naked Title subject only to one round of taxation.
Examples: A gave naked title to B and beneficial title to C, B transfers naked ownership to C.
A transfers property to B and he could retain it for 10 years, afterwards, transfer it to C.

GROSS ESTATE
INCLUDED

EXCLUDED

(1)

Exclusive Property of the Decedent

(3)

Exclusive Property of the Surviving Spouse

(2)

Shares in the conjugal properties

(4)

Share of the Surviving Spouse in the

conjugal properties

Properties Acquired

Conjugal Partnership

Absolute Community

Prior to marriage
-

by gratuitous title

by industry

During marriage
-

by gratuitous title

by industry

*Check also the type of tax-payer to determine whether properties will be part of the gross estate.

Valuation of the Gross Estate

1. Real Property

Fair Market Value (different from assessed value)

Follow Schedule of Zonal Values (determined by the Commissioner of Internal Revenue) or the
Schedule of Values (FMV as determined by the city or provincial assessor based on the tax
declarations), whichever is HIGHER.

2. Shares of stock

Unlisted: look into the audited financial statements of the corporation that issued the shares. Its not
only based on par value (value stated in the certificate of stock), its based on book value (includes

the share of the shares in the retained earnings of the corporation). In computation of book value,
you exclude revaluation surplus (the gains in the assets of the corporation not yet realised) as well
as impairment losses (also an unrealised loss).

Listed: arithmetic mean based on the quotations in the stock exchange (PSE publishes the values
listed in the stock exchange)

III. DETERMINATION OF NET ESTATE/ALLOWABLE DEDUCTIONS FROM GROSS ESTATE

1. Ordinary Deductions
Expenses: funeral expense, judicial expense
o

Funeral expenses: Actual / 5% of the Gross Estate / Ceiling P200,000. Only those incurred from
death up to the time of interment.

Judicial expenses: fees of the executor or administrator, attorneys fees (no limit based on law).
Relevant Period: within 6 month period from death until the deadline of filing of estate tax
declaration and payment

Losses: losses, casualty losses

o

Casualty Losses: not compensated for by insurance. Relevant Period: 6 months also from death
to deadline of filing the estate tax return.

Indebtedness: claims against the estate, claims against insolvent persons, unpaid mortgages
o

Claims against the estate: Estate/decedent is the debtor, claimant is the creditor.

Claims against insolvent person: Creditor is the estate, debtor is insolvent. No need to file
petition for insolvency, follow the same rules in Income Tax for bad debts. Presupposes that the
claim is included in the gross estate, and then you deduct.

Unpaid mortgages: Estate is the debtor, and the mortgagee is the creditor. If at the time of death
there are unpaid mortgages, this could be deducted from the gross estate provided the value of
the property without deductions will be included in the gross estate.

Taxes: unpaid taxes

o

Unpaid Taxes: must be unpaid prior to the death of the decedent

2. Special Deductions
a. Family Home

Must be situated in the Philippines in order that the decedent can claim the deduction

Only available to resident citizens and resident aliens. Not available to non-residents

Stockholders Equity is comprised of (1) paid-in capital and (2) retained earnings. Stockholders equity divided by the

number of shares issued and outstanding is equal to the book value of the share. As opposed to par value, which was
arbitrarily assigned.
2

This rule also applies in Capital Gains Tax.

9

Ceiling: P1 million; You can only claim one (1) family home.

Examples:
FMV

Allowable Deduction

P 2M

P 1M

P 0.5M

P 0.5M

P 2M

P 1M

P 1.5M

P 0.75M

Exclusive Property (FMV or

P1M, whichever is lower)
Conjugal Property
(FMV/2 or P1M, whichever
is lower

Not deducted from conjugal properties, even if the family home is conjugal property

b. Standard Deduction

c.

P 1,000,000 without need for substantiation

Not deducted from conjugal properties

Transfers for public use

Donations to the Philippine government, LGUs or any political/government agency

d. Vanishing Deductions or Property Previously Taxed

Steps in Computing Vanishing Deductions:

(1) Determine the initial value. Compare the FMV of the property under the estate of the
st

1 decedent and the present estate. Take the lower value.

(2) Deduct the mortgages paid. If the property is subject to a mortgage and the 2

nd

decedent paid for those mortgages, such payment is deducted from the initial value. This will
be the initial basis.
(3) Deduct the ratio of expenses.
Initial Basis [ELIT x (Initial Basis/Gross Estate)] = Final Basis
(4) Apply the rates. Final Basis x Rate
100%, 80%, 60%, 40%, 20% (from 1-5 years)

e. Medical Expenses

Even if the decedent has been suffering illness for more than a year, he can only claim
medical expenses incurred within one year prior to his death.

Ceiling: P500,000

Not deducted from the conjugal properties, even if the fund is deducted from conjugal funds
(benefit given to taxpayers)

f.

Retirement Benefits

10

g. Share of the Surviving Spouse

Expenses will first be deducted from the conjugal properties. This does not only pertain to
ordinary expenses, refer to the Family Code. Not all ordinary expenses are chargeable
against the conjugal partnership (i.e., claim against the estate is an exclusive debt, not
chargeable under the conjugal partnership). Always examine the nature of the expenses, if
its against the conjugal partnership or against the exclusive property of the decedent.

Total Conjugal Properties

Less: Special Deductions
Transfers for Public Use
Net Conjugal Properties

of Net Conjugal Properties is the share of the surviving Spouse

RC, NRC, RA

NRA

ELIT x (Phil. Gross Estate/Gross

1. ELIT/Ordinary Expenses

Estate)
2. VD/PPT

3. Transfers for Public Purpose

4. Share of Surviving Spouse

5. Family Home

6. Standard Deduction

7. Medical Expenses

VI. FILING OF NOTICE OF DEATH/FILING OF RETURNS/PAYMENT OF ESTATE TAX

A. Requirement of Filing for Notice of Death

Very important, file with the RDO of domicile of decedent

60 Days

B. Filing of Return

Within 6 months
o

Penalty for late filing is more than 25%

Where? National Office Revenue Regions Revenue District Offices, which has jurisdiction
over the residence of the decedent
o

Penalty for wrong venue is 25%

11

Executor/Administrator or Heirs are the ones who should file. Executor/Administrator are primarily
liable, and the heirs are subsidiarily liable.

Important Documents:
o

Certificates of Title (OCT/TCT) determine ownership

Tax Declarations value of gross estate

Death Certificate to determine the date of death, important for filing purposes

Residence state the desired venue for filing of the estate tax returns (especially if
the client has two homes, one in the province, and one in Manila) since some
taxpayers prefer certain RDOs especially since some examiners are more friendly in
certain areas.

Will or Notarized Deed of Extrajudicial Settlement

Petition for probate of the will must be filed in the RTC which has jurisdiction over
the residence of the decedent.

If there is no will, there could be a deed of extrajudicial settlement (prepared by

lawyers)

Who are the heirs?

What are the properties that comprise the estate?

C. Payment

Upon Filing of the Return

After all these steps

BIR will issue Certificate Authorising Registration (tax clearance)

After this, the Register of Deeds could cancel the old titles and issue new ones for the new owners.
(But settle the transfer tax with the LGU and a certificate of non-delinquency from the treasurers
office of the LGU where the property is located, which requires payment of real property taxes that
havent been paid)

Get new tax declarations from the Assessors Office

Going back to the context of Estate Planning, here are practical issues in tax planning

In Estate Tax, maximum tax rate is 20% in excess of P10 million, Donors Tax maximum rate is
15%. Sales tax of capital assets is only subject to 6% capital gains tax.
o

So sale is more beneficial because eases the tax burden of the taxpayer

But if the sale is fictitious, the entire amount is subject to estate or donors tax. [Challenge
for BIR: identifying which sales are fictitious, for insufficient consideration, or genuine]

Another Problem is reporting what is included in the gross estate. Cash does not require a tax
clearance.

12

What if cash is deposited in the bank? The dead cannot withdraw! Unless theres some
connivance between the bank and the heirs. [How will the BIR detect this?]

If its a joint account, there must be a clearance for the surviving depositor to
withdraw.

Avoid tax by putting the cash accounts in a corporation. Tax-free exchanges to

corporation could also be utilised, so that the shares of stocks will be subject to
estate tax, it freezes the value of the real property since shares are assessed on
book value (so it doesnt take into account the appreciation of real property).
Property owner minimises his exposure to tax. However, this is not usually done in
contemplation of death.

What about jewellery? Not subject to tax clearance also. So are other personal properties.

Usually what is reported: real property, shares of stocks, motor vehicles.

Another problem in Tax Administration is determining the situs of the properties for non-resident
citizens and non-resident aliens. Its very difficult to determine properties outside the Philippines. Its
useless to put something in the law if you cannot enforce it. Theres always a problem of
enforcement.

