Académique Documents
Professionnel Documents
Culture Documents
ii
iii
TABLE OF CONTENTS O.4. POWER TO TAX INVOLVES POWER TO
DESTROY ............................................................ 27
TAXATION 1 O.5. ESCAPE FROM TAXATION ......................... 27
iv
OWNERSHIPS, JOINT VENTURES AND II. DONOR’S TAX .................................... 144
CONSORTIUMS .................................................. 114
A. BASIC PRINCIPLES .................................... 144
E. FILING OF RETURNS AND PAYMENT OF
INCOME TAX .................................................. 116 B. DEFINITION................................................ 144
E.4. WHERE TO FILE INCOME TAX RETURNS .. 118 G. TRANSFER FOR LESS THAN ADEQUATE
AND FULL CONSIDERATION ........................ 145
E.5. PENALTIES FOR NON-FILING OF RETURNS
............................................................................ 118 H. CLASSIFICATION OF DONOR ................... 145
F. WITHHOLDING OF TAXES ......................... 118 I. DETERMINATION OF GROSS GIFT
F.1. CONCEPT OF WITHHOLDING TAXES ......... 118 (INCLUDING COMPOSITION OF GROSS GIFT)
........................................................................ 146
F.2. KINDS OF WITHHOLDING TAXES .............. 119
J. VALUATION OF GIFTS MADE IN PROPERTY
........................................................................ 147
TAXATION 2 K. TAX CREDIT FOR DONOR’S TAXES PAID IN
A FOREIGN COUNTRY ...................................148
I. ESTATE TAX ......................................... 121
L. EXEMPTIONS OF GIFTS FROM DONOR’S
A. BASIC PRINCIPLES .................................... 121 TAX ................................................................. 149
B. DEFINITION ............................................... 121 M. PERSON LIABLE ....................................... 149
C. NATURE ..................................................... 121 N. TAX BASIS ................................................. 149
D. PURPOSE OR OBJECT .............................. 121 III. VALUE-ADDED TAX (VAT) .................157
E. TIME AND TRANSFER OF PROPERTIES .. 121 A. CONCEPT ................................................... 157
F. CLASSIFICATION OF DECEDENT ..............122 B. CONSTITUTIONALITY OF VAT .................. 157
F.1. CONCEPT OF RESIDENCE .......................... 122
C. CHARACTERISTICS/ELEMENTS OF A VAT-
F.2. RULE OF RECIPROCITY ............................. 123 TAXABLE TRANSACTION .............................. 157
G. GROSS ESTATE VIS-À-VIS NET ESTATE . 124 D. IMPACT OF TAX V. INCIDENT OF TAX ..... 158
H. DETERMINATION OF GROSS ESTATE AND E. TAX CREDIT METHOD ............................... 158
NET ESTATE (AND COMPOSITION) ............. 124
F. DESTINATION PRINCIPLE ......................... 159
VALUATION OF GROSS ESTATE (SEC 88) ...126
G. PERSONS LIABLE ...................................... 159
J. ITEMS TO BE INCLUDED IN GROSS ESTATE
H. VAT ON SALE OF GOODS OR PROPERTIES
........................................................................126
........................................................................160
K. DEDUCTIONS FROM ESTATE ...................129
I. ZERO-RATED SALES OF GOODS OR
K.1. ORDINARY DEDUCTIONS .......................... 129 PROPERTIES, AND EFFECTIVELY ZERO-
L. EXCLUSIONS FROM ESTATE ....................135 RATED SALES OF GOODS OR PROPERTIES162
M. TAX CREDIT FOR ESTATE TAXES PAID IN A J. TRANSACTIONS DEEMED SALE (SEC. 106 (B)
FOREIGN COUNTRY ...................................... 137 ........................................................................ 164
N. ZERO-RATED SALE OF SERVICES .......... 169 C.6. SITUS OF TAX COLLECTED ...................... 235
O. VAT EXEMPT TRANSACTIONS ................ 169 D. TAXING POWERS OF BARANGAYS ........ 236
Q. SOURCES OF INPUT TAX .......................... 176 E. COMMON REVENUE RAISING POWERS. 237
R. PERSONS WHO CAN AVAIL OF INPUT TAX F. COMMUNITY TAX ..................................... 238
CREDIT............................................................ 176 F.1. TAX PERIOD AND MANNER OF PAYMENT
...........................................................................240
S. DETERMINATION OF OUTPUT/INPUT TAX;
VAT PAYABLE; EXCESS INPUT TAX CREDITS F.2. ACCRUAL OF TAX......................................240
........................................................................ 177 F.3. TIME OF PAYMENT ....................................240
S.1. DETERMINATION OF OUTPUT TAX............177 F.4. PENALTIES ON UNPAID TAXES, FEES OR
S.2. DETERMINATION OF INPUT TAX CHARGES ..........................................................240
CREDITABLE .......................................................177 F.5. AUTHORITY OF TREASURER IN COLLECTION
S.3. ALLOCATION OF INPUT TAX ON MIXED AND INSPECTION OF BOOKS ..........................240
TRANSACTIONS .................................................177 G. TAXPAYER’S REMEDIES .......................... 240
T. SUBSTANTIATION OF INPUT TAX CREDITS G.1. PERIODS OF ASSESSMENT AND
........................................................................ 177 COLLECTION OF LOCAL TAXES, FEES OR
CHARGES ..........................................................240
U. REFUND OR TAX CREDIT OF EXCESS INPUT
TAX (CF REFUND OF ERRONEOUSLY PAID G.2. PROTEST OF ASSESSMENT .....................240
TAXES) ........................................................... 182 G.3. CLAIM FOR REFUND OF TAX CREDIT FOR
ERRONEOUSLY OR ILLEGALLY COLLECTED TAX,
V. INVOICING REQUIREMENTS ....................183
FEE OR CHARGE...............................................240
W. FILING OF RETURN AND PAYMENT ...... 185
H. CIVIL REMEDIES BY THE LGU FOR
X. WITHHOLDING OF FINAL VAT ON SALES TO COLLECTION OF REVENUES ....................... 240
GOVERNMENT .............................................. 185
H.1. LOCAL GOVERNMENT’S LIEN FOR
IV. TAX REMEDIES UNDER THE NIRC.....197 DELINQUENT TAXES, FEES OR CHARGES .....240
C.1. TAX ON VARIOUS TYPES OF BUSINESSES I.8. ASSESSMENT OF REAL PROPERTY ......... 246
...........................................................................233 I.9. COLLECTION OF REAL PROPERTY TAX ... 246
C.2 CEILING ON BUSINESS TAX IMPOSSIBLE ON I.10. SPECIAL RULES ON PAYMENT ................ 246
MUNICIPALITIES WITHIN METRO MANILA .... 235
J. TAXPAYER’S REMEDIES ........................... 247
C.3. TAX ON RETIREMENT ON BUSINESS ...... 235
J.1. ADMINISTRATIVE ....................................... 247
C.4 RULES ON PAYMENT OF BUSINESS TAX 235
vi
J.2. JUDICIAL .................................................... 248 I. REMEDIES .................................................. 267
VII. TARIFF AND CUSTOMS CODE OF 1978, I.1. GOVERNMENT ............................................ 267
AS AMENDED ........................................ 252 I.2. TAXPAYER .................................................. 269
A. TARIFF AND DUTIES, DEFINED ............... 252 VIII. JUDICIAL REMEDIES....................... 275
B. GENERAL RULE: ALL IMPORTED ARTICLES A. JURISDICTION OF THE COURT OF TAX
ARE SUBJECT TO DUTY [SEC. 101, TCC; SEC. APPEALS ....................................................... 275
104, CMTA] .................................................... 252
A.1. CIVIL TAX CASES........................................ 275
C. PURPOSE FOR IMPOSITION .................... 252
A.2. CRIMINAL CASES ...................................... 275
D. FLEXIBLE TARIFF CLAUSE....................... 252 B. JUDICIAL PROCEDURES .......................... 276
E. REQUIREMENTS OF IMPORTATION ....... 253 B.1. JUDICIAL ACTION FOR COLLECTION OF
E.1. BEGINNING AND ENDING OF IMPORTATION TAXES................................................................ 276
.......................................................................... 253 B.2. CIVIL CASES................................................277
E.2. OBLIGATIONS OF IMPORTER .................. 253 B.3. CRIMINAL CASES ...................................... 279
F. IMPORTATION IN VIOLATION OF TCC .... 257 C. TAXPAYER’S SUIT IMPUGNING THE
F.1. SMUGGLING............................................... 257 VALIDITY OF TAX MEASURES OR ACTS OF
F.2. OTHER FRAUDULENT PRACTICES .......... 258 TAXING AUTHORITIES ................................. 280
C.1. TAXPAYER’S SUIT, DEFINED ....................280
G. CLASSIFICATION OF GOODS...................258
C.2. DISTINGUISHED FROM CITIZEN’S SUIT ..280
G.1. TAXABLE IMPORTATION .......................... 258
C.3. REQUISITES FOR CHALLENGING THE
G.2. PROHIBITED IMPORTATION.................... 258
CONSTITUTIONALITY OF A TAX MEASURE OR
G.3. CONDITIONALLY-FREE IMPORTATION .. 259 ACT OF TAXING AUTHORITY ...........................280
H. CLASSIFICATION OF DUTIES................... 264
H.1. ORDINARY/REGULAR DUTIES ................ 264
H.2. SPECIAL DUTIES....................................... 267
vii
UP LAW BOC TAXATION 1 TAXATION LAW
TAXATION LAW
TAXATION 1
PAGE 1 OF 275
UP LAW BOC TAXATION 1 TAXATION LAW
(2) The process or means by which the sovereign, (3) Be a bargaining tool by setting tariff rates first
through its law-making body, raises income to at a relatively high level before trade
defray the necessary expenses of government; a negotiations are entered into with another
method of apportioning the cost of government country.
among those who in some measure are privileged (4) Halt inflation in periods of prosperity to curb
to enjoy its benefits and must, therefore, bear its spending power; ward off depression in
burdens [51 Am. Jur. 34; 1 Cooley 72-93]. periods of slump to expand business.
(3) As a power, it refers to the inherent power of (5) Reduce inequalities in wealth and incomes, as
the state to demand enforced contributions for for instance, the estate, donor's and income
public purpose or purposes. taxes, their payers being the recipients of
(4) Is described as a destructive power which unearned wealth or mostly in the higher
interferes with the personal and property rights of income brackets. Progressive system of
the people and takes from them a portion of their taxation prevents the undue concentration of
property for the support of the government. wealth in the hands of a few individuals.
[Paseo Realty & Development Corporation v. CA, Progressivity is keystoned on the principle that
G.R. No. 119286 (2004)] those who are able to pay shoulder the bigger
portion of the tax burden. [Mamalateo]
PAGE 2 OF 275
UP LAW BOC TAXATION 1 TAXATION LAW
landmark legislation on sin taxes in 2012 (see provided in the fundamental law or implied
R.A. No. 10351). therefrom, while the rest spring from the nature
of the taxing power itself although they may or
may not be provided in the Constitution.
B. NATURE AND CHARACTERISTICS OF
TAXATION
B.2 CHARACTERISTICS
B.1 NATURE (1) It is an enforced contribution for its imposition
is in no way dependent upon the will or assent
1) Inherent in sovereignty – The power to tax is an of the person taxed. It is not contractual, either
attribute of sovereignty. It is a power emanating express or implied, but positive acts of
from necessity. It is a necessary burden to government.
preserve the State's sovereignty and a means to
give the citizenry an army to resist an aggression, (2) It is generally payable in the form of money,
a navy to defend its shores from invasion, a corps although the law may provide payment in kind
of civil servants to serve, public improvement (e.g. backpay certificates under Sec. 2, R.A. No.
designed for the enjoyment of the citizenry and 304, as amended);
those which come within the State's territory, and (3) It is proportionate in character or is laid by
facilities and protection which a government is some rule of apportionment which is usually
supposed to provide [Phil. Guaranty Co., Inc. v. based on ability to pay.
Commissioner, G.R. No. L-22074 (1965)].
“The rule of taxation shall be uniform and
equitable. The Congress shall evolve a
2) Essentially a legislative function – The power to progressive system of taxation.” [Sec. 28 (1),
tax is peculiarly and exclusively legislative and Art. VI, 1987 Constitution]
cannot be exercised by the executive or judicial (4) It is levied on persons, property, rights, acts,
branch of the government [1 Cooley 160-161]. privileges, or transactions.
Hence, only Congress, our national legislative
body, can impose taxes. The levy of a tax, (5) It is levied by the State which has jurisdiction
however, may also be made by a local legislative or control over the subject to be taxed.
body subject to such limitations as may be (6) It is personal to the taxpayer.
provided by law. It includes the authority to:
(7) It is levied by the law-making body of the
(a) Determine the nature, purpose, extent, State. The power to tax is a legislative power
coverage, apportionment, situs, and method but is also granted to local governments,
of collection of the tax; subject to such guidelines and limitations as
(b) Grant tax exemptions or condonations; and law may be provided by law.
(c) Specify or provide for the administrative as “Each local government unit shall have the
well as judicial remedies that either the power to create its own sources of revenues
government or the taxpayers may avail and to levy taxes, fees, and charges subject to
themselves in the proper implementation of such guidelines and limitations as the
the tax measure. Congress may provide, consistent with the
basic policy of local autnomy. Such taxes, fees,
and charges shal accrue exclusively to the
3) Subject to constitutional and inherent local governments.” [Sec. 5, Art. X, 1987
limitations – The power to tax is said to be the Constitution];
strongest of all the powers of government. It is (8) It is levied for public purpose. Revenues
unlimited, plenary, comprehensive and supreme, derived from taxes cannot be used for purely
in the absence of constitutional restrictions, the private purposes or for the exclusive benefit of
principal check on its abuse resting in the private persons. [Gaston v. Republic Planters
responsibility of members of Congress to their Bank, G.R. No. 77194 (1988)]. The “public
constituents. However, the power of taxation is purpose or purposes” of the imposition is
subject to constitutional and inherent limitations implied in the levy of tax. [Mendoza v.
[Mamalateo]. These limitations are those Municipality, G.R. No. L-7373 (1954)]. A tax
PAGE 3 OF 275
UP LAW BOC TAXATION 1 TAXATION LAW
levied for a private purpose constitutes a (9) It is also an important characteristic of most
taking of property without due process of law; taxes that they are commonly required to be
and paid at regular periods or intervals (see 1
Cooley 64) every year.
([Mamalateo, Reviewer on Taxation 2nd Edition (2008), Rex Bookstore, Inc., pp. 11-12)
PAGE 5 OF 275
UP LAW BOC TAXATION 1 TAXATION LAW
D. THEORY AND BASIS OF TAXATION authorities, every person who is able to must
contribute his share in the running of the
(1) Lifeblood theory government. The government for its part is
Taxes are the lifeblood of the government and expected to respond in the form of tangible
their prompt and certain availability is an and intangible benefits intended to improve
imperious need. [CIR v. Pineda, G.R. No. L- the lives of the people and enhance their
22734 (1967)] moral and material values. This symbiotic
relationship is the rationale of taxation and
Taxes are the lifeblood of the government and
should dispel the erroneous notion that it is an
so should be collected without unnecessary
arbitrary method of exaction by those in the
hindrance. It is said that taxes are what we pay
seat of power. [CIR v. Algue, supra]
for civilized society. Without taxes, the
government would be paralyzed for lack of the
(4) Jurisdiction over subject and objects
motive power to activate and operate it [CIR v.
The limited powers of sovereignty are confined
Algue, G.R. No. L-28896 (1988)].
to objects within the respective spheres of
governmental control. These objects are the
(2) Necessity theory proper subjects or objects of taxation and
The power of taxation proceeds upon theory none else.
that the existence of government is a
necessity; that is cannot continue without
means to pay its expenses; and that for those E. PRINCIPLES OF A SOUND TAX
means it has the right to compel all citizens SYSTEM
and property within its limits to contribute. (1) Fiscal adequacy
The sources of tax revenue should coincide
The power to tax is an attribute of sovereignty. with, and approximate the needs of,
It is a power emanating from necessity. It is a government expenditures. The revenue
necessary burden to preserve the State's should be elastic or capable of expanding or
sovereignty and a means to give the citizenry: contracting annually in response to variations
an army to resist an aggression; in public expenditures.
a navy to defend its shores from invasion;
a corps of civil servants to serve’ (2) Administrative feasibility
public improvement designed for the Tax laws should be capable of convenient, just
enjoyment of the citizenry and those which and effective administration. Each tax should
come within the State's territory; and be capable of uniform enforcement by
facilities and protection which a government officials, convenient as to the
government is supposed to provide. time, place, and manner of payment, and not
[Phil. Guaranty v. CIR, G.R. No. L-22074 unduly burdensome upon, or discouraging to
(1965)] business activity.
The obligation to pay taxes rests upon the (3) Theoretical justice or equality
necessity of money for the support of the state. The tax burden should be in proportion to the
For this reason, no one is allowed to object to taxpayer’s ability to pay. This is the so-called
or resist the payment of taxes solely because ability to pay principle. Taxation should be
no personal benefit to him can be pointed out. uniform as well as equitable
[Lorenzo v. Posadas, G.R. No. L-43082 (1937)] Note: The non-observance of the above
principles will not necessarily render the tax
(3) Benefits-protection Theory (Symbiotic imposed invalid except to the extent those
Relationship) specific constitutional limitations are violated.
This principle serves as the basis of taxation (De Leon)
and is founded on the reciprocal duties of
protection and support between the State and
its inhabitants.
Despite the natural reluctance to surrender
part of one's hard earned income to the taxing
PAGE 6 OF 275
UP LAW BOC TAXATION 1 TAXATION LAW
Thus, the property or income of a foreign state (c) The practical effect of an exemption
or government may not be the subject of running to the benefit of the government is
taxation by another state. merely to reduce the amount of money that
has to be handled by the government in the
Reasons:
course of its operations: For these reasons,
(1) In par in parem non habet imperium. As
provisions granting exemptions to government
between equals there is no sovereign
agencies may be construed liberally in favor of
(Doctrine of Sovereign Equality among
non-tax liability of such agencies. [Maceda v.
states under international law). One state
Macaraig, Jr., G.R. No. 88291 (1991)].
cannot exercise its sovereign powers over
another.) Exception: There is no constitutional
prohibition against the government taxing
(2) In international law, a foreign government
itself. [Coll. v. Bisaya Land Transportation, 105
may not be sued without its consent →
Phil. 338 (1959)].
useless to impose a tax which could not be
collected.
If the taxing authority is a local government
(3) Usage among states that when a foreign unit: RA 7160 expressly prohibits LGUs from
sovereign enters the territorial jurisdiction levying tax on the National Government, its
of another, there is an implied agencies and instrumentalities and other
understanding that the former does not LGUs. [Sec. 133 (o), Local Government Code]
intend to degrade its dignity by placing
itself under the jurisdiction of the other. F.2. CONSTITUTIONAL LIMITATIONS
PAGE 9 OF 275
UP LAW BOC TAXATION 1 TAXATION LAW
amount or equality in its strict and essentiality to the taxpayer of the object of
literal meaning. The reason is simple taxation, or on the taxpayer’s ability to pay.
enough. If legislation imposes a single Example is that individual income tax system
tax upon all persons, properties, or that imposes rates progressing upwards as
transactions, an inequality would the tax base (taxpayer’s taxable income)
obviously result considering that not all increases. A progressive tax, however, must
persons, properties, and transactions not be confused with a progressive system of
are identical or similarly situated. taxation.
Neither does uniformity demand that
While equal protection refers more to like
taxes shall be proportional to the
treatment of persons in like circumstances,
relative value or amount of the subject
uniformity and equity refer to the proper
thereof. Taxes may be progressive.
relative treatment for tax purposes of persons
in unlike circumstances.
(2) Equity
(a) Uniformity in taxation is effected through (iii) Grant by Congress of authority to the
the apportionment of the tax burden among President to impose tariff rates
the taxpayers which under the Constitution Delegation of Tariff powers to the President
must be equitable. “Equitable” means fair, under the flexible tariff clause [Sec. 28(2), Art.
just, reasonable and proportionate to the VI, 1987 Constitution], which authorizes the
taxpayer’s ability to pay. Taxation may be President to modify import duties. [Sec. 1608,
uniform but inequitable where the amount of Customs Modernization and Tariff Act;
the tax imposed is excessive or unreasonable. previously, Sec. 401, TCC]
(b) The constitutional requirement of equity in
(iv) Prohibition against taxation of religious,
taxation also implies an approach which
charitable entities, and educational entities
employees a reasonable classification of the
entities or individuals who are to be affected
Art. VI, Sec. 28(3), 1987 Constitution:
by a tax. Where the “tax differentiation is not (a) Charitable institutions, churches and
based on material or substantial differences,” personages or convents appurtenant
the guarantee of equal protection of the laws thereto, mosques, non-profit
and the uniformity rule will likewise be cemeteries, and all lands, buildings, and
infringed. improvements,
(b) Actually, directly, and exclusively used
Taxation does not require identity or equality
for religious, charitable, or educational
under all circumstances, or negate the
purposes shall be exempt from taxation.
authority to classify the objects of taxation.
Classification, to be valid, must be reasonable (c) The tax exemption under this
and this requirement is not deemed satisfied constitutional provision covers property
unless: taxes only and not other taxes [Lladoc v.
(1) It is based upon substantial distinctions Commissioner, G.R. No. L-19201 (1965)].
which make real differences;
(2) These are germane to the purpose of the
legislation or ordinance; In general, special assessments are not
covered by the exemption because by
(3) The classification applies not only to
nature they are not classified as taxes.
present conditions but also to future
[Apostolic Prefect v. City Treasurer of
conditions substantially identical to those
Baguio, G.R. No. L-47252 (1941)]
of the present; and
(4) The classification applies equally to all
those who belong to the same class. To be entitled to the exemption, the petitioner
[Pepsi-Cola v. Butuan City, G.R. No. L- must prove that:
22814 (1968)]
The progressive system of taxation would (1) It is a charitable institution
place stress on direct rather than indirect (2) Its real properties are actually, directly and
taxes, on non-essentiality rather than exclusively used for charitable purposes.
PAGE 10 OF 275
UP LAW BOC TAXATION 1 TAXATION LAW
including restrictions on dividends and Art. VI, Sec. 28, par. 3 Art. XIV, Sec. 4,
provisions for reinvestment. par. 3
religious, charitable,
(4) Subject to conditions prescribed by law,
or educational
all grants, endowments, donations, or
purposes.
contributions used actually, directly, and
exclusively for educational purposes shall Property taxes Income, property,
be exempt from tax. and donor’s taxes
and custom duties.
This provision covers only non-stock, non-
profit educational institutions. (vi) Majority vote of Congress for grant of tax
The exemption covers income, property, and exemption
donor’s taxes, custom duties, and other taxes Art. VI, Sec. 28, 1987 Constitution. No law
imposed by either or both the national granting any tax exemption shall be passed
government or political subdivisions on all without the concurrence of a majority of all
revenues, assets, property or donations, used the Members of the Congress.
actually, directly and exclusively for
educational purposes. (In the case of religious
Basis: The inherent power of the state to
and charitable entities and non-profit
impose taxes carries with it the power to grant
cemeteries, the exemption is limited to
tax exemptions.
property tax.)
The exemption does not cover revenues
Exemptions may be created by:
derived from, or assets used in, unrelated
activities or enterprise. (1) The Constitution, or
(2) Statutes, subject to constitutional
Similar tax exemptions may be extended to limitations
proprietary (for profit) educational institutions
by law subject to such limitations as it may Vote required for the grant of exemption:
provide, including restrictions on dividends Absolute majority of the members of Congress
and provisions for reinvestment. The (at least ½ + 1 of ALL the members voting
restrictions are designed to insure that the SEPARATELY)
tax-exemption benefits are used for Vote required for withdrawal of such grant of
educational purposes. exemption: Relative majority is sufficient
Lands, buildings, and improvements actually, (majority of the quorum).
directly and exclusively used for educational The provision guaranteeing equal protection
purposes are exempt from property tax [Sec. of the laws and that mandating the rule of
28(3), Art. VI, 1987 Constitution], whether the taxation shall be uniform and equitable
educational institution is proprietary or non- likewise limit, although not expressly, the
profit. legislative power to grant tax exemption.
Art. VI, Sec. 28, par. 3 Art. XIV, Sec. 4, Grants in the nature of tax exemptions:
par. 3 (1) Tax amnesties
Charitable Non-stock, non- (2) Tax condonations
institutions, churches profit educational (3) Tax refunds
and parsonages or institutions.
convents
appurtenant thereto, Note:
mosques, non-profit (1) Local government units may, through
cemeteries, and all ordinances duly approved, grant tax
lands, buildings, and exemptions, incentives or reliefs under
improvements, such terms and conditions as they may
actually, directly, and deem necessary. [Sec. 192, LGC]
exclusively used for
PAGE 12 OF 275
UP LAW BOC TAXATION 1 TAXATION LAW
(2) The President of the Philippines may, Even the legislative body cannot deprive the
when public interest so requires, condone SC of its appellate jurisdiction over all cases
or reduce the real property tax and interest coming from inferior courts where the
for any year in any province or city or a constitutionality or validity of an ordinance or
municipality within the Metropolitan the legality of any tax, impost, assessment, or
Manila Area. [Sec. 277, LGC] toll is in question. [San Miguel Corp v. Avelino,
G.R. No. L-39699 (1979)]
(vii) Prohibition on use of tax levied for special
purpose Art. VI, Sec. 30, 1987 Constitution. No law
All money collected on any tax levied for a shall be passed increasing the appellate
special purpose shall be treated as a special jurisdiction of the Supreme Court without
fund and paid out for such purpose only. its advice and concurrence.
If the purpose for which a special fund was
created has been fulfilled or abandoned, the
balance, if any, shall be transferred to the Scope of Judicial Review in taxation: limited
general funds of the Government. [Gaston v. only to the interpretation and application of
Republic Planters Bank, G.R. No. L-77194 tax laws. Its power does not include inquiry
(1988)]. into the policy of legislation. Neither can it
legitimately question or refuse to sanction the
provisions of any law consistent with the
(viii) President’s veto power on appropriation, Constitution. [Coll. v. Bisaya Land
revenue, tariff bills Transportation, 105 Phil. 338 (1959)].
Art. VI, Sec. 27(2), 1987 Constitution. The
President shall have the power to veto any
(x) Grant of power to the local government
particular item or items in an appropriation,
units to create its own sources of revenue
revenue, or tariff bill, but the veto shall not
LGUs have power to create its own sources of
affect the item or times to which he does not
revenue and to levy taxes, fees and charges,
object.
subject to such guidelines and limitations as
the Congress may provide which must be
consistent with the basic policy of local
(ix) Non-impairment of jurisdiction of the
autonomy. [Art. X, Sec. 5, 1987 Constitution]
Supreme Court
Art VIII, Sec. 2, 1987 Constitution. The
Congress shall have the power to define, (xi) Flexible tariff clause
prescribe, and apportion the jurisdiction of Delegation of tariff powers to the President
the various courts but may not deprive the under the flexible tariff clause [Art. VI, Sec.
Supreme Court of its jurisdiction over cases 28(2), 1987 Constitution]
enumerated in Section 5 hereof. Flexible tariff clause: the authority given to the
President, upon the recommendation of
Art. VIII, Sec. 5(2(b)), 1987 Constitution. The NEDA, to adjust the tariff rates under Sec.
Supreme Court shall have the following 1608 of the CMTA (previously, Sec. 401, CMTA)
powers: in the interest of national economy, general
welfare and/or national security.
(2) Review, revise, modify or affirm on
appeal or certiorari, as the laws or the Rules
of Court may provide, final judgments and (xii) Exemption from real property taxes
orders of lower courts in Art. VI, Sec. 28(3), 1987 Constitution
(b) all cases involving the legality of any Charitable institutions, churches and
tax, impost, assessment or toll or personages or convents appurtenant
any penalty imposed in relation thereto, mosques, non-profit cemeteries,
thereto. and all lands, buildings, and improvements,
actually, directly, and exclusively used for
PAGE 13 OF 275
UP LAW BOC TAXATION 1 TAXATION LAW
PAGE 14 OF 275
UP LAW BOC TAXATION 1 TAXATION LAW
PAGE 15 OF 275
UP LAW BOC TAXATION 1 TAXATION LAW
H. DEFINITION, NATURE AND (3) The person or property taxed is within the
CHARACTERISTICS OF TAXES jurisdiction of the taxing authority;
(4) Assessment and collection is in
H.1 TAXES consonance with the due process clause;
AND
(a) Are enforced proportional contributions
from persons and property levied by the law- (5) The tax must not infringe on the inherent
making body of the State by virtue of its and constitutional limitations of the power
sovereignty for the support of the government of taxation.
and all public needs.
(b) Are the enforced proportional and J. TAX AS DISTINGUISHED FROM
pecuniary contributions from persons and
OTHER FORMS OF EXACTIONS
property levied by the law-making body of the
state having jurisdiction over the subject of the (1) Tariff
burden for the support of the government and Taxes Tariff
public needs. All embracing term to A kind of tax imposed
include various kinds on articles which are
(c) Are what we pay for civilized society.
of enforced traded internationally
Without taxes, the government would be
contributions upon
paralyzed for lack of the motive power to
persons for the
activate and operate it. [CIR v. Algue, supra]
attainment of public
purposes
Essential Characteristics
(a) It is a forced charge, imposition or (2) Toll
contribution. As such, it operates ad Taxes Toll
infinitum. Paid for the support Paid for the use of
(b) It is assessed in accordance with some of the government another’s property.
reasonable rule of apportionment which Demand of Demand of
means that conformably with the sovereignty proprietorship
constitutional mandate for Congress to
evolve a progressive tax system, taxes Generally, no limit on Amount paid
must be based on taxpayer’s ability to pay the amount collected depends upon the
[Art VI, Sec 28[a], 1987 Constitution] as long as it is not cost of construction
excessive, or maintenance of the
(c) It is a pecuniary burden payable in money. unreasonable or public improvement
(d) It is imposed by the State on persons, confiscatory used.
property, or exercise within its jurisdiction, Imposed only by the Imposed by the
in accordance with the principle of government government or by
territoriality. private individuals or
(e) It is levied by the legislative body of the entities.