13

Business Tax

26/3/11 3:30 PM

Value Added Tax is a tax on the

Sale of goods or properties

o

Rate: 12%; Tax Base: Gross Selling Price

Includes barters, exchanges, assignment, could be capital contribution (assignment but the
assignee is a corporation)

Lease of goods (e.g. computers) or properties (e.g. lease of real properties, rent is subject to VAT)
o

Rate: 12%; Tax Base: Gross Receipts

Importation of goods
o

Rate: 12%; Tax Base: Amount used by the Bureau of Customs in computing customs duties.
Landed cost + custom duties + other duties = Amount subject to VAT

Export of goods
o

Rate: 0%

Sale of services
o

Rate: 12%; Tax Base: Gross Receipts

Example: Taxpayer 1, sells to Taxpayer 2 (both are Resident Citizens) with a selling price of P100, the VAT is
P12. Hence, the invoice price is P112.

Suppose Taxpayer 1 and Taxpayer 2 went to Hong Kong to consummate the sale, the sale is NOT
subject to VAT. All sales outside the Philippines are not subject to VAT because only sales within
the Philippines are subject to VAT.

In the Philippines, there are Special Economic Zones (PEZA). Say Taxpayer 3 sells goods to
Taxpayer 4. The sale is subject to VAT, but with a rate of 0% since it is in the nature of an export.
The Special Economic Zone geographically is still part of the Philippine territory. However, it is
treated as an export sale in special economic zone, because it is treated as outside the customs
territory of the Philippines. Hence, when locators import to the Special Economic Zones, they are not
subject to customs duties and taxes because by fiction of law, it is located outside the customs
territory of the Philippines. PEZA locators are only liable for income tax under a preferential
rate of 5% of the gross income in lieu of other taxes, including VAT. (CIR v Toshiba
Information Equipment)

So if goods come from the Special Economic Zone into the Customs Territory, it is considered an
importation and therefore, subject to customs duties + VAT (12%).

* If you want to perform services that can be performed outside the Philippines and you do not want to be
subjected to VAT, the documentation must be clear that the services can be rendered outside the Philippines so
that it wont be subject to VAT.

Marketing, accounting can be rendered off-shore

VAT is a sellers liability

However, the seller could shift the tax burden to the buyer
o

For example, the good to be sold is P100, the VAT is P12, the buyer pays P112. The seller
just shifts the tax burden, not the liability. The seller is still the one who should pay it to the
BIR (monthly VAT declarations and quarterly VAT returns).

Persons Liable

Any person could be a natural (RC, NRC, RA, NRA) or juridical person (DC, RFC, NRFC, JV,
GPP)
o

Joint Ventures and General Professional Partnerships may be considered flow-through

entities and exempt from income tax but are subject to VAT. (Hence, the sale of legal
services is subject to VAT at 12%)

NGOs, Educational Institutions, GOCCs are also subject to VAT

In the course of trade or business

o

A car dealer who sells cars is subject to VAT

However, a lawyer who sold his car is not subject to VAT because the lawyer is not engaged
in the buy and sell of cars

A real estate dealer who sells subdivision lots is subject to VAT since hes doing it in the
course of business

A sale of capital goods is not subject to VAT. Normally, if its a sale of ordinary assets
(primarily held for sale to customers), its subject to VAT.

A sale of a non-real estate developer for a building used in business, it is now subject to
VAT because it is an incidental transaction, which is in the conduct of the regular business
of the taxpayer. Hence, properties even if not held for sale or lease to customers is now
subject to VAT. (RR 04-07, Sec. 14: However, even if the real property is not primarily held
for sale to customers or held for lease in the ordinary course of trade or business but the
same is used in the trade or business of the seller, the sale thereof shall be subject to VAT
being a transaction incidental to the taxpayers main business.)

When property is subject to depreciation, it is also an asset used in the business,

hence, subject to VAT

TP 1 ------sells------ TP 2 ------sells------ TP 3
SP 100
+ VAT

150

12

18

Invoice 112

168

Price

15

Output Tax = Gross Selling Price x 12%

Input Tax
What is TP1s tax liability? Output Tax Input Tax = VAT Payable
Output Tax

12

18

Less: Input Tax 0

Tax Liability

12 (claimed by TP 2 as income tax credit)

P12

P6

Suppose TP 2 was computing his Gross Income:

SP

150

Cost of Goods Sold

100

Gross Income

50 THIS IS THE VALUE-ADDED!

(12% of 50 is 6)

But this assumes that TP 2 was able to sell all of the units (see back of page 7 of the syllabus of
what happens if TP 2 did not sell everything in one month INPUT TAX CREDIT)

JAN

FEB

MAR

Selling Price

50

50

50

VAT

56

Output Tax

Input Tax

12

VAT Payable

(6)

In most transactions, the taxpayer keeps on purchasing goods, raw materials, services, supplies, so
it keeps on accumulating input tax credits.
o

Sources of input tax credits: goods for sale

As long as the VAT taxpayer has more input tax credit than his output, then he would not
have to pay any VAT to the government

In effect, in the system there is still VAT collected because the input tax is paid by the
sellers/suppliers

For the purchase of assets with a life of 5 years or more, Input Tax is allocated for 60
months; If the assets life is less than 5 years, you could use it as input tax for the number of
months of its life (Sec. 110 Sources of input tax)

Penalty for non-registration as a VAT entity, is that it cannot claim input tax credits

VAT is a tax on sale of goods or properties

16

For example, a car dealer gives a car to his son (donation)

o

Subject to VAT + Donors Tax + Income Tax (seems like one step, but it can be dissected to
be subjected to different forms of taxes)

Imposition of VAT is because it is a deemed sale (Sec. 106-B). Transfer, use or

consumption not in the course of business of goods or properties originally intended for sale
or for use in the course of business.

No consideration is required;

A deemed sale must be stated in the Code.

Other deemed sales :

distribution of property dividends

consignment of goods if actual sale is not made within 60 days, so they are
deemed sold unless the consignee returns the goods or the consignor
withdraws the goods

retirement from or cessation of business with respect to inventories on hand

Gain is immaterial, the seller could sell the goods at cost and it will still be subject to VAT.
o

In the example of telecom companies, all telcos (PLDT, Smart, Globe, Bayantel) put up a
National Digital Transmission Network, which was put in a single corporation and sold the
services at cost. This is still subject to VAT.

For example a client deposited for time charges fees to a law firm is subject to VAT.
However, a deposit for expenses for filing fees, taxes, registration (Courts, Taxes, SEC),
there is no need for VAT because the deposit is just given to the law firm in trust. The same
way if a trustee holds a property in trust turns over the property (an ordinary asset) to the
principal/owner, it will not be subject to VAT since theres no sale (no consideration).

Sale of Goods vs Sale of Services

Sale of Goods

Sale of Services

Tax Rate

12%

12%

Tax Base

Gross Selling Price

Gross Receipts

Accrual of VAT liability

Upon sale irrespective of date of

Upon receipt of payment

receipt of payment

irrespective of when the service

was rendered

Documentation

Sales Invoice

Official Receipt

For example TP 1 sells property to TP 2 for P1 million but it was a sale on credit and on the books it
was considered A/R. The sale is still subject to VAT.

TP 1 sells services to TP 2 for P1 million and sends its billing statement but was paid a year after.
VAT liability is upon receipt.

17

So if TP 1 receives the P1 million even prior to the rendering of service, it is reported in the
VAT returns.

Airtime is a sale of service (not sale of intangible), professional service is a sale of service. Important
to know if its a service or good because theres a timing issue (the client might want to delay or
immediately pay the VAT so you can determine the point of accrual by knowing the principles and
restructuring transactions so the VAT liability could accrue upon the desired period)

Input tax credits require validly issued sale invoices (the seller/supplier must also be VAT-registered
for it to support as input tax credit). The sale invoice will suffice for crediting purposes, even if you
have not paid for it yet. As opposed to purchase of services, there must be actual payment before it
could be credited as input tax because it is only then when the official receipt will be given.

Instalment Sale v Deferred Payment Plan, not an instalment sale

Instalment Sale

Deferred Payment Plan

Initial Payments (all

Should not exceed 25% of the

Greater than 25% of the contract

payments received within in

contract price or selling price

price or selling price

On each instalment

Treated as cash sale, on the entire

the year of sale =

downpayment and
amortisation)
Output Tax

selling price

Advice clients properly or else they might pay deficiency VAT plus penalties (surcharges)

Suppose theres an assumption of mortgage, e.g., buyer buys a car for P100,000 and assumes the
chattel mortgage of P10,000, all-in-all he pays P110,000.
o

Know the basis. Assume its P80,000, so P10,000 mortgage assumed is less than the basis,
hence it will be ignored for purposes of computing the initial payment

Assume the basis was P5,000, include the P5,000 in excess of the P10,000 mortgage
assumed to the initial payment, hence initial payment will be P25,000.

18

15 January 2011
Sec. 105, 106
Sale of goods or properties

Sec. 106 (B)

Deemed Sale

In the course of trade or business

1. Transfer, use, or consumption, NOT IN

(regular conduct or pursuit of a commercial or

THE COURSE OF TRADE OR BUSINESS of

economic activity including transactions incidental

goods originally intended for sale or use in the

thereto)

course of trade or business

2. Property Dividends
3. Dacion in payment
4. Consigned goods if not sold or physically
returned in 60 days
5. Retirement/cessation

Example: a pharmaceutical company keeps a fleet of cars for its employees and maintains a
programme of selling cars which have been used for more than five years. This is subject to VAT
even if the pharmaceutical company is not in the business of selling cars but the BIR would impose
VAT based on the provision that it is incidental to the regular trade and business of the
pharmaceutical company.