State. A toll is a sum of money for the use of
(f) It is levied for a public purpose. something, generally applied to the
consideration which is paid for the use of a
(g) It is personal to the taxpayer. road, bridge or the like, of a public nature. (1
Cooley 77.)
I. REQUISITES OF A VALID TAX The view has been expressed, however, that
the taking of tolls is only another method of
(1) For a public purpose; taxing the public for the cost of the
(2) Rule of taxation should be uniform; construction and repair of the improvement
for the use of which the toll is charged. (71 Am.
Jur. 2d 351.)
PAGE 16 OF 275
UP LAW BOC TAXATION 1 TAXATION LAW
PAGE 17 OF 275
UP LAW BOC TAXATION 1 TAXATION LAW
imposed upon each person performing are indirect (e.g., VAT, percentage tax,
a certain act or engaging in a certain excise taxes on specified goods,
business or profession are not, however, customs duties).
poll taxes. (71 Am. Jur. 2d 357).
(b) Property Tax – tax imposed on property,
(3) As to tax rates
real or personal, in proportion to its
(a) Specific Tax – a tax of a fixed amount
value or in accordance with some other
imposed by the head or number or by
reasonable method of apportionment
some other standard of weight or
(e.g., real estate tax). The obligation to
measurement. It requires no
pay the tax is absolute and unavoidable
assessment (valuation) other than the
and is not based upon the voluntary
listing or classification of the objects to
action of the person assessed.
be taxed (e.g., taxes on distilled spirits,
(c) Privilege/Excise Tax – any tax which wines, and fermented liquors; cigars
does not fall within the classification of and cigarettes)
a poll tax or a property tax. Thus, it is
(b) Ad Valorem Tax – a tax of a fixed
said that an excise tax is a charge
proportion of the value of the property
imposed upon the performance of an
with respect to which the tax is
act, the enjoyment of a privilege, or the
assessed. It requires the intervention of
engaging in an occupation, profession,
assessors or appraisers to estimate the
or business. The obligation to pay the
value of such property before the
tax is based on the voluntary action of
amount due from each taxpayer can be
the person taxed in performing the act
determined. The phrase “ad valorem”
or engaging in the activity which is
means literally, “according to value.”
subject to the excise. The term “excise
(e.g., real estate tax, excise tax on
tax” is synonymous with “privilege tax”
automobiles, non-essential goods such
and the two are often used
as jewelry and perfumes, customs
interchangeably (e.g., income tax, value
duties (except on cinematographic
added tax, estate tax, donor’s tax).
films)).
(c) Mixed
(2) As to burden or incidence
(a) Direct Taxes – taxes which are
demanded from persons who also (4) As to purpose
shoulder them; taxes for which the (a) General or Fiscal Tax – levied for the
taxpayer is directly or primarily liable, or general or ordinary purposes of the
which he cannot shift to another (e.g., Government, i.e., to raise revenue for
income tax, estate tax, donor’s tax, governmental needs (e.g., income tax,
community tax) VAT, and almost all taxes).
(b) Indirect Taxes – taxes which are (b) Special/Regulatory/Sumptuary Tax –
demanded from one person in the levied for special purposes, i.e., to
expectation and intention that he shall achieve some social or economic ends
indemnify himself at the expense of irrespective of whether revenue is
another, falling finally upon the actually raised or not (e.g., protective
ultimate purchaser or consumer; taxes tariffs or customs duties on imported
levied upon transactions or activities goods to enable similar products
before the articles subject matter manufactured locally to compete with
thereof, reach the consumers who such imports in the domestic market).
ultimately pay for them not as taxes but
Tariff duties intended mainly as a
as part of the purchase price. Thus, the
source of revenue are relatively low so
person who absorbs or bears the burden
as not to discourage imports.
of the tax is other than the one on whom
it is imposed and required by law to pay
the tax. Practically all business taxes
PAGE 19 OF 275
UP LAW BOC TAXATION 1 TAXATION LAW
(5) As to scope (or authority imposing the tax) situs is necessarily in the state which has
(a) National – taxes imposed by the jurisdiction or which exercises dominion over
national government (e.g., national the subject in question. Within the territorial
internal revenue taxes, customs duties, jurisdiction, the taxing authority may
and national taxes imposed by laws). determine the situs.
(b) Municipal or Local – taxes imposed by
local governments (e.g., business taxes
Factors that Determine Situs:
that may be imposed under the Local
(1) Nature of the tax;
Government Code, professional tax).
(2) Subject matter of the tax (person, property,
act or activity);
(6) As to graduation
(a) Progressive – The rate of tax increases as (3) Possible protection and benefit that may
the tax base or bracket increases, e.g., accrue both to the government and the
income tax, estate tax, donor’s tax. taxpayer;
(b) Regressive – The rate of tax decreases as (4) Citizenship of the taxpayer;
the tax base or bracket increases. There is
(5) Residence of the taxpayer;
no regressive tax in the Philippines.
(6) Source of income.
(c) Proportionate – The rate of tax is based on
a fixed percentage of the amount of the
property, receipts or other basis to be taxed, (b) Situs of Income Tax
e.g., real estate tax, VAT, and other
percentage taxes. Taxpayer Source of Income
Citizen- Residency Within Without
(d) Digressive – A fixed rate is imposed on a
ship Phils. Phils.
certain amount and diminishes gradually
on sums below it. The tax rate in this case Filipino Resident Taxable Taxable
is arbitrary because the increase in tax rate
is not proportionate to the increase of tax Filipino Non- Taxable Non-
base. Resident Taxable
Alien Resident Taxable Non-
Taxable
Regressive/Progressive system of taxation
A regressive tax must not be confused with the Alien Non- Taxable Non-
regressive system of taxation. Resident Taxable
In a society where the majority of the people
have low incomes, regressive taxation system (c) Situs of Property Tax
exists when there are more indirect taxes
imposed than direct taxes. Since the low- Kind of Property Situs
income sector of the population as a whole Real property Where it is located
buys more consumption goods on which the (lex rei sitae)
indirect taxes are collected, the burden of Tangible Personal Where property is
indirect taxes rests more on them than on the property physically located
more affluent groups. although the owner
A progressive tax is, therefore, also different resides in another
from a progressive system of taxation. jurisdiction.
Intangible personal Gen Rule: Domicile
property (e.g., of the owner.
L. SITUS OF TAXATION credits, bills Mobilia sequuntur
(a) Meaning: Situs of taxation literally means receivables, bank personam
the place of taxation. The basic rule is that the deposits, bonds, (movables follow
state where the subject to be taxed has a situs promissory notes, the person)
may rightfully levy and collect the tax; and the mortgage loans,
PAGE 20 OF 275
UP LAW BOC TAXATION 1 TAXATION LAW
Kind of Property Situs General Rule: Tax laws are construed strictly
judgments and against the government and liberally in favor
corporate stocks) of the taxpayer. [Manila Railroad Co. v. Coll. of
Exceptions: Customs, G.R. No. L-30264 (1929)].
(1) When property No person or property is subject to taxation
has acquired a unless within the terms or plain import of a
business situs in taxing statute. (see72 Am.Jur. 2d 44).
another
jurisdiction; or Taxes, being burdens, they are not to be
presumed beyond what the statute expressly
(2) When the law and clearly declares. [Coll. v. La Tondena, G.R.
provides for the No. L-10431 (1962)]. Thus, a tax payable by
situs of the “individuals” does not apply to “corporations.”
subject of tax
(e.g., Sec 104, Tax statutes offering rewards are liberally
NIRC) construed in favor of informers. [Penid v.
Virata, G.R. No. L-44004 (1983)].
taxpayer. [Republic Flour Mills v. Comm. & It is an elementary rule in administrative law
CTA, G.R. No. L-25602 (1970)]. that administrative regulations and policies
enacted by administrative bodies to interpret
(a) NPC v. Albay [supra]: Tax exemptions must
the law which they are entrusted to enforce
be shown to exist clearly and categorically,
have the force of law and entitled to great
and supported by clear legal provisions.
respect. They have in their favor a
(b) Floro Cement v. Gorospe [supra]: Claims presumption of legality [Gonzales v. Land
for an exemption must be able to point out Bank, G.R. No. 76759 (1990)]
some provision of law creating the right,
Requisites for validity and effectivity of
and cannot be allowed to exist upon a mere
regulations
vague implication or inference.
(1) Reasonable
(c) CIR v. CA [supra]: Refunds are in the
(2) Within the authority conferred
nature of exemption, and must be
construed strictly against the (3) Not contrary to law and the Constitution
grantee/taxpayer. [Art. 7, NCC]
(d) Comm. v. Kiener Co. Ltd. [G.R. No. L- (4) Must be published
24754 (1975)]: Taxation is the rule and
Tax regulations whose purpose is to enforce of
exemption the exception, and therefore, he
implement existing law must comply with the
who claims exemption must be able to
following requisites to be effective [RP v.
justify his claim or right thereto, by a grant
Pilipinas Shell Petroleum Corp., G.R. No.
expressed in terms “too plain to be
173918 (2008)]:
mistaken and too categorical to be
misinterpreted.” (1) Be published in a newspaper of general
circulation [Art. 2, NCC]; AND
Exceptions: (2) Filed with the UP Law Center Office of the
(a) When the law itself expressly provides for a National Administrative Register (ONAR)
liberal construction, that is, in case of [Ch 2, Book VII, EO 292]
doubt, it shall be resolved in favor of
Note: Administrative rules and regulations
exemption; and
must always be in harmony with the provisions
(b) When the exemption is in favor of the of the law. In case of conflict with the law or
government itself or its agencies, or of the Constitution, the administrative rules and
religious, charitable, and educational regulations are null and void. As a matter of
institutions because the general rule is that policy, however, courts will declare a
they are exempt from tax. regulation or provision thereof invalid only
when the conflict with the law is clear and
(c) When the exemption is granted under
unequivocal.
special circumstances to special classes of
persons.
Administrative interpretations and opinions
(d) If there is an express mention or if the
The power to interpret the provisions of the
taxpayer falls within the purview of the
Tax Code and other tax laws is under the
exemption by clear legislative intent, the
exclusive and original jurisdiction of the
rule on strict construction does not apply.
Commissioner of Internal Revenue subject to
[Comm. v. Arnoldus Carpentry Shop, Inc.,
review by the Secretary of Finance [Sec. 4,
G.R. No. 71122 (1988)].
par.1, NIRC].
Revenue regulations are the formal
M.3. TAX RULES AND REGULATIONS interpretation of the provisions of the NIRC
and other laws by the Secretary of Finance
General Rule: The Secretary of Finance, upon
upon the recommendation of the
recommendation of the CIR, shall promulgate
Commissioner of Internal Revenue.
all needful rules and regulations for the
effective enforcement of the provisions of the General rule: The Commissioner has the sole
NIRC. [Sec. 244, NIRC] authority to issue rulings but he also has the
PAGE 22 OF 275
UP LAW BOC TAXATION 1 TAXATION LAW
power to delegate said authority to his and the discretion of the court limited. [People
subordinates with the rank equivalent to a v. Purisima, G.R. No. L-42050-66 (1978)].
division chief or higher.
M.5. NON-RETROACTIVE APPLICATION OF
Exceptions: The Commissioner may not TAX LAWS TO TAXPAYERS
delegate the following:
General rule: Tax laws are prospective in
(a) The power to recommend the operation. The reason is that the nature and
promulgation of rules and regulations by amount of the tax could not be foreseen and
the Secretary of Finance; understood by the taxpayer at the time the
transaction which the law seeks to tax was
(b) The power to issue rulings of first
completed.
impression or to reverse, revoke, or modify
any existing ruling of the Bureau; Exception: Tax laws may be applied
retroactively provided it is expressly declared
(c) The power to compromise or abate any tax
or clearly the legislative intent. [Lorenzo v.
liability as provided by Sec. 204 and 205 of
Posadas, supra].
the NIRC
Exception to the exception: a tax law should
Exception to the exception: BUT assessments
not be given retroactive application when it
issued by RDOs involving (a) Php500,000 or
would be so harsh and oppressive for in such
less, and (b) minor criminal violations as
case, the constitutional limitation of due
determined by the Secretary of Finance as
process would be violated [Republic v.
recommended by the Commissioner, may be
Fernandez, supra].
compromised by a Regional Evaluation Board
(CHAIRMAN: Regional Director; MEMBERS:
Assistant Regional Director, heads of the
Legal, Assessment and Collection Divisions,
N. SOURCES OF TAX LAWS
and the Revenue District Officer having
jurisdiction over the taxpayer.) [Sec. 7, NIRC]. (a) Constitution of the Philippines
Decisions of the Supreme Court applying or A constitutional provision regarding taxation
interpreting existing tax laws are binding on is primarily intended to limit and regulate the
all subordinate courts and have the force and exercise of taxation power. The State can
effect of law. As provided for in Article 8 of the exercise the power to tax even if the
Civil Code, they “form part of the law of the Constitution is completely silent about
land”. taxation.
decision of the Supreme Court on any matter (g) BIR Revenue Memorandum Circulars and
is final and executory. Bureau of Customs Memorandum Orders
These are administrative rulings or opinions
(d) Executive Orders which are less general interpretations of tax
Executive Orders are regulations issued by the laws being issued from time to time by the
President or some administrative authority Commissioner of the Internal Revenue or
under his direction for the purpose of Commissioner of the Bureau of Customs, as
interpreting, implementing, or giving the case may be. They are primarily intended
administrative effect to a provision of the to maintain uniform application of tax laws
Constitution or of some law or treaty. within the department or area of authority.
(e) Tax Treaties and Conventions Memoranda have the status of advisory or sort
These refer to the treaties or international of information service. For this reason, they
agreements with foreign countries regarding can be reversed anytime.
tax enforcement and exemptions. They have
the force and effect of law. Note: The Courts generally respect the
interpretations made by the executive officer
(f) Revenue Regulations by the Department of whose duty is to enforce the law. However,
Finance such interpretations are not conclusive and
Revenue Regulations are rules or orders shall be disregarded if found erroneous by the
having force of law issued by executive Court. [Molina v. Rafferty, 37 Phil 545]
authority of the government to ensure uniform
application of the tax law. (h) BIR Rulings
BIR Rulings are expressed official
In order that administrative regulations may interpretations of the tax laws as applied to
be considered valid, all of the following specific transactions. Unlike a Revenue
requisites must be complied with: Regulation, it is more limited in application.
(1) The regulations must be useful, practical
and necessary for the enforcement of the BIR Rulings are not the final interpreations of
law; the tax laws. They are considered the best
(2) They must be reasonable in their opinion or advisory at the moment and are
provisions; considered sound law until chagned by the
(3) They must not be contrary to law; and court. [CIR v. Ledesma, (1970)]
(4) They must be duly published in the
Official Gazette. [Inter-provincial Auto (i) Local Tax Ordinances
Bus Co. v. Collector, 52 O.G. No. 2, p. 791; These are tax ordinances issued by the
Lim Hoa Ting v. Central Bank, L-10666, province, city, municipality and baranggay
(1958)] subjct to such limitations as provided by the
Local Government Code. [Valencia and Roxas]
Note: Ruling of the Secretary of Finance are
not binding on the courts because the duty or
power of interpreting laws is primarily a O. DOCTRINES IN TAXATION
function of the judiciary.
O.1. PROSPECTIVITY OF TAX LAWS
The Secretary of Finance is vested with General rule: Tax laws are prospective in
authority to revoke, repeal or abrogate acts or operation.
previous rulings of his predecessors in office
because these are not binding on their
Reason: Nature and amount of the tax under
tax laws enacted after the transaction could
successors. [Hilado v. Collector of Internal
not have been foreseen and understood by the
Revenue, et al., 100 Phil 295]
taxpayer at the time of the transaction.
Exception: Tax laws may be applied
retroactively provided it is expressly declared
or it is clearly the legislative intent (e.g.,
PAGE 24 OF 275
UP LAW BOC TAXATION 1 TAXATION LAW
post-clearance audit. (Note: The same rule (b) Broad sense (Indirect Duplicate Taxation)
was provided under Sec. 1603 of the TCC, but There is double taxation in the broad sense or
it was worded differently). there is indirect duplicate taxation if any of the
elements for direct duplicate taxation is
absent.
(3) Local Government Code – prescribes
It extends to all cases in which there is a
prescriptive periods for the assessment from
burden of two or more pecuniary impositions.
the date they became due (5 years) and
For example, a tax upon the same property
collection (5 years) of taxes (including Real
imposed by two different states.
Property Taxes) from the date of assessment
by administrative or judicial action. The Double taxation, standing alone and not being
prescriptive period is 3 years if the tax accrued forbidden by our fundamental law, is not a
before the effectivity of the Local Government valid defense against the legality of a tax
Code. [Sec. 194 and 270, RA 7160 or the LGC]. measure [Pepsi Cola v. Mun. of Tanauan, G.R.
In case of fraud or intent to evade the payment No. L-31156 (1976)]. But from it might
of taxes, fees, or charges, the same may be emanate such defenses against taxation as
assessed from discovery of the fraud or intent oppressiveness and inequality of the tax.
to evade payment (10 years).
Constitutionality of double taxation
There is no constitutional prohibition against
The prescriptive period is tolled when:
double taxation in the Philippines. It is
(a) The treasurer is legally prevented from something not favored, but is permissible,
making the assessment or collection provided some other constitutional
(b) The taxpayer requests for a requirement is not thereby violated.
reinvestigation and executes a waiver [Villanueva v. City of Iloilo, G.R. No. L-26521
in writing before expiration of the (1968)]
period within which to assess or collect; If the tax law follows the constitutional rule on
and uniformity, there can be no valid objection to
(c) The taxpayer is out of the country or taxing the same income, business or property
otherwise cannot be located. twice. [China Banking Corp. v. CA, G.R. No.
146749 (2003)]
O.3. DOUBLE TAXATION Double taxation in its narrow sense is
undoubtedly unconstitutional but that in the
Means taxing twice the same taxpayer for the
broader sense is not necessarily so. (De Leon,
same tax period upon the same thing or
activity, when it should be taxed once, for the
citing 26 R.C.L 264-265). Where double
taxation (in its narrow sense) occurs, the
same purpose and with the same kind of
taxpayer may seek relief under the uniformity
character of tax.
rule or the equal protection guarantee. (De
(a) Strict sense (Direct Duplicate Taxation) Leon, citing 84 C.J.S.138).
(1) The same property must be taxed twice
when it should be taxed once;
International Double Taxation
(2) Both taxes must be imposed on the same Double taxation usually takes place when a
property or subject matter; person is resident of a contracting state and
(3) For the same purpose; derives income from, or owns capital in, the
(4) By the same State, Government, or taxing other contracting state and both states
authority; impose tax on that income or capital. In order
(5) Within the same territory, jurisdiction or to eliminate double taxation, a tax treaty
taxing district; resorts to several methods. [CIR v. SC Johnson
(6) During the same taxing period; and & Sons, Inc., G.R. No. 127105 (1999)]
(7) Of the same kind or character of tax.
The purpose of these international
agreements is to reconcile the national fiscal
legislations of the contracting parties in order
PAGE 26 OF 275
UP LAW BOC TAXATION 1 TAXATION LAW
to help the taxpayer avoid simultaneous be exercised fairly, equally and uniformly, lest
taxation in two different jurisdictions. More the tax collector kills the 'hen that lays the
precisely, the tax conventions are drafted with golden eggs.' And in order to maintain the
a view towards the elimination of international general public's trust and confidence in the
juridical double taxation, which is defined as government, this power must be used justly
the imposition of comparable taxes in two or and not treacherously." [Roxas v. Court of Tax
more states on the same taxpayer in respect of Appeals, 23 SCRA 276, App120, 1968; Philex
the same subject matter and for identical Mining Corp. vs. Comm. of Internal Revenue,
periods. The apparent rationale for doing 97 SCAD 777,294 SCRA 687 (Aug. 28, 1998)].
away with double taxation is to encourage the
free flow of goods and services and the Note: Justice Holmes once said: “The power to
movement of capital, technology and persons ta is not the power to destroy while this Court
between countries, conditions deemed vital in (the Supreme Court) sits.” The two limitations
creating robust and dynamic economies. on the power of taxation are the inherent and
Foreign investments will only thrive in a fairly constitutional limitations which are intended
predictable and reasonable international to prevent abuse on the exercise of the
investment climate and the protection against otherwise plenary and unlimited power. It is
double taxation is crucial in creating such a the Court’s role to see to it that the exercise of
climate. [CIR v. SC Johnson & Sons, Inc., supra] the power does not transgress these
limitations.
Modes of eliminating double taxation
(a) Allowing reciprocal exemption either by
O.5. ESCAPE FROM TAXATION
law or by treaty;
a. Shifting of tax burden
(b) Allowance of tax credit for foreign taxes Shifting - the transfer of the burden of a tax by
paid; the original payer or the one on whom the tax
(c) Allowance of deductions such as for was assessed or imposed to someone else.
foreign taxes paid, and vanishing What is transferred is not the payment of the
deductions in estate tax; OR tax but the burden of the tax. All indirect taxes
may be shifted; direct taxes cannot be shifted.
(d) Reduction of Philippine tax rate.
(i) Ways of shifting the tax burden
(1) Forward shifting - When the burden of
O.4. POWER TO TAX INVOLVES POWER TO the tax is transferred from a factor of
DESTROY production through the factors of
distribution until it finally settles on the
According to Chief Justice John Marshall, "the ultimate purchaser or consumer.
power to tax involves the power to destroy." Examples: VAT, percentage tax.
[McCulloch vs. Maryland, 17 U.S. [4 Wheat.]
316-428, 4L. ed. 579.] To say, however, that (2) Backward shifting - When the burden of
the power to tax is the power to destroy is to the tax is transferred from the consumer
describe not the purposes for which the taxing or purchaser through the factors of
power may be used but the extent to which it distribution to the factor of production.
may be employed in order to raise revenues. Example: Consumer or purchaser may
(see1 Cooley 178.) Thus, even if a tax should shift tax imposed on him to retailer by
destroy a business, such fact alone could not purchasing only after the price is
invalidate the tax. (84 C.J.S. 46.) reduced, and from the latter to the
wholesaler, and finally to the
Incidentally, our Constitution mandates that manufacturer or producer.
"the rule of taxation shall be uniform and (3) Onward shifting - When the tax is
equitable." In a case, our Supreme Court said: shifted two or more times either forward
"The power of taxation is sometimes called or backward.
also the power to destroy. Therefore, it should
be exercised with caution to minimize injury to
the proprietary rights of the taxpayer. It must
PAGE 27 OF 275
UP LAW BOC TAXATION 1 TAXATION LAW
(ii) Factors determining tax shifting the person who must pay the tax to the
government.
(1) Elasticity of demand and supply - The
more the elasticity, the lower the Incidence of taxation is that point on which the
incidence on the sales. The higher the tax burden finally rests or settles down. It
incidence on supply. takes place when shifting has been effected
(2) Nature of markets – In an oligopolistic from the statutory taxpayer to another.
market (i.e. sellers and many buyers)
tax shifting to buyers is high since few Impact Distinguished from Incidence
sellers can team up to determine the
market price. In a situation where (1) Impact refers to the initial burden of the
there are many buyers and sellers, a tax, while incidence refers to the ultimate
large portion of tax will be borne by burden of the tax.
sellers. For a monopolistic market, the (2) Impact is at the point of imposition,
entire tax burden falls on the incidence occurs at the point of settlement.
shoulders of the buyer. (3) The impact of a tax falls upon the person
(3) Government policy on pricing – In the from whom the tax is collected and the
case of government price control, the incidence rests on the person who pays it
supplier cannot increase prices, hence eventually.
cannot shift tax burden to buyers and Example: Suppose a tax — excise duty — is
vice versa. imposed on soap. Its impact is on the
(4) Geographical location – If taxes are producers, in the first instance, as they are
imposed on certain regions, it is hard liable to pay it to the government. But, the
to shift them to consumers because producers may succeed in collecting it
consumers will move to regions with from the consumers by raising the price of
low taxes. soap by the amount of tax. In that case,
(5) Nature of tax (Direct or Indirect tax) – consumers eventually pay the tax and so
Direct tax e.g. PAYE (pay-as-you- the incidence falls upon them.
earn) cannot be shifted whatsoever (4) Impact may be shifted but incidence
while indirect taxes can be shifted cannot. For, incidence is the end of the
through increase in prices. shifting process. Sometimes, however,
(6) Rate of tax – If too high, shifting can when no shifting is possible, as in the case
occur backwards or forwards, if too of income tax or such other direct taxes,
low, it may be absorbed by the the impact coincides with incidence on the
manufacturer. same person.
(7) Time available for adjustment – The
person who can adjust faster (buyer or Relationship between Impact, Shifting, and
seller) will be able to shift tax e.g. if Incidence of a Tax
the buyer cash shift to substitute The impact is the initial phenomenon, the
goods, the seller will bear the tax shifting is the intermediate process, and the
burden. incidence is the result.
(8) The tax point Impact is the imposition of the tax; shifting is
the transfer of the tax; while incidence is the
setting or coming to rest of the tax. (e.g.
(ii) Taxes that can be shifted
impact in VAT is on the producer who shifts
(a) Value-added Tax
the burden to the customer who finally bears
(b) Percentage Tax
the incidence of the tax)
(c) Excise Tax
b. Tax avoidance (Tax Minimization)
The exploitation by the taxpayer of legally
(iii) Meaning of impact and incidence of
permissible alternative tax rates or methods of
taxation
assessing taxable property or income in order
Impact of taxation is the point on which a tax
to avoid or reduce tax liability. It is politely
is originally imposed. In so far as the law is
concerned, the taxpayer, the subject of tax, is
PAGE 28 OF 275
UP LAW BOC TAXATION 1 TAXATION LAW
But equity is NOT a ground for tax exemption. Exemptions are not presumed, but when
Exemption from tax is allowable only if there public property is involved, exemption is
is a clear provision. While equity cannot be the rule, and taxation is the exception.
used as a basis or justification for tax
(iii) Contractual - The legislature of a State
exemption, a law may validly authorize the
may, in the absence of special restrictions
condonation of taxes on equitable
in its constitution, make a valid contract
considerations.
with a corporation in respect to taxation,
and that such contract can be enforced
against the State at the instance of the
(b) Nature of tax exemption
corporation [Casanovas v. Hord, G.R. No.
(1) Mere personal privilege - cannot be
3473 (1907)]. In the real sense of the term
assigned or transferred without the
and where the non-impairment clause of
consent of the legislature. The legislative
the Constitution can rightly be invoked, this
consent to the transfer may be given either
includes those agreed to by the taxing
in the original act granting the exemption
authority in contracts, such as those
or in a subsequent law
contained in government bonds or
(2) General rule: Revocable by the debentures, lawfully entered into by them
government. under enabling laws in which the
government, acting in its private capacity,
Exception: If founded on a contract which is
sheds its cloak of authority and waives its
protected from impairment. But the
governmental immunity.
contract must contain the essential
elements of other contracts. An exemption These contractual tax exemptions,
provided for in a franchise, however, may however, are not to be confused with tax
be repealed or amended pursuant to the exemptions granted under franchises. A
Constitution [Art. XII, Sec. 11, 1987 franchise partakes the nature of a grant
Constitution]. A legislative franchise is a which is beyond the purview of the non-
mere privilege. impairment clause of the Constitution.
[Manila Electric Company v. Province of
(3) Implies a waiver on the part of the
government of its right to collect taxes due Laguna, G.R. No. 131359 (1999)]
to it, and, in this sense, is prejudicial
thereto. Hence, it exists only by virtue of an
(d) Rationale of Tax Exemption
express grant and must be strictly
Such exemption will benefit the body of the
construed.
people and not particular individuals or
(4) Not necessarily discriminatory, provided it private interest and that the public benefit is
has reasonable foundation or rational basis. sufficient to offset the monetary loss entailed
Where, however, no valid distinction exists, in the grant of the exemption.
the exemption may be challenged as
violative of the equal protection guarantee
Principles of Tax Exemption:
or the uniformity rule.
(1) As the power of taxation is a high
prerogative of sovereignty, the relinquishment
(c) Kinds of tax exemption is never presumed and any reduction or
(i) Express or Affirmative - either entirely or in diminution thereof with respect to its mode or
part, may be made by provisions of the its rate, must be strictly construed, and the
Constitution, statutes, treaties, ordinances, same must be couched in clear and
franchises, or contracts. unmistakable terms in order that it may be
applied. [Floro Cement v. Gorospe, G.R. No. L-
(ii) Implied or Exemption by Omission - when a
46787 (1991)]
tax is levied on certain classes without
mentioning the other classes. Every tax (2) When granted, they are strictly construed
statute, in a very real sense, makes against the taxpayer [Luzon Stevedoring Co. v.
exemptions since all those not mentioned CTA, G.R. No. L-30232 (1988)]
are deemed exempted. The omission may
be either accidental or intentional.