Incidental transaction must be ancillary or subsidiary to the regular line of business of the
taxpayer.
o

Another example, a telecom company selling cellphones. If the telecom company sells its
microwave backbone network, it is VATable, but the BIR could rule that it is an isolated
transaction and hence, except from VAT.

Sale of scrap materials by a car manufacturer

Sale of land/building by either a car manufacturer or pharmaceutical company, BIR could

still impose VAT since they are transactions incidental to the regular line of business.
Reasoning is that when the taxpayer acquired the property to the seller, the seller shifted
VAT. The taxpayer will now be entitled to claim input tax credit as a deduction to its output
tax. Since the input tax was credited, if the property is sold, the BIR must be able to get back
the VAT.

Sometimes, the justification of the BIR, if its an ordinary asset (but what about real property
in the business, property subject to depreciation?), its subject to VAT. If its capital asset its
not subject to VAT.

Argue that it is not in the regular course of business of the taxpayer.

Goods or properties shall mean all tangible and intangible objects which are
capable of pecuniary estimation and shall include: (a) Real properties held primarily
for sale to customers or held for lease in the ordinary course of trade or business
[Sec. 106(A)(1)(a)]. Take note of the qualifier.

19

In exempt transactions: sale of real property NOT primarily held for lease or sale;
therefore, it should NOT be subject, even if it was used for business (very explicit)
[Sec. 109(P)]

DEEMED SALE

If a supermarket retires its operation, then all its goods are deemed sold, subject to VAT
(CESSATION)
o

Includes ordinary assets! As justified by the incidental transaction definition

Once the business is retired, the excess inventory could be transferred to another
corporation so that the transferee corporation could claim input tax credit

All deemed sale presuppose that the goods involved in the first place would have been subject to
VAT. Hence, if the good was not subject to VAT, it does not matter if it was a deemed sale.

Subject to VAT, but without proper documentation the taxpayer will not be entitled to input tax credit

For CONSIGNMENT, the taxpayer just has to return the goods before the sixty day lapses to avoid
the VAT. But usually what is done is to prepare physical evidence that it has been returned.

Actual Sale v Deemed Sale

In actual sale, there is a sale between parties (buyer and seller) and there is a passing/payment of
consideration

In deemed sale, it does not always follow that it is a bilateral transaction nor is there always
consideration
Deemed Sale

Parties

Consideration

Tax Base

1. Transfer not in the

Transferor and

No

Market Value

course of business

transferee

2. Property dividends

Corporation and

No

Market Value

stockholder
3. Dacion in payment

Debtor and Creditor

Yes

Market Value

4. Consignment

Consignor and

No (or not yet :P)

Market Value

No

Acquisition Cost or

consignee
5. Retirement or

Corporation only

Cessation

Market Value
whichever is lower

Other Deemed Sale Transactions

Changing status from VAT taxable status to VAT-exempt (example: Change of non-life insurance
company to life Insurance, which is VAT-exempt)

20

If the annual sales does not exceed P1.5million (threshold amount), it has the option of not
registering for VAT and instead pay a 3% percentage tax. However, the taxpayer could register for
VAT purposes and pay the VAT so it could claim input tax credits

NOT A DEEMED SALE

Change of control of a corporation. Shareholder sells shares to another shareholder in a corporation

engaged in the sale of VATable goods. The sale to the other shareholder is NOT VATable, because
of the separate legal personality of the corporation.

Change in the trade or corporate name

Merger or consolidation of corporations. The transfer of inventory goods from the absorbed
corporation to the surviving corporation is not subject to tax. Tax attributes are also transferred
(creditable withholding tax and input-tax credits, as well as NOLCO and MCIT)
o

What if the original corporation was VAT-exempt becomes VAT-registered? (Sec. 111)
Could claim transitional input tax credit.

If the surviving entity is VAT-exempt, you will now have a deemed sale. Therefore, excess
input tax credit is recorded as Cost of Goods Sold since it cannot be claimed as a refund.
(Only time there an input tax credit may be refunded is if theres a zero-rated sale)

However,

Tax Free Exchange [Sec. 40(C)(2)]. In a transfer to a controlled corporation, is subject to VAT.
o

As provided by the Revenue Regulations since it is neither merger or consolidation.

It might not be subject to income tax, but it could be subject to VAT. However, if the property
exchanged was a capital asset, it is exempt from VAT, not because it was under a tax-free
exchange, but because the sale of capital goods is not subject to VAT.

Original issuance of shares and the sale of shares is NOT subject to VAT, whether the
shares are ordinary assets or capital assets. (If it was sold by a dealer in securities, it is the
dealer of securities subject to VAT for SALE OF SERVICES)

Additional Paid-in Capital (APIC) is not taxable income, even if the shares was sold at a
premium.

COMPUTATION OF VAT PAYABLE

Output Tax Less Input Tax

If there is excess input tax

o

If engaged in zero-rated sales: possible to get tax refund

If not: Claim it and carry-over to the next succeeding months or quarters (no period
restriction, you can keep on carrying over until it is extinguished)

21

If the seller is VAT registered but if the buyer is VAT exempt, the seller cannot claim the exemption
because the VAT is imposed on the seller. However, it also becomes an indirect tax when the
burden is shifted to the buyer.
o

The shift to the VAT exempt buyer is not acquiring the liability, just the burden. Unless the
law says so, tax can be shifted even to a tax-exempt person.

The VAT exemption pertains to his sales, not his purchases.

The VAT exempt entity could just use the input tax as part of the Cost of Goods Sold.

22 Jan. 11
EXPORT SALES
VAT-Rate: 0%
1. Sale and actual shipment (physical transfer of goods from the Philippines to a foreign country)

Must be paid in an acceptable foreign currency. It must inwardly transmit remittance to the
Philippines, this is a basic requirement.

Accounted for based on BSP rules

Shipping arrangement not relevant [Sec. 4.106-5(a)].

o

For importation, shipping arrangement will be important as to who will shoulder the VAT. If
title passes outside the Philippines, seller will not be subject to VAT, but the importer will be
liable for VAT. If title passes inside the Philippines, seller is liable but it will shift the burden
to the importer. Bottomline: always the importer who pays the VAT otherwise he wont be
able to release the goods from customs.

For income tax, follow the title-passage rule. If title passes outside the Philippines, its not
income that comes from the Philippines, hence, not taxable.

2. Sale between a seller in the Philippines and a non-resident buyer but the raw material and packaging
materials are to be delivered to a local export enterprise who will use those materials to produce/package goods
for export

Ultimately, the destination of the goods is outside the Philippines

Paid in foreign currency

3. Sale of raw materials or packaging materials to export-oriented enterprise

Must satisfy the requirement of exporting at least 70% of its annual production

4. Sale of gold
5. Considered export sales
6. Sale of goods to those engaged in international shipment

Effectively Zero-Rated Sale

Difference of Zero-Rated Sale and Exempt Transactions

22

Zero-rated is still subject to VAT and could still claim unused input-tax credit as refund

Exempt, hence, input-tax credit cannot be refunded, it becomes part of the Cost of Goods Sold

Better position for the taxpayers: Zero-rated sale

Exempt Sales
1. Sale or importation of agricultural and marine food products in their original state, regardless of the
personality of the seller (primary seller, retailer, wholesaler or trader) because it is the transaction that is
exempt, not the person
o

Sale of bamboo and rattan in its original state? Subject to VAT because it is not a food product

Sale of bottled mineral water in its original state? Not an agricultural or marine product, hence, subject to
VAT. Sale of water by Manila Water and Maynilad is also subject to VAT.

Boneless bangus? Still exempt

Iodised salt? Only ordinary salt is exempt, hence, subject to VAT

Copra? Expressly exempt from VAT. Because we have a coconut industry, so many companies are
engaged in the purchasing and processing copra.