PAGE 30 OF 275
UP LAW BOC TAXATION 1 TAXATION LAW
(3) Tax exemptions are strictly construed O.9. COMPROMISE AND TAX AMNESTY
against the taxpayer, they being highly
COMPROMISE
disfavored and may almost be said “to be
odious to the law.” [Manila Electric Company v. (a) A contract whereby the parties, by making
Vera, G.R. No. L-29987 (1975)] reciprocal concessions avoid litigation or
put an end to one already commenced. (Art.
2028, Civil Code). It involves a reduction of
(e) Revocation of Tax Exemption the taxpayer’s liability.
General Rule: Revocable by the government. (b) Requisites of a tax compromise:
Exception: Contractual tax exemptions may (1) The taxpayer must have a tax liability.
not be unilaterally so revoked by the taxing
(2) There must be an offer (by the taxpayer
authority without thereby violating the non-
or Commissioner) of an amount to be
impairment clause of the Constitution.
paid by the taxpayer.
(3) There must be acceptance (by the
O.7. DOCTRINE OF EQUITABLE Commissioner or the taxpayer, as the
RECOUPMENT case may be) of the offer in settlement of
the original claim.
A claim for refund barred by prescription may
be allowed to offset unsettled tax liabilities.
The doctrine finds NO application in this TAX AMNESTY
jurisdiction.
(a) Definition
A tax amnesty partakes of an absolute
O.8. COMPENSATION AND SET-OFF forgiveness or waiver by the Government of its
right to collect what otherwise would be due it,
General rule: Internal revenue taxes cannot be
and in this sense, prejudicial thereto,
the subject of set-off or compensation
particularly to give tax evaders, who wish to
[Republic v. Mambulao Lumber, G.R. No. L-
relent and are willing to reform a chance to do
17725 (1962)]
so and become a part of the new society with
Reasons: a clean slate. [Republic v. IAC, G.R. No. L-
(1) This would adversely affect the 69344 (1991)]
government revenue system [Philex Mining A tax amnesty, much like a tax exemption, is
v. CA, G.R. No. 125704 (1998)]. never favored nor presumed in law. If granted,
(2) Government and the taxpayer are not the terms of the amnesty, like that of a tax
creditors and debtors of each other. The exemption, must be construed strictly against
payment of taxes is not a contractual the taxpayer and liberally in favor of the taxing
obligation but arises out of a duty to pay. authority. The State cannot strip itself of the
[Republic v. Mambulao Lumber, supra] most essential power of taxation by doubtful
words. He who claims an exemption (or an
Exception: If the claims against the amnesty) from the common burden must
government have been recognized and an justify his claim by the clearest grant of
amount has already been appropriated for organic or state law. It cannot be allowed to
that purpose. Where both claims have already exist upon a vague implication. If a doubt
become (1) due and (2) demandable as well as arises as to the intent of the legislature, that
(3) fully liquidated, compensation takes place doubt must be resolved in favor of the state.
by operation of law under Art. 1200 in relation [CIR v. Marubeni Corp., G.R. No. 137377
to Articles 1279 and 1290 of the NCC, and both (2001)].
debts are extinguished to the concurrent
amount. [Domingo v. Garlitos, G.R. No. L-
18994 (1963)] (b) Amnesty distinguished from tax exemption
Tax amnesty is immunity from all criminal and
civil obligations arising from non-payment of
taxes. It is a general pardon given to all
PAGE 31 OF 275
UP LAW BOC TAXATION 1 TAXATION LAW
taxpayers. It applies to past tax periods, hence The doctrine of locus standi is the right of
of retroactive application. [People v. appearance in a court of justice. The doctrine
Castañeda, G.R. No. L-46881 (1988)] requires a litigant to have a material interest
in the outcome of a case. In private suits, locus
Tax exemption is immunity from all civil
standi requires a litigant to be a "real party in
liability only. It is an immunity or privilege, a
interest," which is defined as "the party who
freedom from a charge or burden of which
stands to be benefited or injured by the
others are subjected. [Greenfield v. Meer, C.A.
judgment in the suit or the party entitled to the
No.-156 (1946)]. It is generally prospective in
avails of the suit."
application (Dimaampao, 2005, p. 111).
In public suits, this Court recognizes the
difficulty of applying the doctrine especially
Tax Amnesty v. Tax Exemption when plaintiff asserts a public right on behalf
Tax of the general public because of conflicting
Tax Amnesty
Exemption public policy issues. On one end, there is the
Immunity Immunity right of the ordinary citizen to petition the
from civil, from civil courts to be freed from unlawful government
criminal, liability (relief intrusion and illegal official action. At the
administrative from paying other end, there is the public policy precluding
Benefit
liability taxes) excessive judicial interference in official acts,
arising from which may unnecessarily hinder the delivery of
non-payment basic public services.
of taxes
The Court has adopted the "direct injury test"
Past tax Future tax to determine locus standi in public suits. In
Coverage
liability liability People v. Vera, it was held that a person who
Actual Yes None impugns the validity of a statute must have "a
Revenue personal and substantial interest in the case
Loss such that he has sustained, or will sustain
direct injury as a result." the "direct injury test"
O.10. TAXPAYER’S SUIT in public suits is similar to the "real party in
interest" rule for private suits under section 2,
a. Nature and Concept Rule 3 of the 1997 Rules of Civil Procedure.
Taxpayer’s suit – refers to a case where the act [Planter’s Products, Inc. v. Fertiphil
complained of directly involves the illegal Corporation, G.R. no. 166006, (March 14,
disbursement of public funds derived from 2008)]
taxation. [Kilosbayan v. Guingona, Jr. (1994)]
As applied to taxation:
b. As distinguished from a citizen’s suit It is well-stated that the validity of a statute
The plaintiff in a taxpayer's suit is in a different may be contested only by one who will sustain
category from the plaintiff in a citizen's suit. In a direct injury in consequence of its
the former, the plaintiff is affected by the enforcement. Yet, there are many decisions
expenditure of public funds, while in the latter, nullifying, at the instance of taxpayers, laws
he is but the mere instrument of the public providing for the disbursement of public funds,
concern. [De Castro v. Judicial and Bar Council upon the theory that "the expenditure of
(2010)] public funds by an officer of the state for the
purpose of administering an unconstitutional
c. Requisites of a taxpayer’s suit challenging act constitutes a misapplication of such
the constitutionality of a tax measure or act of funds," which may be enjoined at the request
a taxing authority; concept of locus standi, of a taxpayer. [Pascual v. Secretary of Public
doctrine of transcendental importance and Works (1960)]
ripeness for judicial determination A taxpayer is allowed to sue where there is a
claim that public funds are illegally disbursed,
(1) Concept of locus standi as applied in or that the public money is being deflected to
taxation any improper purpose, or that there is wastage
of public funds through the enforcement of an
PAGE 32 OF 275
UP LAW BOC TAXATION 1 TAXATION LAW
invalid or unconstitutional law. A person suing issue as the final arbiter of all justiciable
as a taxpayer, however, must show that the act controversies. The doctrine of standing, being
complained of directly involves the illegal a mere procedural technicality, should be
disbursement of public funds derived from waived, if at all, to adequately thresh out an
taxation. He must also prove that he has important constitutional issue.
sufficient interest in preventing the illegal
expenditure of money raised by taxation and
that he will sustain a direct injury because of (3) Ripeness for judicial determination
the enforcement of the questioned statute or
“Ripeness for judicial determination” means
contract. In other words, for a taxpayer’s suit
that litigation is inevitable or there is no
to prosper, two requisites must be met:
adequate relief available in any other form or
(1) public funds derived from taxation are proceeding.
disbursed by a political subdivision or
instrumentality and in doing so, a law is
violated or some irregularity is committed and CJH Development Corp. V. BIR (2008):
However, CJH is not left without recourse. The
(2) the petitioner is directly affected by the
tariff and customs code provides for the
alleged act. [Mamba v. Lara, G.R. no. 165109,
administrative and judicial remedies available
(Dec. 14, 2009)]
to a taxpayer who is minded to contest an
assessment, subject of course to certain
reglementary periods. The TCC provides that a
(2) Doctrine of transcendental importance
protest can be raised provided that payment
Recognizing that a strict application of the first be made of the amount due. The decision
"direct injury" test may hamper public interest, of the Collector can be reviewed by the
this court relaxed the requirement in cases of Commissioner of Customs who can approve,
"transcendental importance" or with "far modify or reverse the decision or action of the
reaching implications." being a mere Collector. If the party is not satisfied with the
procedural technicality, it has also been held ruling of the Commissioner, he may file the
that locus standi may be waived in the public necessary appeal to the Court of Tax Appeals.
interest. [Ibid] Afterwards, the decision of the Court of Tax
Appeals can be appealed to this Court.
Planters Products, Inc. v. Fertiphil Corp.: even
assuming arguendo that there is no direct
injury, We find that the liberal policy
consistently adopted by this court on locus
standi must apply. The issues raised by
Fertiphil are of paramount public importance.
It involves not only the constitutionality of a
tax law but, more importantly, the use of taxes
for public purpose. Former President Marcos
issued LOI no. 1465 with the intention of
rehabilitating an ailing private company. This
is clear from the text of the LOI. PPI is
expressly named in the LOI as the direct
beneficiary of the levy. Worse, the levy was
made dependent and conditional upon ppi
becoming financially viable. The LOI provided
that "the capital contribution shall be
collected until adequate capital is raised to
make PPI viable."
that may be filed by the taxpayers in prescribing the place of filing of returns and
connection with the payment of the tax. payments of taxes by large taxpayers.
Provided, however, That notwithstanding the
other provisions of this Code prescribing the
A.2. JURISDICTION, POWER AND
place of filing of returns and payment of taxes,
FUNCTIONS OF THE COMMISSIONER OF
the CIR may, by rules and regulations require
INTERNAL REVENUE
that the tax returns, papers and statements
and taxes of large taxpayers be filed and paid,
respectively, through collection officers or
a. Powers and duties of the Bureau of Internal
through duly authorized agent banks:
Revenue (Sec. 2, NIRC)
Provided, further, That the CIR can exercise
(1) To assess and collect national internal
this power within six (6) years from the
taxes, fees, and charges;
approval of Republic Act No. 7646 or the
completion of its comprehensive (2) To enforce all forfeitures, penalties and
computerization program, whichever comes fines connected therewith;
earlier: (3) To execute judgment in all cases decided in
Provided, finally, That separate venues for the its favor by the CTA and the ordinary courts;
Luzon, Visayas and Mindanao areas may be and
designated for the filing of tax returns and (4) To effect and administer the supervisory
payment of taxes by said large taxpayers. and police powers conferred upon it by the Tax
For the purpose of this Section, 'large Code or other special laws.
taxpayer' means a taxpayer who satisfies any
of the following criteria:
b. Power of the Commissioner to interpret tax
(1) Value-Added Tax (VAT) - Business laws and to decide tax cases
establishment with VAT paid or payable of at
least P100,000 for any quarter of the (1) Shall be under the exclusive and original
preceding taxable year; jurisdiction of the CIR, subject to review by the
Secretary of Finance. (Sec. 4, NIRC)
(2) Excise tax - Business establishment
with
excise tax paid or payable of at least (2) A ruling by the BIR Commissioner shall be
P1,000,000 for the preceding taxable year;
presumed valid unless modified, reversed or
superseded by the Secretary of Finance.
(3) Corporate Income Tax - Business
establishment with annual income tax paid or (3) A taxpayer who receives an adverse ruling
payable of at least P1,000,000 for the from the CIR may, within thirty (30) days from
preceding taxable year; and
the date of receipt of such ruling, seek its
review by the Secretary of Finance, either by
(4) Withholding tax - Business establishment himself/itself or though his/its duly
with withholding tax payment or remittance of authorized representative.
at least P1,000,000 for the preceding taxable
year.
(4) A reversal or modification of the BIR ruling
shall terminate its effectivity upon
the
Provided, however, That the Secretary of receipt by the taxpayer or the BIR of written
Finance, upon recommendation of the CIR, notice of reversal or modification, whichever
may modify or add to the above criteria for came earlier.
determining a large taxpayer after considering
such factors as inflation, volume of business, **The Secretary of Finance may now also
wage and employment levels, and similar review the rulings MOTU PROPRIO. (DOF
economic factors. ORDER 7-02)
The penalties prescribed under Section 248
shall be imposed on any violation of the rules c. Non-retroactivity of rulings (Sec. 246, NIRC)
and regulations issued by the Secretary of
Finance, upon recommendation of the CIR, General Rule: No retroactive application if the
revocation, modification or reversal of rules
PAGE 35 OF 275
UP LAW BOC TAXATION 1 TAXATION LAW
and regulations, rulings or circulars will be business within the Philippines [Sec. 24 (A),
prejudicial to the taxpayers. Sec. 25 (A), Sec. 27 (A), Sec. 28 (A), NIRC]. It is
also imposed on the gross income of
Exceptions:
nonresident aliens and foreign corporations
(a) Where the taxpayer deliberately misstates not doing business in the Philippines [Sec. 25
or omits material facts from his return or any (B), (C), (D), Sec. 28 (B), NIRC]. It is further
document required of him by the BIR; imposed as a final tax on certain passive
income (interests, royalties, prizes, and other
(b) Where the facts subsequently gathered
winnings), cash and property dividends,
by the BIR are materially different from
the
capital gains from the sale of domestic shares
facts on which the ruling is based; or
of stock and real property classified as capital
(c) Where the taxpayer acted in bad faith.
assets located in the Philippines (Sec. 24 (B),
Sec. 25 (A) (2), (3), Sec. 27 (D), Sec. 28 (A),
NIRC).
B. NATIONAL INTERNAL REVENUE
Income Tax Law aims to mitigate the evils
CODE (NIRC) OF 1997, AS AMENDED arising from the inequalities of wealth by a
progressive scheme of taxation which places
the burden of taxation on those best able to
B.1. INCOME TAXATION pay [Madrigal v. Rafferty & Concepcion, G.R.
a. DEFINITION, NATURE AND GENERAL No. L-12287 (1918)].
PRINCIPLES
a.1. Income Tax Systems
Definition (a) Global Tax System
Income Tax is defined as a tax on all yearly Under a global tax system, it did not matter
profits arising from property, professions, whether the income received by the taxpayer
trades, or offices, or as a tax on the person’s is classified as compensation income,
income, emoluments, profits and the like business or professional income, passive
[Fisher v. Trinidad, G.R. No. L-2118643 (1924)]. investment income, capital gain, or other
It may be succinctly defined as a tax on income. All items of gross income, deductions,
income, whether gross or net, realized in one and personal and additional exemptions, if
taxable year. any, are reported in one income tax return, and
one set of tax rates are applied on the tax base.
Nature
Income tax is generally classified as an excise (b) Schedular Tax System
tax. It is not levied upon persons, property, Different types of incomes are subject to
funds or profits but upon the right of a person different sets of graduated or flat income tax
to receive income or profits. rates. The applicable tax rate(s) will depend
on the classification of the taxable income and
General Principles the basis could be gross income or net income.
Separate income tax returns (or other types of
In the Philippines, income tax is imposed on
return applicable) are filed by the recipient of
the net income of citizens, resident aliens,
income for the particular types of income
domestic corporations, and nonresident aliens
received.
and foreign corporations engaged in trade or
PAGE 36 OF 275
UP LAW BOC TAXATION 1 TAXATION LAW
Most equitable system yet developed for Because of its multiple rates, the tax burden of a
distributing tax burden. The burden of an person does not correspond to his income but
individual is closely d related to his resources and rather fall fortuitously on the type of his income. It
his ability to pay. is fixed and final.
It serves as a means for redistributing income and This function is alien to schedular system where in
wealth. Big income earners are subject to higher times of plenty or in times of need, people pay the
taxes than small income earners it serves as an same fixed tax on their income.
automatic counter-cyclical device to generate
more revenues from people in times of expanding
economies and at the same time to collect less
from them in times of depression.
It serves as a supplementary device to accomplish The schedular system cannot perform any of these
non-fiscal goals of the government, such as, to functions.
encourage desired activities. By adjusting the
rates, for instance, it can promote saving or
consumer's demand, or encourage donations
worthy causes.
Administration is not quite as easy as schedular The administration is simple, being confined to
because one has to consider all income from each transaction or activity.
whatever source.
(1) Citizenship or Nationality Principle (6) Capital gains tax on sale or exchange of
real property classified as capital asset
A citizen of the Philippines is subject to
Philippine income tax: (7) Final withholding tax on certain passive
investment income paid to residents
(a) On his worldwide income, if he resides in (8) Final withholding tax on income payments
the Philippines; or made to non-residents
(b) Only on his income from sources within the (9) Fringe benefits tax on fringe benefits of
Philippines, if he qualifies as a nonresident supervisory or managerial employees
citizen. (10) Branch profit remittance tax
(11) Tax on improperly accumulated earnings
of corporations
(b) Residence Principle
A resident alien is liable to pay Philippine
income tax on his income from sources within a.5. Taxable Period
the Philippines but is exempt from tax on his
The accounting periods used in determining
income from sources outside the Philippines.
the taxable income of taxpayers are:
(1) Calendar Year - Accounting period of 12
(c) Source of Income Principle months ending on the last day of
An alien is subject to Philippine income tax December. Instances when the Calendar
because he derives income from sources Year is used for the computation of income:
within the Philippines. Thus, a non-resident
i. If the taxpayer's annual accounting
alien or non-resident foreign corporation is
period is other than a fiscal year; or
liable to pay Philippine income tax on income
from sources within the Philippines, such as ii. If the taxpayer has no annual
dividend interest, rent, or royalty, despite the accounting period; or
fact that he has not set foot in the Philippines. iii. If the taxpayer does not keep books of
accounts; or
The income tax law adopts the most
iv. If the taxpayer is an individual [Sec. 43,
comprehensive tax situs of nationality and
NIRC].
residence of the taxpayer and of the generally
accepted and internationally recognized (2) Fiscal Year - Accounting period of 12
income tax base [Tan v. De Rosario, G.R. No. months ending on the last day of any
109289 (1994)]. Resident citizens and month other than December [Sec. 22(Q),
domestic corporations are subjected to NIRC].
income tax liability on their income from all (3) Short Period - Accounting period which
sources within and without the Philippines. starts after the first month of the tax year or
The law adopts the source rule with respect to ends before the last month of the tax year
income received by taxpayers other than (less than 12 months). Instances whereby
resident citizens and domestic corporations. short accounting period arises:
i. When a corporation is newly
a.4. Types of Philippine Income Tax organized.
ii. When a corporation is dissolved.
(1) Graduated income tax on individuals
iii. When a corporation changes
(2) Normal corporate income tax on accounting period.
corporations
iv. When the taxpayer dies.
(3) Minimum corporate income tax on
"Taxable year" means the calendar year, or the
corporations
fiscal year ending during such calendar year,
(4) Special income tax on certain corporations upon the basis of which the net income is
(5) Capital gains tax on sale or exchange of computed under Title II (Tax on Income).
shares of stock of a domestic corporation
classified as capital assets Taxable year includes, in the case of return
made for a fractional part of a year under the
PAGE 38 OF 275
UP LAW BOC TAXATION 1 TAXATION LAW
PAGE 39 OF 275
UP LAW BOC TAXATION 1 TAXATION LAW
Primary
Sub-Classification(s)
Classification
Citizens of the Residents citizens
Philippines Non-resident citizens
Residents
Engaged in Trade or Business in the
Aliens Philippines
Individuals Non-residents
Not Engaged in Trade or Business in the
Philippines
Special Classes of
Minimum Wage Earner
Individuals
Domestic Corporations
Corporations Resident Corporations
Foreign Corporations
Non-resident Corporations
Estates and
Trusts
General Business Partnership
Partnerships
General Professional Partnership
Co-
ownerships
PAGE 40 OF 275
UP LAW BOC TAXATION 1 TAXATION LAW
General Principles
(c) Partnerships
(a) A resident citizen of the Philippines is taxable
The Tax Code mandates that every other type of on all income derived from sources within and
business partnership (Ordinary Partnerships) is without the Philippines;
subject to income tax in the same manner and at
(b) A nonresident citizen is taxable only on
the same rate as an ordinary corporation.
income derived from sources within the
General Professional Partnerships (GPP) Philippines;
A general professional partnership is a
(c) An individual citizen of the Philippines who is
partnership formed by persons for the sole
working and deriving income from abroad as
purpose of exercising their common profession,
an overseas contract worker is taxable only on
no part of the income of which is derived from
income derived from sources within the
engaging in any trade or business.
Philippines:
Not considered as a taxable entity for income tax
Provided, That a seaman shall be treated as
purposes. The partners themselves, not the
an overseas contract worker if he is a:
partnership, are liable for the payment of income
tax in their individual capacities. (1) citizen of the Philippines; and
(2) receives compensation for services
rendered abroad as a member of the
(d) Estates and Trusts
complement of a vessel engaged
Taxable estates and trusts are taxed in the same exclusively in international trade
manner and on the same basis as an individual.
(d) An alien individual, whether a resident or not
of the Philippines, is taxable only on income
(e) Co-ownership derived from sources within the Philippines;
For income tax purposes, the co-owners in a co-
ownership report their share of the income from
PAGE 42 OF 275
UP LAW BOC TAXATION 1 TAXATION LAW
Foreign Corporation X
Income v. Capital {Madrigal v. Rafferty, supra]
(a) Income means all wealth which flows to the Service of wealth Wealth itself
taxpayer other than a mere return of capital. It Subject to tax Return of capital is
includes gain derived from the sale or other not subject to tax
disposition of capital assets. Income is a gain
derived from labor or capital, or both labor Fruit Tree
and capital; and includes the gain derived
from the sale or exchange of capital assets.
ii. Realization of Income
(b) It is an amount of money coming to a person Income is realized when there is a gain or profit
within a specified time, whether as payment derived from a closed and completed transaction.
for services, interest or profit from investment.
Unless otherwise specified. It means cash or Actual vis-à-vis Constructive receipt
its equivalent. Income can also be thought of (1) Actual receipt – Income is actually reduced to
as a flow of the fruits of one's labor. [Conwi v. possession. The realization of gain may take
CTA , G.R. No. 48532 (1992)] the form of actual receipt of cash.
(c) Income may be received in the form of cash, (2) Constructive receipt – An income is
property, service, or a combination of the three. considered constructively received when it is
credited to the account of, or segregated in
favor of a person. The person may withdraw
Nature the said account credited in his favor anytime
Income includes earnings, lawfully or unlawfully without any substantial limitations or
acquired, without consensual recognition, conditions upon which payment or enjoyment
express or implied, of an obligation to repay and is to be made or exercised.
without restriction as their disposition. [James v.
US, 366 US 213(1961)]
Examples:
b.2.2. When Income is Taxable
PAGE 43 OF 275
UP LAW BOC TAXATION 1 TAXATION LAW
(a) Interest credited on savings bank deposit (3) Wages due to workers but remaining
unpaid
(b) Matured interest coupons not yet collected
by the taxpayer Generally, trade and manufacturing businesses
use accrual method while servicing businesses
(c) Dividends applied by the corporation
use cash method. If the service business opted to
against the indebtedness of a stockholder
report on accrual basis, such method can only be
(d) Share in the profit of a partner in a general applied when it comes to reporting of expense. To
professional partnership, although not yet prevent tax evasion, individual taxpayers whose
distributed, is regarded as constructively business consists of the sale of inventories cannot
received; or use cash method. [Valencia and Roxas]
(e) Intended payment deposited in court
(consignation). iv. Cash Method of Accounting versus Accrual
The doctrine of constructive receipt is Method of Accounting
designed to prevent the taxpayer using the Cash method generally reports income upon cash
cash basis from deferring or postponing the collection and reports expenses upon payment. If
actual receipt of taxable income. Without the earned from rendering of services, income is to be
rule, the taxpayer can conveniently select the reported in the year when collected, whether
year in which he will report the income. earned or unearned.
(Dimaampao)
Accrual method generally reports income when
For a taxpayer using the accrual method, the earned and reports expense when incurred. If
determinative question is, when do the facts earned from sale of goods, income is to be
present themselves in such a manner that the reported in the year of sale, irrespective of
taxpayer must recognize income or expense? The collection.
accrual of income and expense is permitted when
the all-events test has been met. This test
Methods of accounting in reporting income and
requires: (1) fixing of a right to income or liability
expenses
to pay; and (2) the availability of the reasonable
[N.B. Not in syllabus; Additional matter]
accurate determination of such income or liability
[CIR v. Isabela Cultural Corporation, G.R. No.
135210 (2001) ].
Installment method vis-à-vis Deferred method
The “As If” Theory of Constructive Income is vis-à-vis Percentage of completion method (in
designed to prevent a cash basis taxpayer to long- term contracts)
delay reporting of income. It also resumes the
Installment Method is a special method of
existence of income on transactions supposedly
accounting whereby income on installment sales
not subject to tax. [Valencia and Roxas]
of property during the year is allowed to be
reported in installments in proportion to the
installment payments actually received in that
iii. Recognition of Income
year, which the gross profit realized or to be
Income realized pertains to the accrual basis of
realized when payment is completed, bears to the
accounting.
total contract price (Sec. 49, NIRC).
Recognition of income in the books is when it is
realized and expenses are recognized when
incurred. It is the right to receive and not the Income may be reported on the installment basis
actual receipt that determines the inclusion of in the following cases:
the amount in gross income
Examples:
Sales of personal property by a dealer
(1) Interest or rent income earned but not
A dealer who regularly sells or otherwise disposes
yet received
of personal property on the installment plan
(2) Rent expense accrued but not yet paid
Sales of real property (inventory) and casual sales
of personalty
PAGE 44 OF 275
UP LAW BOC TAXATION 1 TAXATION LAW
(1) casual sale or other casual disposition of basis. In computing his income for the year of
personal property (not of a kind which would change or any subsequent year, amounts actually
be includible in the inventory of the taxpayer if received during any such year on account of sales
on hand at the close of the taxable year) or other dispositions of property made in any prior
where the selling price > P1,000 and the initial year shall not be excluded. [see Sec. 49(D), NIRC].
payments do not exceed 25% of the selling
price, or
Deferred Payment
(2) sale or other disposition of real property
(inventory), if the initial payments do not (a) If the initial payments exceed 25% of the
exceed 25% of the selling price. Note: This sale selling price, the gain realized may be
is subject to creditable withholding tax and reported on a deferred payment method.
normal tax which is 30% for corporate
(b) The taxable gain or income returnable during
taxpayer or 5% to 32% for individual taxpayer.
the year of sale is the difference between the
selling or contract price and the cost of the
property, even though the entire purchase
Sales of real property considered as capital asset
price has not been actually received in the year
by individuals
of sale.
An Individual who sells or disposes of real
(c) The obligations of the purchaser received by
property, considered as capital asset, if initial
the vendor are to be considered as equivalent
payments do not exceed 25% of the selling price,
of cash.
may pay the capital gains tax in installments (Sec.
49(C), NIRC). Note: This sale is subject to a
capital gains tax of 6% based on the selling price
Personal Property Real Property
or zonal value, whichever is higher.
Dealer
Note: Initial payments are the total payments Dealer in personal Installment
received in cash or property (other than evidences property who method; Provided,
of indebtedness such as promissory notes, regularly sells in initial payments do
mortgages given) by the seller upon or before the installment plan: not exceed 25% of
execution of the instrument of sale during the Installment method selling price
taxable year of the disposition of the real property. *held as ordinary If exceeds 25%--
Considered as initial payments are the asset regardless of Deferred payment
downpayment and all other payments received amount of method
by the seller during the year of sale, including percentage of initial *held as inventory
excess mortgage assumed by the buyer over the payments
basis or cost of the property sold. It contemplates Casual Sale
at least one other payment in addition to the Installment
initial payment. If the entire purchase price is to method; Provided:
be paid in a lump sum in a later year, there being (1) Selling price
no payment during the first year, the income may exceeds
not be returned on the installment basis. php1,000
Selling price is the total amount or price of the (2) Initial
sale including the cash or property received and payments do not
all notes of the buyer or mortgages assumed by exceed 25% of
him. selling price
If either of 2 or both
Contract price is the amount which the purchaser conditions not
contracts to pay the seller in cash. It includes the met—Deferred
excess of the mortgages assumed over the cost or payment method
other basis of the property sold. *personal property
Change from accrual to installment basis not considered
A taxpayer entitled to the benefits of a dealer in inventory
personal property may elect for any taxable year Sale by Individuals
to report his taxable income on the installment
PAGE 45 OF 275
UP LAW BOC TAXATION 1 TAXATION LAW
income, profits, and income derived from any the Philippines; and gains, profits and income
source whatever (whether legal or illegal), unless from sale of real property as well as from
it is exempt from income tax under the personal property in the Philippines. As a rule,
Constitution, tax treaty, or statute or it is subject incomes earned within the Philippines are
to final withholding income tax in accordance taxable.
with the semi-global or semi-schedular tax
system adopted by the Philippines.
(ii) Derived entirely from sources without the
It is the difference between gross sales/revenue
Philippines [Sec. 42(C), NIRC]. Examples:
and the cost of goods sold/services. The
compensation for labor or service rendered by
definition of gross income is broad and
overseas contract workers; interest on bonds,
comprehensive to include proceeds from sales of
notes, deposits and the like earned abroad;
transport documents. (Mamalateo)
dividends declared by nonresident foreign
corporation; rental and royalties from property
located outside the Philippines; and gains, profits
b.3.2. Concept of Income From Whaterver Source
and income from sale of real property as well as
Derived
from personal property located outside the
“Income derived from whatever source” means Philippines. As a rule, income earned from
inclusion of all income not expressly exempted outside the Philippines are not taxable except for
within the class of taxable income under the laws resident citizens and domestic corporations.
irrespective of the voluntary or involuntary action
of the taxpayer in producing the gains, and
whether derived from legal or illegal sources (i.e. (iii) Derived from sources partly within or partly
gambling, extortion, smuggling, etc.) without the Philippines. Examples: gains, profits
and income from transportation or other services
rendered partly within and partly outside, and
b.3.3. Gross Income vis-à-vis Net Income vis-à-vis dividend received by a resident citizen from a
Taxable Income resident foreign corporation. (Sec. 43(E), NIRC).