Raw cane sugar? Exempt; Brown sugar? Exempt; Refined sugar? VATable

Sale of pigs? Exempt

Sale of dogs? (noooooo!) But exempt if used for food (nooooooooo!) but if its as pets, subject to VAT

2. Fertilizers and feeds

3. Personal and household effects belonging to residents of the Philippines or non-residents coming to re-settle
in the Philippines
4. Importation of professional instruments and implements, wearing apparel, domestic animals and personal
household effects belonging to persons coming to settle in the Philippines, for their own use and not for sale
5. Services subject to percentage tax
o

General Rule: A taxpayer is only subject to EITHER VAT or percentage tax

If its subject to percentage tax, then it is exempt from VAT (and vice versa)

Exception: (subject to both percentage tax and VAT) Sec. 113(B). If someone whos not registered
issues a VAT receipt, as a penalty (since the buyer will be able to charge input tax credit), the VAT is
paid + 50% surcharge

6. Agricultural contract growers (on the service)

o

Milling for others palay, corn into grits and sugar cane to raw sugar are exempt

Way to avoid the tax: Seller dont sell refined sugar, sells the raw sugar (in raw sugar quedans). And
then buyer does not receive it, but is sent to the millers. So now, only the milling services will be subject
to VAT, not on the selling price of the refined sugar. (Case of Victoria Milling) still allowed by the BIR

Presumptive input tax credits[Sec. 111(B)]: 4%

7. Sales by agricultural cooperatives to its members

o

Exemption extends to both to members and non-members

23

Condition for non-members: must be produced by the cooperative itself

8. Credit cooperatives
o

Includes microlending

Electric cooperatives are VATable

9. Non-agricultural, non-electric and non-credit

o

E.g. marketing cooperative

Provided the share capital contribution does not exceed P15,000 per member
o

What is share capital contribution? Subscription contribution, or paid-in capital? For the
cooperatives, it should be paid-in (advocates for the cooperatives)

10. Sale of real properties

o

When it is not held primarily for sale or for lease

Utilised for low-cost housing

Lot less than P1.5 million; Residential house and lot P2.5 million (incentive for realtors and developers to
lower the cost for housing)

11. Lease
o

Residential Units: for loan, option money or security deposit (not VATable) but pre-paid rental is
VATable

Lease of car is VATable

12. Educational services

o

Must be accredited by DepED, CHED and TESDA (Technical Education and Skills Development
Authority whose head now is the son of Bro. Eddie Villanueva because he supported PNoy)

Includes government educational institutions

It is not the entity that is VAT-exempt, it is the transaction

- If these institutions have properties for lease its VATable

13. Books
o

For magazines, it must not be primarily for advertising and has to go out in regular intervals

14. Medical services

o

Doctor and medical fees are subject to VAT (professional services)

Hospital services are exempt (so if youre confined, hospital fees are not VATable)

Medicine in the hospital pharmacy is exempt for in-patients but VATable for out-patients

15. Services rendered due to employer-employee relationship

o

Lawyer services are VATable, but if theres an employer-employee relationship, it is exempt

Agent and Principal: VATable

Commissions of Real Estate Dealers/Brokers: VATable

16. Services rendered by regional headquarters in the Philippines to MNCs

o

Between a branch and a head office, it is exempt, because there is no sale of services because there is
only one corporate entity, hence, only one taxpayer. RDO with jurisdiction of head office pays.

24

- Large taxpayers have to pay in the main office of the BIR

17. Services of banks, non-banks
o

Subject to gross receipt percentage tax of 3%

18. International agreements that provide that the transaction is exempt

19. Threshold is P1.5 million annual gross receipt

Input Tax

Can be claimed against

o

Goods (proved by sales invoices)

Official receipt may also be attached

Accrues upon consummation of sale and the issuance of the sales invoice (not the
receipt of payment)

Built-in mechanism for the buyer to compel the seller to issue a sales
invoice, so the seller has to pay the output VAT upon issuance

Raw materials

Depreciable goods

Input tax credit must be spread-over 60 months if the purchase price is more than
P1,000,000 (must be amortised). Quite unfair for the buyer who already paid the
VAT on the whole amount but could only claim input tax credit on a staggered basis.
Solution: Payment by instalment scheme

Property used in business

Purchase of services (proved by the official receipt)

Billing statement may also be attached

Upon receipt regardless of when service will be performed (unlike in income tax,
which is upon the accrual of the income)

There is incentive to pay the fees for the services

Transitional Input Tax and Presumptive Input Tax

Transitional Input Tax for those who became VAT-registered (non-VAT elects to be VATregistered)
o

Acquired input prior to VAT registration, hence entitled to transitional input tax

2% of the value of inventory of goods

VAT actually paid, whichever is high

Presumptive Input Tax for processors of sardines, mackerel, milk sugar, oil, noodles
o

To overcome the fact that their raw materials are exempt, theyre given a presumptive
income tax

4% of the primary agricultural products produced

25

Refund Entitlement

Exporters

2 years from the close of the last taxable quarter

Commissioner should act upon it within 120-days from submission of application

If denied, 30 days to go to the Court of Tax Appeals

Invoicing Requirements

If this is not followed, input tax credit will be denied

Accounting staff of taxpayer must be properly advised (check the requisites for sales invoices and
official receipt)

Failure to indicate tax-exemption, will be liable to VAT (even if the law says it is exempt!)

Filing of VAT Returns

Filed on a monthly basis (Monthly VAT Declarations)

o

Hence, it is paid on a monthly basis

Filed within 20 days after the end of each month

And prepares a Quarterly VAT Returns

o

Filed within 25 days from the close of the taxable quarter

Venue: Banks within the revenue district (Authorised Agent Banks)

Sale of Goods to the Government

Subject to VAT, since it is a tax on the seller, not on the buyer

Government agencies, instrumentalities, GOCCs are obligated to withhold 5% as Final Withholding

Tax
o

Division of the concept of tax

There is no additional input tax credit or output tax, its final

If theres an overpayment of VAT payable, overpayment forms part of the adjusted

cost and theres a subsequent income tax reduction (although lugi coz you just get
30% back of the overpayment)

If there was an underpayment, it reduces the cost/expense and theres a

subsequent increase in income tax

The difference must be close to expense or cost

26

Taxpayer Remedies

26/3/11 3:30 PM

Basic Organisation of the Bureau of Internal Revenue

Commissioner has the discretion to create rulings but may delegate it to the DC for Legal or AC for
Legal if there are precedents. Cases of first impressions must be ruled upon by the Commissioner,
or in cases of reversal, modification or revocation.
o

Large Taxpayers Service (LTS)

Deputy Commissioners (4)

o

Operations

Regional Directors (for Revenue Regions)

Assistant Regional Directors

Revenue District Offices

Assistant RDO

Examiners

Legal and Inspections

o

Assistant Commissioner for Legal

Chief of Law Division requests for ruling are received

Assistant Commissioner for Enforcement

National Investigation Division (Tax Fraud Division) conduct examination within 10

years from the discovery of the fraud; examinations are triggered by information
given by informers or denunciation letters (theres a reward if BIR was able to
collect, but limited now to P1 million)

Resources and Management

Information Systems

Duty of all taxpayers

Register with the BIR

o

TIN number

Permit for printing of official receipts and sales invoices

Maintain books of account

o

All transactions must be maintained

General ledgers and subsidiary ledgers

Bookkeeper who keeps the books of accounts

Based on the entries, the accounting staff will generate the financial statements

Audited by external auditors to determine that it is a fair statement of the financial conditions
and result of the operations of the business entity

Based on the audited financial statements, taxpayer will now prepare the tax returns

Financial Accounting v Tax Accounting

Income reported is different

Filing Tax Returns: Periods and Venues

Income Tax
o

Quarterly Income Tax Returns 60 days

Annual Adjustment Returns 15 day of the 4 month following the close of the year

Venue: Revenue District Office of where you are registered (usually where you reside or

th

th

principal place of business)

Capital Gains Tax Return

o

30 days from transaction (execution of the document, which is the signing)

Venue: RDO with jurisdiction over the location of the real property; for sale of shares, place
of registration of the seller of the shares

Estate Tax Return

o

6 months from the death of the decedent

Venue: RDO with jurisdiction over the residence of the decedent

Donors Tax Return

o

30 days from gift

Venue: RDO with jurisdiction over the donors residence

Value Added Tax

o

Monthly VAT 20 days from end of month

Quarterly VAT 25 days from end of quarter

Venue: Place of registration

Documentary Stamp Tax

o

5 days following the month of execution of the document

Venue: Look at transaction (sale of land, RDO where it is located)

After filing, taxpayers wait for assessment

1. Letter of Authority (LA)

Looked at taxes being investigated

Specify the taxable period to be examined

Name of examiners/Team who will conduct the examination

May cover several years (all years that has not yet prescribed)

2. Once LA is issued, examination must be completed within 120 days (4 months), extendible for
another 120 days. Audit must be completed in the place of business of the taxpayer.

28

Prescription of Assessment

3 years reckoned from the last day of filing; but if filed after the last day of filing, 3 years from the
date of late filing.

10 years reckoned from discovery if there is:

o

false return

fraudulent return

non-filing (omission)

If not assessed within these periods, the right to assess and collect prescribes

False, Fraudulent Return

Burden of proof with the BIR

Intent to deceive, palpable negligence

Period to Collect

5 years from Assessment

BIR will have some initial findings after the examination prompted by the LA

3. Informal Conference TP meets with the examiners to discuss the initial findings and give the TP an
opportunity to explain his/her side. Examiners could ask for additional documents and verificatory questions.

4. Preliminary Assessment Notice (PAN) 15 days

5. Reply to PAN

6. Final Assessment Notice (FAN) / Letter of Demand

Date of issue

Date of mailing critical in determining the prescriptive period

Date of receipt

Signed by the Commissioner, Deputy Commissioner or Regional Directors

7. Protest 30 days from FAN receipt

File the protest in the office of the signatory of the FAN

Two forms:
1.

Request for reconsideration no factual issue, the appreciation of the facts,

hence no new evidence is given, just to give the facts a second look

29

2.

Request for reinvestigation requesting the regional director/dep comm./CIR to

open the case again for investigation to allow the reception of new evidence or to
allow the examination of new documents

Submit Additional Documents 60 days from the filing of the protest

180 days in which BIR should make a decision

For reconsideration, reckoned from filing

For reinvestigation, reckoned from submission of additional documents

If BIR issues a decision finding for the taxpayer, the assessment is CANCELLED

If BIR was only partially convinced, the old assessment is cancelled, and a new assessment is
issued

If BIR Commissioner is too busy (hence, inaction), 30 days from denial or 30 days from the lapse,
the taxpayer could bring it up to the CTA

If some parts are undisputed, the undisputed parts must be paid for

Denial of Protest

Could be explicit or indirect

Indirect Denial: Instituting a criminal case, civil action for collection (restraint, levy)

Taxpayer has 30 days from the receipt of the denial to appeal to the CTA

Lapse of the 180-day period, Taxpayer has 30-days to go to the CTA

Requisites of a Valid Assessment

Must not just state the amount of the deficiency tax

Law, rules and regulations and jurisprudence relied upon for such assessment must also be stated
(legal and factual basis)

Properly served with the taxpayer

o

Based on the address in the return

If taxpayer changed his address, the taxpayer must inform the BIR. If transferring to a new
district, apply for change of registration (tax clearance by the RDO where first registered
before allowed to transfer in another district)

Waiver of the Running of Statute of Limitations

Government and Taxpayer will be benefitted for the extension of time in the conduction of
examination and make the assessment

If no waiver, government will issue a Jeopardy Assessment (based on the best evidence obtainable)

Requisites of Waiver
o

In writing

Proper form prescribed by the BIR

30

Signed by the taxpayer and the Commissioner/authorised representative (bilateral

agreement)

Copy must be given to the taxpayer

For example the taxpayer received a FAN and failed to protest the assessment because he was abroad. So
taxpayer paid the tax, will filing for a claim of refund be an appropriate remedy if the tax did not have legal or
factual basis? NO. He effectively waived the right when he did not protest the assessment. Refund and credit is
for taxes erroneously paid. So if theres no basis, you cannot pay the tax and claim a refund.

Suspension of the Running of the Prescriptive Period

Filing of the protest requesting for reinvestigation and acceptance of the BIR that suspends the
running of the prescriptive period

12 February 2011
Protest

Complaint on a final assessment notice + letter of demand

Protest letters must be filed with the official (e.g., regional director) who issued the assessment

If denied by the regional director, go up to the Commissioner; if denied, go up to the Court of Tax
Appeals
o

Unlike for BIR Rulings, in case of an adverse decision by the Commissioner, it is brought to
the Secretary of Finance, not CTA

Period of Petition for Review

o

In case of denial: 30-days from receipt of denial

In case of inaction after 180 days from filing of additional documents: 30-days

What if the Commissioner issued an adverse decision after 180-days? Appealable within 30-days

If taxpayer fails to file an appeal, the assessment becomes final

TAX REFUND AND CREDIT

For taxes erroneously and illegally collected

To be filed in the RDO where the taxpayer is registered

Legal Basis: Even the government should not be unjustly enriched at the expense of taxpayers (Civil
Code concept of solutio indebiti)

Tax Refund v Tax Credit

Tax Refund government gives the cash

Tax Credit government issues a Tax Credit Certificate stating the amount that can be applied
against the tax liabilities of the taxpayer

31

Tax Credit is the preferred remedy because the BIR does not have ready funds for a Tax
Refund because all the funds are remitted to the National Treasury and needs
Congressional appropriation before it could be re-disbursed

TCCs are also transferrable because they are property rights (Revenue Regulations)

Requirements

Written claim for refund

o

File first with the BIR (exhaustion of administrative remedies)

Filing within the prescriptive period

o

GENERAL: 2 years from the payment regardless of supervening cause

Withholding Taxes

Final Withholding Tax (dividends, royalties) once the withholding agent withholds,
thats a final tax, no need to declare in the ITR of the taxpayer

The taxpayer is the proper party to claim for a tax credit or a refund.
EXCEPT: the withholding agents of non-resident foreign corporations

PRESCRIPTION: 2 years reckoned from the filing of the withholding tax

return by the withholding agent

Creditable Withholding Tax only represents a partial payment of the tax due and
the taxpayer is allowed to credit that against its tax liability

PRESCRIPTION: 2 years reckoned from two schools of thought: (1) From

filing of the withholding tax return; (2) Filing of the annual tax return because
it was the only time the taxpayer would have known if there was
excess/illegally collected taxes

Corporate Income Tax

Files Quarterly Income Tax Returns and Annual Income Tax Returns (Final
Adjustment Returns)

If there are excess withholding taxes for a quarter, it is not immediately

creditable/refundable because it could be carried over

Refund/Credit is only allowed for the Annual Income Tax Returns

PRESCRIPTION: 2 years from the filing of the Annual Income Tax Return (not the
filing of the quarterly income tax return)

VAT

Output Tax
Less: Input Tax
VAT Payable

Excess Input Tax are carried over

32

Tax Credit or Refund is allowed for Zero-rated/EZR taxpayers for unused input tax
credit or when it shifts from VAT-registered

PRESCRIPTION: 2 year period reckoned from the close of the taxable quarter when
the sales transaction was consummated

SC ruled that the 2 year period could be reckoned from the filing of the
quarterly tax returns because it is the only time the taxpayer could ascertain
its tax liability

This ruling is strange because excess tax paid could be determined already
on the monthly tax returns and that two years is enough time to discover
and file for a refund/tax credit

Payment is erroneous or illegal

33

Government Remedies

4/12/10 9:01 AM

Tax Lien

Legal claim or charge on property (real or personal) as security of payment

Once the BIR has an assessment, it has a legal claim over the properties (registered mostly like
land, vehicles and shares of stock)

BIR has to annotate the lien in the titles covering the real properties in the Registry of Deeds

This is just a CHARGE, not yet a satisfaction of the tax liability; Can be enforced as a security

Distraint of Personal Property

Levy of Real Property

Notice, publication, sale and period of redemption

Compromise or Abatement of Taxes

Compromise means reduction of the amount to be paid by the tax payers

Grounds for Compromise

1. Reasonable doubt as to the validity of assessment

40% of the basic tax

2. Financial incapacity to pay the tax

10% of the basic tax (minimum)

The taxpayer has to waive his right to the secrecy of his bank deposits

Abatement means cancellation of the entire amount (the entire amount is cancelled by the BIR)

Grounds for Abatement

1. Unjust and excessive assessment
2. Administration and collection costs do not justify the collection of the amount due

Taxpayer filing a petition for review CIVIL Case

To prevent abuse by the BIR Commissioner, there is a National Evaluation Board to evaluate the
compromise offer
o

If it exceeds P1,000,000

For CRIMINAL actions, generally it could be compromised

o

Except: (1) When fraud is involved; (2) it is already pending in court

May the BIR file for tax evasion even before the issuance of an assessment? If there is a prima facie showing
that there is an attempt to evade the payment of taxes (Ungab v Cusi)

CIVIL PENALTIES
Deficiency Tax v Delinquency Tax

Deficiency Tax difference between the amount determined by the BIR and the amount reported
by the taxpayer (taxpayer thought P1,000,000 was due but BIR did not recognise some of the
expenses, hence tax is P1.5 million)

Delinquent Tax failure to pay tax due (due P1,000,000 paid only P500,000). If deficiency tax has
been demanded by the BIR and the taxpayer fails to pay, it becomes a delinquent tax

Surcharges

25% of the basic tax; Grounds:

o

Late payment of taxes

Filed in an improper venue

50% in case of fraudulent/false returns, wilful omission to file a return

Interest

20% per annum (no time limit)

Other Fines and Penalty

Failure of withholding agent to collect and remit tax

o

The liability of the withholding agent is separate from the taxpayer

35

Local Government Taxation

4/12/10 9:01 AM

Q: If the Constitution does not provide taxation powers, can the State through its national government/BIR
impose taxes?
A: The power to tax is inherent in every state, theres no need for a constitutional provision. It is inherent
because of the lifeblood theory, the government must have the power to raise revenues otherwise it cannot exist
and survive.

Power of a Local Government to Tax

Not inherent

It must be delegated by statute (via Congress)

Can Congress deprive local governments of their power to tax since it is just a delegated authority?
No. There is a direct grant of the power by the Constitution (Sec. 5, Art. X), hence, Congress cannot
deny them of it. Unlike the 1935 Constitution, the 1987 Constitution now directly grants this power to
the LGU. In the absence of this constitutional provision, LGUs cannot exercise the power to tax
since they are mere creations of law.

May LGUs exercise the power to tax in the absence of a statute like the Local Government Code?
No. Because the constitutional provision states that the power is not self-executory, it needs an
enabling act (subject to such guidelines and limitations as the Congress may provide).

Can the mayor impose a tax? No, it is legislative in character and the power is vested in the
sanggunians of the LGUs.

Can congress still make laws imposing local taxes instead of just making guidelines? Its a grey
area. (Asked in the Bar exams)
o

Some say that Congress has to do it by providing the limitations and guidelines

Some say that the powers of Congress is plenary so they could directly pass a law even
without passing through the LGUs

The power to tax of the State is subject to inherent and constitutional limitations. The power to tax of
the State is subject to inherent, constitutional and statutory limitations.