In general, when an income is earned partly from
Gross income – means income, gain or profit
within and partly from without, only income
subject to tax.
within is taxable in the Philippines, except if the
Taxable income – means the pertinent items of taxpayer is a resident citizen or a domestic
gross income specified in the Tax Code, less the corporation. A Filipino citizen or a domestic
deductions and/or personal and additional corporation whose income is derived from within
exemptions, if any, authorized for such types of and without the Philippines is generally subject
income by the Tax Code or other special laws (Sec. to tax.
31, NIRC).
subject to Fringe Benefit Tax (FBT) under Section for services performed as a private secretary, even
33 of the Tax Code, and taxable pensions and if they are performed in the employer’s home is
retirement pay (e.g., retirement benefits earned considered as compensation.
without meeting the conditions for exemption
The term “casual labor” includes labor which is
thereof, such as retirement of less than 50 years
occasional, incidental or regular. “Not in the
of age.)
course of the employer’s trade or business”
includes labor that does not promote or advance
the trade or business of the employer.
General Rule: every form of compensation
income is taxable regardless of how it is earned, The term “remuneration paid for services
by whom it is paid, the label by which it is performed as an employee of a foreign
designated, the basis upon which it is determined, government or an international organization”
or the form in which it is received. The basis upon includes not only remuneration paid for services
which remuneration is paid is immaterial. It may performed by ambassadors, ministers and other
be paid on the basis of piece of work, percentage diplomatic officers and employees but also
of profits, hourly, weekly, monthly, or annually. remuneration paid for services performed as
consular or other officer or employee of a foreign
Exception: The term wages does NOT include
government or as a non-diplomatic
remuneration paid:
representative of such government.
a) For agricultural labor paid entirely in
Compensation income including overtime pay,
products of the farm where the labor is
holiday pay, night shift differential pay, and
performed
hazard pay, earned by MINIMUM WAGE
b) For domestic service in a private home EARNERS (MWE) who has no other returnable
income are NOT taxable and not subject to
c) For casual labor not in the course of the
withholding tax on wages [RA 9504]; Provided,
employer's trade or business
however, that an employee shall not enjoy the
d) For services by a citizen or resident of the privilege of being a MWE and, therefore, his/her
Philippines for a foreign government or entire earning are not exempt from income tax
an int’l organization. [Sec. 78(A), NIRC] and, consequently, from withholding tax if he
receives/earns additional compensation such as
commissions, honoraria, fringe benefits, benefits
The term “remuneration for domestic services” in excess of the allowable statutory amount of
refers to remuneration paid for services of a P82,000 [RA 10653], taxable allowance, and
household nature performed by an employee in other taxable income other than the statutory
or about the private home of the person whom he minimum wage (SMW), holiday pay, overtime pay,
is employed. The services of household personnel hazard pay and night shift differential pay.
furnished to an employee (except rank and file
employees) by an employer shall be subject to the MWEs receiving other income, such as income
fringe benefits tax pursuant to Sec. 33 of the Tax from the conduct of trade, business, or practice of
Code. A private home is the fixed place of abode profession, except income subject to final tax, in
of an individual or family. If the home is utilized addition to compensation income are not
primarily for the purpose of supplying board or exempted from income tax on their income
lodging to the public as a business enterprise, it earned during the taxable year.
ceases to be a private home and remuneration This rule, notwithstanding, the SMW, Holiday Pay,
paid for services performed therein is not overtime pay, night differential pay and hazard
exempted. Services of the household nature in or pay shall still exempt from withholding tax.
about a private home include services rendered
by cooks, maids, butlers, valets, laundresses,
gardeners, chauffeurs of automobiles for family Forms of compensation and how they are
use. The remuneration paid for the services which assessed
are performed in or about rooming or lodging
Cash – If compensation is paid in cash, the full
houses, boarding houses, clubs, hotels, hospitals
amount received is the measure of the income
or commercial officer or establishments is
subject to tax.
considered as compensation. Remuneration paid
PAGE 49 OF 275
UP LAW BOC TAXATION 1 TAXATION LAW
Medium other than money – If services are paid under Section 32 (b)(7)(e) of the Tax Code,
for in a medium other than money (e.g., shares of Provided, that the excess of the ‘de minimis’
stock, bonds, and other forms of property), the benefits over their respective ceilings prescribed
fair market value (FMV) of the thing taken in by these regulations shall be considered as part
payment is the amount to be included as of “other benefits” and the employee receiving it
compensation subject to tax. If the services are will be subject to tax only on the excess over the
rendered at a stipulated price, in the absence of P82,000 ceiling, Provided, further, that MWEs
evidence to the contrary, such price will be receiving, ‘other benefits’ exceeding the P82,000
presumed to be the FMV of the remuneration limit shall be taxable on the excess benefits, as
received. well as on his salaries, wages, and allowances,
just like an employee receiving compensation
income beyond the SMW. Any amount given by
Living quarters or meals the employer as benefits to its employees,
whether classified as “de minimis” benefits or
General Rule: The value to the employee of the
fringe benefits, shall constitute as deductible
living quarters and meals given by the employer
expense upon such employer. Where
shall be added to his compensation subject to
compensation is paid in property other than
withholding.
money, the employer shall make necessary
Exception: If living quarters/meals are furnished arrangements to ensure that the amount of the
to an employee for the convenience of the tax required to be withheld is available for
employer, the value need NOT be included as payment to the BIR.
part of compensation income.
Facilities and privileges of a relatively small value
Classification of Gross Compensation Income
- Facilities and privileges (such an entertainment,
medical services, or so called “courtesy” Basic salary or wage
discounts on purchases), otherwise known as
Salary – earnings received periodically for a
“de minimis benefits” furnished or offered by an
regular work other than manual labor, e.g.,
employer to his employees generally, are NOT
monthly salary of an employee
considered as compensation subject to income
tax and therefore withholding tax if such facilities Wages – earnings received usually according to
are offered or furnished by the employer merely specified intervals of work, as by the hour, day, or
as means of promoting the health, goodwill, week, e.g., a carpenter’s wage.
contentment, or efficiency of his employees.
Backwages are subject to income tax and
withholding tax on wages [BIR Ruling No. DA-
073-2008]
Exception: Any amount paid specifically, either as basic salary together with the overtime pay and
advances or reimbursements for travelling, night differential to arrive at gross salary.
representation and other bona fide ordinary and
necessary expenses incurred or reasonably
expected to be incurred by the employee in the Retirement Pay – a lump sum payment received
performance of his duties are NOT by an employee who has served a company for a
COMPENSATION subject to withholding tax, considerable period of time and has decided to
provided the following conditions are satisfied: withdraw from work into privacy. [RR 6-82, Sec.
2b]
a) It is for ordinary and necessary traveling
and representation or entertainment
expenses paid or incurred by the
In general, retirement pay is taxable except in the
employee in the pursuit of the employer’s
following instances:
trade, business or profession; and
a) SSS or GSIS retirement pays.
b) The employee is required to account or
liquidate for the foregoing expenses. b) Retirement pay (R.A. 7641) due to old age
provided the following requirements are
The excess of actual expenses over advances
met:
made shall constitute taxable income if such
amount is not returned to the employer. The i. The retirement program is
employee is required to account/liquidate for the approved by the BIR
expenses in accordance with the specific Commissioner;
requirements of substantiation for each category ii. It must be a reasonable benefit
of expenses pursuant to Sec.34 of the Tax Code. plan. (Its implementation must be
Note: Reasonable amounts of fair and equitable for the benefit of
reimbursements/advances for traveling and all employees)
entertainment expenses which are pre-computed iii. The retiree should have been
on a daily basis and are paid to an employee employed for 10 years in the said
while he is on an assignment or duty are NOT company;
subject to withholding tax on wages and
substantiation requirements. iv. The retiree should have been 50
years old or above at the time of
retirement; and
Commission – usually a percentage of total sales v. It should have been availed of for
or on certain quota of sales volume attained as the first time.
part of incentive such as sales commission.
Separation pay – taxable if VOLUNTARILY
Fees – received by an employee for the services availed of. It shall not be taxable if involuntary,
rendered to the employer including a director’s i.e., death, sickness, disability, reorganization/
fee of the company, fees paid to the public merger of company and company at the brink of
officials such as clerks of court or sheriffs for bankruptcy or for any cause beyond the control of
services rendered in the performance of their the said official or employee.
official duty over and above their regular salaries.
Amounts received by reason of involuntary Fringe Benefits – any good, service, or other
separation remain EXEMPT from income tax even benefit furnished or granted by an employer, in
if the official or the employee, at the time of cash or in kind, in addition to basic salaries of an
separation, had rendered less than ten (10) years individual employee [Sec. 33, NIRC]
of service and/or is below fifty (50) years of age.
De Minimis – privileges of relatively small value
Any payment made by an employer to an as given by the employer to his employees.
employer to an employee on account of dismissal,
Fringe Benefits and De Minimis are not
constitutes compensation regardless of whether
considered compensation subject to income tax
the employer is legally bound by contract, statute,
and withholding tax.
or otherwise, to make such payment.
State requires the ER to withhold the tax upon (c) Vehicle of any kind
payment of the compensation income.
(d) Household personnel, such as maid,
driver and others
ii. Fringe Benefits (e) Interest on loan at less than market rate
to the extent of the difference between
(a) Special treatment of fringe benefits
the market rate and actual rate granted.
Persons liable: The Employer (as a withholding
(f) Membership fees, dues and other
agent), whether individual, professional
expenses borne by the employer for the
partnership or a corporation, regardless of
employee in social and athletic clubs and
whether the corporation is taxable or not, or the
similar organizations
government and its instrumentalities, is liable to
remit the fringe benefit tax to the BIR once fringe (g) Expenses for foreign travel
benefit is given to a managerial or supervisory
(h) Holiday and vacation expenses
employee.
(i) Educational assistance to the employee
The fringe benefit tax (FBT) is a final tax on the
or his dependents; and
employee’s income to be withheld by the
employer. The withholding and remittance of (j) Life or health insurance and other non-
FBT shall be made on a calendar quarterly basis. life insurance premiums or similar
amounts on excess of what the law
Managerial employee: one who is vested with the
allows.[Sec. 33(B)]
powers or prerogatives to lay down and execute
management policies and/or to hire, transfer,
suspend, lay-off, recall, discharge, assign or
Tax Rate and Tax Base
discipline employees.
Tax base is based on the grossed-up monetary
Supervisory employees: those who, in the interest
value (GMV) of fringe benefits. Rate is generally
of the employer, effectively recommend such
32%.
managerial actions if the exercise of such
authority is not merely routinary or clerical in GMV represents: (a) the whole amount of income
nature but requires the use of independent realized by the employee which includes the net
judgment. amount of money or net monetary value of
property that has been received; and (b) the
All employees not falling within any of the above amount of fringe benefit tax due from the
definitions are considered rank-and-file
employee which has been withheld and paid by
employees.
the employer for and in behalf of his employee..
Fringe benefit tax is imposed on fringe benefits
received by supervisory and managerial
employees. The fringe benefits of rank and file How GMV is determined
employees are treated as part of compensation GMV is determined by dividing the actual
income subject to income tax and withholding tax monetary value of the fringe benefit by 68%
on compensation. [100% - tax rate of 32%]. For example, the actual
monetary value of the fringe benefit is P1,000.
The GMV is equal to P1,470.59 [P1,000 / 0.68].
(b) Definition
The fringe benefit tax, therefore, is P470.59
Fringe benefit means any good, service, or other [P1470.59 x 32%].
benefit furnished or granted by an employer, in
Special Cases:
cash or in kind, in addition to basic salaries, to an
individual employee (except rank and file a) For fringe benefits received by non-
employees) such as, but not limited to the resident alien not engaged in trade of
following: business in the Philippines (NRANETB),
the tax rate is 25% of the GMV. The GMV
(a) Housing
is determined by dividing the actual
(b) Expense Account monetary value of the fringe benefit by
75% [100% - 25%].
PAGE 53 OF 275
UP LAW BOC TAXATION 1 TAXATION LAW
PAGE 54 OF 275
UP LAW BOC TAXATION 1 TAXATION LAW
(7) Laundry allowance not exceeding P300 per Fringe Benefit Tax
month; (RR No. 5-2011) Housing Privilege Base (Monetary
Value)
(8) Employees achievement awards, e.g., for
length of service or safety achievement, Purchase of residential MV= 5% x
which must be in the form of a tangible property in installment acquisition cost
personal property other than cash or gift basis for the use of the exclusive of
employee interest x 50%
certificate, with an annual monetary value
not exceeding P10,000 received by the Purchase of residential MV= FMV or ZV,
employee under an established written plan property and ownership whichever is
which does not discriminate in favor of highly is transferred in the higher
paid employees; (RR No. 5-2011) name of the employee
(9) Gifts given during Christmas and major ZV = Zonal Value = value of the land or
anniversary celebrations not exceeding improvement, as declared in the Real Property
P5,000 per employee per annum; (RR No. 5- Declaration Form
2011)
FMV = Fair Market Value = FMV as determined by
(10) Daily meal allowance for overtime work and the Commissioner of Internal Revenue
night/graveyard shift not exceeding twenty-
five percent (25%) of the basic minimum
wage on a per region basis; (RR No. 5-2011) Non-taxable housing fringe benefit:
(11) Benefits received by an employee by virtue of a) Housing privilege of the Armed Forces of
a collective bargaining agreement (CBA) and the Philippines (AFP) officials – i.e, those
productivity incentive schemes provided that of the Philippine Army, Philippine Navy,
the total monetary value received from both or Philippine Air Force
CBA and productivity incentive schemes
b) A housing unit, which is situated inside or
combined do not exceed P10,000.00 per
adjacent to the premises of a business or
employee per taxable year. (RR No 1-2015)
factory – maximum of 50 meters from
perimeter of the business premises
All other benefits given by employers which are
c) Temporary housing for an employee who
not included in the above enumeration shall NOT
stays in housing unit for three months or
be considered as "de minimis" benefits and hence,
less
shall be subject to withholding tax on
compensation (rank and file employees) and FBT
(managerial/supervisory employees).