Inherent Limitations of the Power to Tax

1. Public Purpose
2. Territorial Jurisdiction
3. Double Taxation is prohibited
4. Exemption from Taxation of Government or Instrumentalities

Constitutional Limitations of the Power to Tax

1. Due process and Equal Protection
2. Non-impairment of obligations of contracts
3. Non-imprisonment for non-payment of a poll tax

4. The rule of uniformity in taxation

5. Tax exemptions of religious and charitable institutions

Fundamental Principles
1. Uniformity
o

Does not mean equality

Businesses, properties or activities may be subject to classification in a territory. As long as there is

reasonable classification, taxing authority can classify or categorise within their locality.

Business and activities in those class should be subject to the same rates (UNIFORMITY WITHIN THE
CLASS)

Tax ordinance of Quezon City imposes a franchise tax but the tax ordinance of Muntinlupa does not
impose a franchise tax, may residents of Quezon City complain? They cant complain, uniformity is
required only WITHIN the territory of the LGU.

2. Tax should be equitable and practicable to the taxpayers ability to pay

3. Collected for public purposes
4. Not unjust, excessive, oppressive or confiscatory
5. Not contrary to law, public policy, national economic policy, or in restraint of trade
o

Not contrary to national economic policy LGUs should not be inconsistent with the incentives given
by Congress

Not in restraint of trade

LGUs cannot impose taxes of goods carried in and out of the LGUs territory or those
passing through

6.

Collection and other impositions shall in no case be let to any private person
o

Imposition is inherently legislative in nature, hence, it cannot be let to a private person (not even to the
executive like to the mayors, governors). It can only be exercised by the legislative body of the LGUs.
Thats why theres really no need for this prohibition to be expressed.

But collection is just administrative and yet the law prohibits that function be transferred to a private
person. It must be collected by the treasurer.

If Congress decides to delete this provision, does that mean LGUs are given the discretion to transfer
the collection to private persons? This is done in other countries and no constitutional prohibition if
collection of taxes is given to private persons. Of course the taxes collected will still accrue to the LGUs
and the private persons will be paid for the services they render. It is only because of the provision in the
LocGov Code why this is prohibited.

7. The revenue collected shall inure solely to the benefit of the local government unit
8. Progressive System

37

National Government
NIRC

Local Government Units/Cities

TCC (BOC)

Income Tax

Provinces

Municipalities

Barangays
x

except on banks
and financial
institutions
Estate Tax

except tax on
transfer of real

Donors Tax

property ownership

VAT

except they can

Percentage Tax

except franchise

impose business

tax and

tax on the gross

amusement tax

receipts

Excise Tax

DST
Customs Duties
Fees and Charges

x
except wharfage
on wharves
constructed and
maintained by the
LGUs
Professional Tax
Amusement Tax
Franchise Tax

* Taxes that provinces may impose cannot be taxed by the municipality; Taxes of municipality may not be
imposed by the province. The power of cities is more comprehensive, they could impose taxes that are covered
by provinces and municipalities.

38

Amusement Tax Impositions

LGUs

BIR

Theatres

Cockpits

Cinemas

Cabarets

Concert Halls

Night or day clubs

Circuses

Boxing exhibitions

Other amusement places

Professional basketball games

Jai alai
Race track

Provinces

Cities

Municipalities

Barangays

Professional Tax

Fees for seding of licensing

Sari-sari store (v.

weights and measures

minimal)

Fisheries rentals fees and

Barangay

charge

clearances

Community Tax

Billboards and sign

Tax on the Business of Printing

and Publication
Annual Fixed tax on delivery

trucks, vans or vehicles

Tax on sand, gravel or other

boards
x

quarry resources
Service fees/charges

Public utility/charges

Real property Tax

Additional Levy (SEF)
Ad valorem tax
Special Levy

Other Prohibitions

Sec. 133 of the Local Government Code

Taxes on agricultural and aquatic products when sold by marginal farmers or fishermen

Taxes on premiums paid by way of reinsurance or retrocession (premium is also a percentage tax in
the NIRC)
o

Retrocession premium paid by one reinsurer to another reinsurer; return of premium from
risk rejected

Taxes on transport registered in the LTO

Export Philippine products

Countryside and Barangay Business Enterprises

39

National Government (except GOCCs)

Situs of Taxation

If the transaction was made in places where the business do not have branches, situs is the
principal office of the business

If there are branches, transactions in the branches are taxable in the cities where they are located

If there are warehouses where the transactions were made, there is no relevance to the situs
(exception: if it accepts orders in the warehouse making it a sales outlet)

If there is a factory/project site/plantation outside the principal offices jurisdiction

o

70% taxable in the factory/project site/plantation

30% taxable in the principal office

If there are no sales in the principal office because it is just an admin office, site of the principal
office and the factory/project site/plantation has NO taxable sales

In case of a roaming store, the situs of the sale will be the branch where the goods were derived
from

If Plantation is not where the factory is

o

30% taxable in the principal office

70% breaks down

60% on the factory

40% on the plantation

If more than one factory, project offices or plants prorated on volume of production

5 March 2011
Accrual of the Tax
Lets say Sanggunian passed a tax ordinance 15 February. When does the tax accrue?

Since its a new tax arising from a newly enacted tax ordinance, the tax accrues on the first day of
the quarter following the enactment of the tax ordinance (1 April)

In case of old taxes, the date of accrual will be the first day of January

Accrual of the tax is not the same as the period to pay the tax

Time of Payment

20 days (January or subsequent quarter)

Penalties will accrue in case of non-payment after the period

o

Surcharge: 25% or lower

Interest: 2% per month (will not exceed 36 months) or lower theres a cap unlike the
national revenue code

40

Remedies of the Local Government in Case of Non-payment

1. Administrative Action
a. Distraint of Personal Property

Seizure. Effected through a duly authenticated service of delinquency which serves as a

warrant of distraint and is served on the delinquent taxpayer. It states the amount of
obligation of the delinquent taxpayer

Accounting and Inventory of Seized Goods

Posting of the Notice of Sale

Sale through a Public Bidding. Suppose there are no bidders, the property will be forfeited in
favour of the local government

b. Levy of Real Property

Theres also a warrant of levy in the form of a certificate of delinquency, describing in that
certificate the nature of the property being levied and the amount of delinquency.

Unlike in distraint, the warrant of levy is mailed to the assessor because the assessors
office is the repository of tax declarations, for annotation. It is also mailed to the Register of
Deeds because it is the repository of titles. And of course, the property owner.

After the service, there is a publication posting in a newspaper of general circulation

Auction sale. Highest bidder else, forfeited to the government

Right of Redemption
o

Only with respect to levy of real property (wala sa distraint of personal property)

Period of 1 year from the date of sale. Date of sale is determined from the date of registration (in most
tax ordinances, date of auction sale, but the Supreme Court says from the date of registration of the
certificate of sale). There must be an annotation in the TCT so that the 1 year redemption period will toll,
otherwise, the period will not commence.

2. Judicial Action

Filed in a court of competent jurisdiction

o

MTC/MCTC less than P300,000 for provinces, P400,000 in Metro Manila

RTC less than P1,000,000

CTA more than P1,000,000

41

Taxpayers Remedies
NIRC

Local Government

LocGov (Real Property

Tax)

Period of Assessment

3 years from the last day of

5 years from the date the

No prescribed period for

filing or the day of filing,

taxes become due (which

an issuance of a notice

whichever is later

is generally January 1)

of assessment from the

treasurer

Period of Assessment

10 years from the discovery

10 years from the date of

in case of Fraud

of the Fraud (can proceed to

discovery

None

immediate collection even

without a prior assessment)
Period of Collection

5 years from the date of

5 years

5 years

Assessment
Period of Collection in

10 years even without prior

case of Fraud

assessment (from date of

10 years

discovery); 5 years if there

was an assessment from
date of assessment
Filing of Written

30 days from the receipt of

60 days from receipt of

Protest

the final assessment notice

assessment filed with the

local treasurer

Period for acting on

180 days from filing of the

60 days from filing of the

the protest

protest

protest

In case of Denial

30 days to bring the

appeal to a court of
competent jurisdiction
(RTC)

(30 days commences also

for lack of a decision after
60 days)
Period to bring to the

30 days (CTA en banc)

CTA
15 days

Period to bring to the

SC

Mere issuance of a demand letter by the treasurer will not suspend the prescriptive period to collect
the tax. Collection is enforced through the collecting remedies (distraint, levy or judicial action).

42

There is no prescribed order when the remedies could be availed of by the treasurer.

Is a payment under protest of a local tax a requisite for protest to be appealable to the RTC? Not a
prerequisite unlike in a real property tax where payment is necessary before the courts could take
cognizance of the case

Assessments
o

BIR. Reflects the amount of tax due (basic + penalty), the type of the tax, and reference to
the factual and legal basis. It is a demand of payment in a prescribed form.

Local Treasurer. For local taxes, same content as the BIRs.

Assessor. For real property, the type/level of property being assessed, and the appraisal
value (does not include a demand). DIFFERENT CONCEPT

Decisions Possible
o

Cancel Assessment

Reduce Assessment

Enforce Assessment

Grounds for the prescriptive period to be suspended in favour of the local treasurer:
(1)

Treasurer legally prevented from making the assessment of

collection;

(2)

The taxpayer requests for a reinvestigation and executes a waiver in

writing before the expiration of the period within which to assess or
collect;

(3)

The taxpayer is out of the country or otherwise cannot be located.

REAL PROPERTY TAX

Assessor issues a Notice of Assessment; Payment under Protest is a requirement (but sometimes,
posting of bonds are allowed).
o

No remedy of a motion for reinvestigation with the assessor (as decided in Callanta v
Ombudsman) before, it was considered part of the exhaustion of administrative remedies
but due to corruption, the SC ruled otherwise

60 days to go to the Local Board of Assessment Appeals (Chaired by the Register of Deeds and
members are the provincial and city prosecutors and the provincial and city engineers)
o

Issue: Reasonableness of the amount assessed (disagreement on the classification of

property; fair market value), not a question of whether or not the property is subject to real
property tax. Hence, the taxpayer is required to pay and the issue will be decided later on.

Problem: Usually the LBAA does not convene because its just an additional function of the
officers who constitute it

LBAA has 120 days to render a decision (no provision for non-rendering of decisions)

43

If the decision is adverse to the real property owner, bring it up to the Central Board of Assessment
Appeals (CBAA) within 30 days

CTA file within 30 days

SC file within 15 days

Questioning the Validity of a Tax Ordinance

Not a question of reasonableness of the amount of the assessment

Issue is the validity or legality of the tax and questioning the authority to collect the tax or to subject
the property to real property tax

Taxpayer could immediately go to the RTC CTA SC

Constitutionality of a Tax Ordinance

File with the DOJ Secretary

30 Days from the Effectivity of the Tax Ordinance

Decision to be rendered 60 days from filing

Appeal within 30 days after the decision, or after the lapse of the 60 days to the RTC CTA (30
Days) SC (15 days)

44

Real Property Tax

4/12/10 9:01 AM

Nature of Real Property Tax

Ad valorem. Based on the value of the real property.

Imposed by the local government

Provinces

Cities

Municipalities in Metro Manila

Direct tax based on the privilege to use real property, not ownership
o

Even exceptions are based on use

Cannot be shifted

Question: What if the lessee is required in the contract to lease to pay the real property tax?
Valid stipulation, but the lessor is still liable. If shifted, the amount of real property tax shifted
to the lessee will form part of the rent, and hence, part of the income of the lessor.

Is it an allowable expense? Yes

Fundamental Principles

Assessment based on current fair market value of the property

Actual use as basis of classification

Private persons cannot be left to appraisal, assessment, levy and collection

Uniform within each local unit

Equitable

Classification of Real Property

Residential

Commercial

Industrial

Agricultural

Timberland

Mineral

Special

Kinds of Impositions on Real Property

Real Property Tax

Not exceeding 1% of assessed value (provinces)

Not exceeding 2% of assessed value (cities)

o

The assessor provides the schedule of values, but it should be enacted/adopted in a form of
an ordinance to be valid and effective

The local government code contains provisions regarding classification of real property and
the applicable assessment levels, however, this is not enough for an LGU to collect, it must
pass an ordinance. The Local Government code only provides guidelines

The obligation is with the real property owner to declare the real properties acquired
o

Failure to declare, the assessor will do the declaration

Assessment

Tax Base of RPT: Assessed Value

o

Assessed Value = FMV x Assessment Level

Can an ordinance state that Real Property Tax should be based on the Zonal Value or Selling Price,
whichever is higher? The LGUs cannot merely reference, they have to prepare their own schedule of
FMVs (but they could adopt it as their schedule). In the case of Allied Bank v Quezon City, the
Supreme Court declared the tax ordinance of QC as invalid because of this issue. The FMV of the
properties should be based on the schedule of FMV prepared by the assessors and adopted by the
sanggunian.

The general revision of FMV of real property is only for every 3 years. (So they cannot adopt a
different basis for every tax declaration)

So if assessor issued an assessment, when will the assessment become effective? 1 January the
year after the issuance of the assessment/reassessment (revised assessment)
o

But a reassessment due to total or partial destruction of real property, it accrues on the first
day of the next quarter. Other grounds:

Major change of use (residential commercial)

Great and sudden Inflation or deflation

Gross illegality of the assessment

Other abnormal cause

In case owner failed to declare the real property and was discovered 20 years after, the
assessor will issue a tax declaration for the first time and collect back taxes worth 10 years;
but if theres a tax declaration and failure to pay by the taxpayer from year 1 to year 20, back
taxes may only be paid for 5 years.

The difference is due to the intent to evade in the first instance by not declaring the
property.

12 March 2011
PRESCRIPTIVE PERIODS FOR ASSESSMENT AND COLLECTION

No provision on prescription for assessment

Collection periods
o

5 years

46

10 years, in case of fraud

Since there is no period of assessment, the treasurer must avail the remedies to be able to collect
the tax

Surcharges and Penalties

Surcharges

Interest

NIRC

LocGov (Local Taxes)

LocGov (Real Property)

25%

25% (limit)

50%, in case of fraud

20% per annum

2% per month, not

2% per month, not

exceeding 36 months

exceeding 36 months

Remedies
(1) Reasonableness of Assessment could refer to back-taxes in cases of classification; disagreement with how
the amount of tax was computed by the treasurer (i.e., when was the effectivity of the revised assessment) so
there could be factual issues
Parties: Treasurer Taxpayer

Taxpayer pays under protest (protest may be filed upon payment)

File written protest within 30 days

Treasurer must decide within 60 days

In case of denial or lapse of the 60-day period, 60 days to bring to the Local Board of Assessment
Appeals

Appeal to Central Board of Assessment Appeals

Appeal to CTA

Appeal to Supreme Court

(2) Classification and Appraisal raise factual issues on the classification and assessment
Parties: Assessor Taxpayer

Assessor gives an assessment to the taxpayer within 30 days

If taxpayer contests the assessment

o

File with the Local Board of Assessment Appeals within 60 days ; LBAA has 120 days to
decide

If unfavourable, appeal to CBAA 30 days from denial

The lapse of the 120 day-period will not entitle the declarant to go to the CBAA

Bring up to the CTA en banc within 30 days

Supreme Court within 15 days

47

Fels Energy v City of Batangas (2007)

Question of power barges being subject to real property tax should be brought to the LBAA (issue is
CLASSIFICATION)

Motion for Reinvestigation with the assessor is not an available remedy (reiteration of Callanta v
Ombudsman)

(3) Questions of Authority question of law (however, if there are factual questions, it should go to the LBAA);
basis is Ty v Trampe
Question: GSIS is exempt from taxes under its charter, a new tax ordinance was passed in the local government
unit making GSIS liable for real property taxes. GSIS invokes its exemption, where can it be invoked?

File a protest with the treasurer, and then go to RTC CTA CTA en banc SC

Its a question of law, the very authority of the assessor to impose the tax and for the treasurer to
collect the tax

Quezon City v Bayantel

Legislative franchise of Bayantel exempted them from real property taxes

o

If used for telecommunication, its exempt

If not, its subject to tax

Bureau of Local Government Finance decisions were adopted

Digitel v Batangas

Reversed Bayantel case

Exemptions are strictly construed against the one claiming it

Refund of Taxes

Filed with the treasurer within 2 years (then follow the rules for remedies in case of appeal)
o

Appeal with the LBAA (issue is overpayment of taxes due to misclassification, erroneous
assessment level)

Appeal with the RTC (issue is overpayment of taxes due to the question of authority)

Exemptions from Real Property Tax

1. Government. Unless the beneficial use is transferred to a taxable person for consideration. (Beneficial Use
Principle)

E.g. Suppose Government donates property to a Charitable institution? still exempt.

Suppose Government leased a property to a proprietary educational institution to be used as a dorm? not
exempt from tax, but if for a school building, it is exempt

48

Government assigns the right to usufruct to a private corporation? subject to tax

* GOCCs are no longer exempt.

o

Local Government Code (1991) does not exempt GOCCs

GSIS was made a GOCC in 1997, but its charter also exempts it from taxes if the property is owned and
used by GSIS

What if GSIS property was leased by a taxable person? For GOCCs, the Beneficial Use
Principle was withdrawn. However, the exemption of GSIS was restored in its charter,
hence, it should still be exempt because the exemption is based on ownership and not use

Manila Hotel case

2. Charitable institutions. All lands, buildings and improvements actually, directly, and exclusively used for
religious, charitable or educational purposes
-

What about mixed use buildings? No exclusive decision or ruling that categorically states that it is

completely exempt or taxable

-

What if property was owned by a private institution now leased by an educational institution? Exempt

during the period of lease

3. Local Water Districts and GOCCs engaged in supply and distribution of Water or Electric Power. With
respect to machineries and equipment that are actually, directly and exclusively used

4. Duly registered Cooperatives.

-

Exempt even if beneficial use is transferred to a taxable person

5. Pollution Control and Environmental Protection. With respect to machineries and equipment

MIA v Pasay
-

Government instrumentality, hence, MIA was concerned exempt

Distinction of government instrumentality and GOCC; GOCC has capital, either as stock or non-stock.

Government instrumentalities do not have capital

GOCCs have shareholders so government controls the shares (at least 50% of the stocks)

Both have government and proprietary functions

Only government instrumentalities are exempt

Condonation or Reduction of Real Property Taxes

Instances:
o

General failure of crops

49

Substantial decrease in the price of agricultural or agribased products

Calamity

Ordinance

Recommendation of Local Disaster Coordinating Council

President may condone or reduce real property tax based on public interest

Case of Pagbilao Power Plant in Quezon

The setting of assessment level rests with the Sanggunian, not with the president. The president
could only condone or reduce the liability.

But here, the president issued an executive order reducing the amount to an amount due if the
assessment level was to be reduced by 15%

There must be uniformity in the taxation, equal protection of the law, all affected must benefit

Here, all penalties were reduced. The Executive Order was issued for the entire province, but there
was only one Independent Power Plant, is this valid? Unresolved

If theres a public interest issue involving all Filipinos, how will the President issue the condonation?

50

Tariff and Customs Code

4/12/10 9:01 AM

NIRC Philippines divided into revenue regions and further divided into revenue district

In TCC, Commissioner is also authorised to subdivide the Philippines into COLLECTION DISTRICTS headed by
district collector of customs

Has a port of entry or ports of entry (about 17 ports of entry and 34 sub-ports of entry)
o

Metro Manila: 3 (District 2A, 2B and 3)

San Fernando, Legazpi, Cebu, Subic, Clark

Normally has a customhouse

o

All imported articles must pass through these customhouses of an authorised ports of entry

Vessels cannot just unload cargo anywhere, must go through prescribed procedure

Import duty v Import Tax = TCC v NIRC (import tax, value added tax or excise tax)

But tariff and duties are used interchangeably. Tariff refers to a list or schedule of commodities with
corresponding rates of duties. Duties could refer to export duties or import duties. (However, under an EO
imposition of export duties has been removed except for export of logs)

Purpose of imposition of import duties

Revenue Generation

Regulation

Flexible Tariff Clause

The power of taxation is essentially legislative in nature, however, as an exception the president has
been delegated to increase, reduce, or remove existing protective rates of duty and to establish
import quotas or ban imports, impose an additional duty

Tariff Commission conducts the investigation and makes the recommendation to NEDA and NEDA
makes the recommendation to the president

Requirements of Importation

Beginning. Carrying vessel entering the Philippines must have the intention to unload the cargo.

End. Upon payment of the duties and taxes. Even if no actual payment was made, but if the owner,
importer, consignee of the goods puts up a bond to secure the payment of such duties and taxes.
But if the goods are not subject to duties and taxes, once the legal permit is granted for the
withdrawal of goods and goods have actually left the custody of the Bureau of Customs than the
Importation is deemed terminated.

Obligations of importer

Cargo Manifest. List of items in the cargo of the carrying vessel. The packages, the
quantity, the marks. Includes the port of departure and port of delivery. Prepared by the
carrying vessel describing the cargo aboard the vessel.

Difference from Bill of Lading. Refers to a specific cargo and just a part of the cargo
and its a contract between the importer consignee and the carrying vessel. It also
serves as an acknowledgement of the carrying vessel that it received those
commodities. It is also a title to the holder of the bill of lading.

Import entry. All importations must be covered by import entries. Duty of the consignee,
importer or holder of bill of lading. Must be filed within 30-days after date of discharge of the
last package from the carrying vessel

Declaration of Correct Weight or Value. After this, the Bureau of Customs will
have an examination and assessment of the duties by an examiner subject to the
approval of an appraiser and submitted to the district collector for final approval.

Liability for payment of duties

Liquidation of duties payment of duties as approved by the collector

Tentative liquidation

Final liquidation

Keeping of Records. 3 years from importation.

Needed for auditing, a new development for customs administration

Importation in violation of TCC

Smuggling
o

Pure smuggling imported goods do not pass through the customhouse of the ports of
entry. Unloaded or entered not through authorised ports of entry.

Technical smuggling goes through customhouse but done with intent to defraud the
government (misclassification, misdeclaration, undervaluation) purposely done to avoid the
duties and taxes

Imported Articles
1. Taxable importations subject to import duties
2. Prohibited importations
3. Conditionally-free importation

Examples: Articles brought into the Philippines to be re-exported (not intended to be kept in the
Philippines); Articles from the Philippines brought to another country for repair; Articles used for
public entertainment (i.e. exhibits); Articles of foreign film producers with intention to re-export it;
Importations of foreign embassies

52

Classification of Duties
1. Ordinary/Regular to generate revenue
2. Special for the protection of industries

Ordinary Duties
1. Ad Valorem based on the value of the imported article
2. Specific based on the weight or measurement (#of units, the head, or any unit of measurement)

Special Duties
1. Dumping Duties in addition to the regular duties, purpose is to offset any disadvantage of local industry as
a result of the undervaluation of the imported article (sold at less than fair market value)

Computed with the difference of the FMV to the selling price

Such amount is imposed in addition to the regular duties

Determined by the Secretary of Trade and Industry for non-agricultural products; Secretary of
Agriculture for agricultural products; Upon prior determination of the Tariff Commission

2. Countervailing Duties when a foreign government (of the country of origin) gives a subsidy so as to
counteract that, our government imposes a countervailing duty

The subsidy could be bounty (cash reward to the manufacturer) or a subsidy (fiscal incentives) to
encourage manufacturers; or subvention (any assistance given to the manufacturer)

Countervailing duty is equal to the estimated amount of subsidy

DTI secretary and DA secretary based on the prior determination by the Tariff Commission
o

TC is discretionary; the DTI and DA secretarys decisions are appealable to the Court of Tax
Appeals

3. Marking Duties On top of the regular duties +5% ad valorem for failure of the importer to mark the imported
articles or containers

Failure or refusal to mark within 30-days the articles will be deemed abandoned

Commissioner of Customs imposes (no longer the Secretaries)

4. Retaliatory/Discriminatory
5. Safeguard measures

Passed by Congress after signing the GATT/WTO

Imposing authority is the DTI/DA Secretary upon the prior and final determination by the Tariff
Commission

Methods of Valuation for Ad Valorem Taxes

1. Transaction Value

Price actually paid by the importer to the seller of the goods + additional cost incurred

53

Distinguished from Home Consumption Value the value if it were to be bought at the principal
market (old base before)

2. Transaction Value of Identical Goods

Identical goods has the same characteristics, same quality, same function

3. Transaction Value of Similar Goods

Not alike in all respects, may perform the same functions and commercially interchangeable

4. Deductive Value

Deducing the transaction value of the imported commodity

Formulae
Unit Price of Identical/Similar Good (sold at or about the same time in the Philippine market)
Less: Commission/Additions (profit, general expenses)
Less: Costs
Less: Duties and Taxes
DEDUCTIVE VALUE

5. Computed Value

Look into the component costs of the commodity

6. Fallback Value

Reasonable means and available data

Drawbacks

Refunds or tax credits

Some importations are entitled to a duty drawback after they have been paid prior to importation,
upon re-exportation, the importer could ask for a duty drawback for duties previously paid

Remedies of the Government

Extrajudicial
o

All articles are subject to a tax lien. Enforced by withholding release or discharge. Available
if only the commodities are still in the custody of the Bureau of Customs. Also available if the
commodities are not prohibited importation and proper making of import entries.

Period for enforcement: As long as the property is within the custody

Seizure and Forfeiture

Issue a warrant for the detention of the property (issued to the importer or consignee
or holder of the bill of lading)

Notice and hearing (formal)

Collector renders a decision

Appealable to Customs Commissioner CTA SC

54

Even if the goods are no longer in the custody of the Bureau of Customs, even if
they are in the hands of an innocent purchaser for value (good faith is not a defence
for the action for seizure, just for the criminal prosecution), the remedy is still
available

Action in rem against property (Republic v Goods, e.g. Republic v 2 Mercedes Benz
cars)

Administrative

Judicial
o

Collection suit. Government can only file a civil action for collection, not a criminal action
(unlike in the NIRC, where criminal actions are permitted)

Remedies of a Taxpayer

Protest
o

Issue: Legality of the assessment

Filed with the district collector

There must be a payment under protest. This is a prerequisite just like real property tax. It is
a jurisdictional requirement.

Filed within 15 days upon payment

Contents: Must be limited to the subject matter of a single adjustment (only what is
contained in the liquidation report), but of course it may raise many issues related to that
single adjustment

Failure to protest makes it final and unappealable

Appeal Commissioner (automatic review if against government) CTA (30 days)

Secretary of Finance could review, but it does not stall the prescriptive periods (but
if the decision is adverse to the government, automatic review)

Abandonment
o

In writing, addressed to the collector of customs concerned

Must be subscribed and sworn to by the importer before a notary public or authorised
customs officer

Implied abandonment. Failure to mark, failure to file an entry, failure to claim after entry.

Effect: importer renounces right over the property, becomes the property of government
which could be sold at option

Final Exams
70% MCQ
30% Remedies, Local Government Taxation, Real Property Taxation, Import Taxation

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