Housing
Motor Vehicle
Fringe Benefit Tax
Fringe Benefit Tax
Housing Privilege Base (Monetary Motor Vehicle
Base
Value)
Purchased in the name MV= acquisition
LEASE of residential MV= 50% of lease
of the employee cost
property for the payments
residential use of Cash given to employee MV= cash received
employees to purchase in his own by employee
where MV = name
monetary value of
the FB Purchase on installment, MV= acquisition
in the name of employee cost exclusive of
Assignment of residential MV= [5% (FMV or interest
property owned by ZV, whichever is
employer for use of higher) x 50%] Employee shoulders part MV= amount
employees of the purchase price, shouldered by
employer
PAGE 55 OF 275
UP LAW BOC TAXATION 1 TAXATION LAW
PAGE 57 OF 275
UP LAW BOC TAXATION 1 TAXATION LAW
Note: For sale, barter, exchange or other forms of price to measure the gain or loss from the sales
disposition of shares of stock subject to the 5% or transaction (Sec. 40, NIRC).
10% capital gains tax on the net capital gain
during the taxable year, the capital losses
realized from this type of transaction during the (3) Long term capital gain vis-à-vis Short term
taxable year are deductible only to the extent of capital gain
capital gains from the same type of transaction
Long-term capital gain: Capital asset is held for
during the same period. If the transferor of the
more than twelve months before it is sold. Only
shares is an individual, the rule on holding period
50% of the gain is recognized.
and capital loss carry-over will not apply,
notwithstanding the provisions of Section 39 of Short-term capital gain: Capital asset is held for
the Tax Code. (RR 6-2008, c.4) 12 months or less, 100% of the gain is subject to
tax.
(2) Actual gain vis-à-vis Presumed gain
Presumed Gain: In the sale of real property
located in the Philippines, classified as capital (4) Net Capital Gain vis-à-vis Net Capital Loss
asset, the tax base is the gross selling price or fair Net Capital Gain: Excess of the gains over the
market value, whichever is higher. The law losses on sales or exchange of capital assets
presumes that the seller makes a gain from such during the taxable year.
sale. Thus, whether or not the seller makes a
profit from the sale of real property, he has to pay Net Capital Loss: Excess of the losses over the
6% capital gains tax. In fact, he has to pay the tax, gains on sales or exchanges of capital assets
even if he incurs an actual loss from the sale during the taxable year. [Sec. 39A, NIRC]
thereof. (However, when the buyer is the
government, the individual seller has the option
whether to be taxed at the graduated income tax (5) Income tax treatment of capital loss
rates or at 6% capital gains tax.) (a) Capital loss limitation rule (applicable to both
Actual Gain: The tax base in the sale of real corporations and individuals)
property classified as an ordinary asset is the General Rule: Losses from sales or exchanges of
actual gain. If the seller incurs a loss from the sale, capital assets shall be allowed only to the extent
such loss may be deducted from his gross income of the gains from such sales or exchanges (Sec.
during the taxable year. The ordinary gain shall 39(C), NIRC).
be added to the operating income and the net
taxable income shall be subject to the graduated Exception for Banks and Trust Companies: If a
rates from 5% to 32% (if an individual) or to 30% bank or trust company incorporated under the
corporate tax or to 2% MCIT (if a corporation). laws of the Philippines, a substantial part of
whose business is the receipt of deposits, sells
any bond, debenture, note, certificate or other
Computation of the amount of gain or loss evidence of indebtedness issued by any
corporation (including one issued by a
Amount realized from sale or other government or political subdivision thereof) with
disposition of property interest coupons or in registered form, any loss
Less: Basis or Adjusted Basis resulting from such sale shall not be subject to
the foregoing limitation and shall not be included
NET GAIN (LOSS) in determining the applicability of such limitation
to other losses (Sec. 39(C), NIRC).
Note: Amount realized from sale or other (b) Net loss carry-over rule (applicable only to
disposition of property = sum of money received individuals)
+ fair market value of the property (other than If an individual sustains in any taxable year a net
money) received capital loss, such loss (in an amount not in excess
of the net income for the year) shall be treated in
the succeeding taxable year as a loss from the
Note: When a taxpayer sells a real or personal
property, he should deduct its cost from its selling
PAGE 58 OF 275
UP LAW BOC TAXATION 1 TAXATION LAW
sale or exchange of a capital asset held for not (a) Shares listed and traded through the stock
more than 12 months (Sec. 39(D), NIRC). exchange other than sale by a dealer in securities:
½ of 1% of the gross selling price of the stock or
gross value in money of the shares of stock sold,
(6) Dealings in real property situated in the
bartered, exchanged or otherwise disposed which
Philippines
shall be assumed and paid by the seller or
Persons Liable and Transactions Affected: transferor through the remittance of the stock
transaction tax by the seller or transferor’s broker.
(a) Individual taxpayers, estates and trusts
Note: In the nature of percentage tax and not
(b) Sale or exchange or other disposition of
income tax; exempt from income tax per Section
real property considered as capital assets.
127 (d):
(c) Includes "pacto de retro sale" and other
“Any gain derived from the sale, barter, exchange
conditional sale.
or other disposition of share of stock under this
(d) Domestic Corporation section shall be exempt from taxes imposed in
(e) Sale or exchange or disposition of lands Sections 24(C), 27(D)(2), 28(A)(8)(c), and
and/or building which are not actually 28(B)(5)(c) of this Code and from the regular
used in business and are treated as individual or corporate income tax.”
capital asset. Note: Percentage tax under Sec. 127 is NOT
Rate and Basis of Tax DEDUCTIBLE for income tax purposes.
(4) Notify the Commissioner within thirty and a non-resident foreign corporation from a
(30) days from the date of sale or domestic corporation is exempt from income tax.
disposition through a prescribed return of
his intention to avail the tax exemption;
Cash dividend is the most common form of
(5) Can only be availed of onlyonce every ten
dividend, valued at the amount of money
(10) years;
received by the stockholder. Cash dividends and
(6) The historical cost or adjusted basis of his property dividends are subject to income tax.
old principal residence shall be carried
over to the cost basis of his new principal
residence (2) Stock dividends
(7) If there is no full utilization, the portion of Stock dividend is generally exempt from income
the gains presumed to have been realized tax, EXCEPT:
shall be subject to capital gains tax. (a) If a corporation cancels or redeems stock
(8) Portion of presumed gains subject to issued as a dividend at such time and in
CGT: (Unutilized/GSP) x (higher of GSP such manner as to make the distribution
or FMV) and cancellation or redemption, in whole
or in part, essentially equivalent to the
distribution of a taxable dividend, the
vi. Passive Investment Income amount so distributed in redemption or
cancellation of the stock shall be
Under Sec 24(B) of the Tax Code, a final tax is
considered as taxable income to the
imposed upon gross passive income of citizen
extent that it represents a distribution of
and resident aliens. An income is considered
earnings or profits (Sec. 73(B), NIRC); or
passive if the taxpayer merely waits for it to be
realized. (b) Where there is an option that some
stockholders could take cash or property
dividends instead of stock dividends;
(a) Interest Income some stockholders exercised the option
to take cash of property dividends; and
An earning derived from depositing or lending of
the exercise of option resulted in a
money, goods or credits [Valencia and Roxas] e.g.,
interest income from government securities such change of the stockholders’
proportionate share in the outstanding
as Treasury Bills.
share of the corporation.
Unless exempted by law, interest income
(3) Property dividends
received by the taxpayer, whether or not usurious,
is subject to income tax. Property dividends or dividends in the form of
property are subject to tax at preferential rate
under the NIRC.
(b) Dividend Income
A form of earnings derived from the distribution
made by a corporation out of its earnings or (4) Liquidating dividends
profits and payable to its stockholders, whether Represents distribution of all the property or
in money or in property. assets of a corporation in complete liquidation or
dissolution. It is strictly not dividend income, but
In general, dividends are subject to final tax
rather is treated in effect, a return of capital to the
under the Tax Code.
extent of the shareholder’s investment. The
difference between the cost or other basis of the
(1) Cash dividends stock and the amount received in liquidation of
the stock is a capital gain or a capital loss. Where
Dividends are subject to final tax under the NIRC. property is distributed in liquidation, the amount
However, dividends received by a domestic received is the FMV of such property. The income
corporation from another domestic corporation, is subject to ordinary income tax rates. It is
PAGE 60 OF 275
UP LAW BOC TAXATION 1 TAXATION LAW
subject neither to the FWT on dividends nor to the Rent income may be in the following forms:
CGT on sale of shares.
(1) Cash, at the stipulated price
(2) Obligations of the lessor to third persons
paid or assumed by the lessee in
consideration of the contract of lease,
e.g., real estate tax on the property
leased assumed by the lessee
(3) Advance payment
If the advance payment is actually a loan to the
lessor, or an option money for the property, or a
security deposit for the faithful performance of
certain obligations of the lessee, such advance
payment is not income to the lessor.
However, a security deposit that is applied to
rental is taxable income to the lessor.
If the advance payment is, in fact, a pre-paid
rental, received by the lessor under a claim of
right and without restriction as to its use, then
such payment is income to the lessor.
Pre-paid rent must be reported in full in the year
of receipt, regardless of the accounting method
used by the lessor.
(3) Tax treatment of: (c) Advance Rental/ Long Term Lease
Pre-paid rent must be reported in full in the year
(a) Leasehold improvements by lessee of receipt, regardless of the accounting method
used by the lessor.
Rent Income from leasehold improvements:
(i) Outright method- lessor shall report as vii. Annuities, Proceeds from Life insurance or
income FMV of the buildings or Other Types of Insurance
improvements subject to the lease in the
year of completion. Annuities are installment payments received for
life insurance sold by insurance companies.
(ii) Spread-out method- lessor shall spread
over the remaining term of the lease the The aleatory contract of life annuity binds the
estimated depreciated (book) value of debtor to pay an annual pension or income
such buildings or improvements at the during the life of one or more determinate
termination of the lease, and reports as persons in consideration of a capital consisting of
income for each remaining term of the money or other property, whose ownership is
lease an aliquot part thereof. transferred to him at once with the burden of the
estimated BV at the end of the lease income. [Art. 2021, New Civil Code]
contract/ remaining lease term = Income The annuity payments represent a part that is
per year taxable and not taxable. If part of annuity
If for any reason than a bona fide purchase from payment represents interest, then it is a taxable
the lessee by the lessor, the lease is terminated, income. If the annuity is a return of premium, it is
so that the lessor comes into possession or not taxable.
control of the property prior to the time originally
fixed, lessor receives additional income for the viii. Prizes and Awards
year which the lease is so terminated to the
PAGE 62 OF 275
UP LAW BOC TAXATION 1 TAXATION LAW
A prize is a reward for a contest or a competition. a creditor, who, in consideration thereof, cancels
It represents remuneration for an effort reflecting the debt, income in that amount is realized by the
one’s superiority. debtor as compensation for personal services.
Contest prizes and awards received are generally It may amount to a gift. If a creditor wishes merely
taxable. Such payment constitutes gain derived to benefit the debtor, and without any
from labor. consideration therefore, cancels the debt, the
amount of the debt is a gift to the debtor and
The EXCEPTIONS are as follows:
need not be included in the latter’s report of
(a) Prizes and awards made primarily in income.
recognition of religious, charitable,
It may amount to a capital transaction. If a
scientific, educational, artistic, literary or
corporation to which a stockholder is indebted
civic achievements are EXCLUSIONS
forgives the debt, the transaction has the effect of
from gross income if:
a payment of dividend.
(b) The recipient was selected without any
action on his part to enter a contest or
proceedings; and (b) Tax Benefit Rule
(c) The recipient is not required to render This is a general principle in taxation which states
substantial future services as a condition that is a taxpayer deducted an item on his income
to receiving the prize or award. tax return and enjoyed a tax benefit (reduced his
income tax) thereby, and in a subsequent year
(d) Prizes and awards granted to athletes in
recovers all or part of that item, he will recognize
local and international sports
gross income in the year the deducted item is
competitions and tournaments held in
recovered. The rule has both an inclusionary and
the Philippines and abroad and
an exclusionary component, i.e., the recovery is
sanctioned by their national associations
included in the taxpayer’s gross income to the
shall be EXEMPT from income tax.
extent that the taxpayer obtained a tax benefit
from the prior year’s deduction, and the recovery
ix. Pensions, Retirement Benefit, or Separation is excluded to the extent that the prior year’s
Pay deduction did not provide a tax benefit.
Paid for past employment services rendered.
3 deductions in Sec. 34 which makes reference to
A stated allowance paid regularly to a person on
Tax Benefit Rule are the following:
his retirement or to his dependents on his death,
in consideration of past services, meritorious • Taxes [ Sec 34(C)(1)]
work, age, loss or injury. It is generally taxable • Abandonment Losses [Sec 34 (D)(7)(b)]
unless the law states otherwise. [VALENCIA, • Bad Debts [Sec 34(E)(1)]
Income Taxation 5th ed. (2009)]
(c) Recovery of accounts previously written-off
x. Income from Any Source Whatever
Bad debts claimed as a deduction in the
Inclusion of all income not expressly exempted preceding year(s) but subsequently recovered
within the class of taxable income under the laws shall be included as part of the taxpayer’s gross
irrespective of the voluntary or involuntary action income in the year of such recovery to the extent
of the taxpayer in producing the gains, and of the income tax benefit of said deduction. There
whether derived from legal or illegal sources is an income tax benefit when the deduction of
the bad debt in the prior year resulted in lesser
(a) Forgiveness of indebtedness income and hence tax savings for the company.
(Sec. 4, RR 5-99)
The cancellation or forgiveness of indebtedness Illustration:
may have any of three possible consequences:
Case A Case B Case C
It may amount to payment of income. If, for Year 1
example, an individual performs services to or for
PAGE 63 OF 275
UP LAW BOC TAXATION 1 TAXATION LAW
PAGE 64 OF 275
UP LAW BOC TAXATION 1 TAXATION LAW
Ultimately, the situs of interest income is the (c) The supply of scientific, technical,
residence of the debtor. industrial or commercial knowledge or
information;
(2) Dividends
(d) The supply of any assistance that is
Dividends received: ancillary and subsidiary to, and is
from a domestic corporation; and furnished as a means of enabling the
application or enjoyment of, any such
from a foreign corporation, UNLESS less than property or right as is mentioned in (a),
50% of its gross income for the previous 3-year any such equipment as is mentioned in
period was derived from sources within the (b) or any such knowledge or information
Philippines [in which case it will be treated as as is mentioned in (c);
income partly from within and partly from (e) The supply of services by a nonresident
without]. person or his employee in connection
with the use of property or rights
belonging to, or the installation or
The income which is considered as derived from operation of any brand, machinery or
within the Philippines is obtained by using the other apparatus purchased from such
following formula: nonresident person;
Philippine Gross Income* x Dividend = Income (f) Technical advice, assistance or services
Within Worldwide Gross Income* rendered in connection with technical
management or administration of any
NOTE: * of the corporation giving the dividend
scientific, industrial or commercial
As a rule, the situs of dividend income is the undertaking, venture, project or scheme;
residence of the corporation declaring the and
dividend. (g) The use of or the right to use:
(1) Motion picture films;
(3) Services (2) Films or video tapes for use in
connection with television; and
Compensation for labor or personal services (3) Tapes for use in connection with
performed in the Philippines: As a rule, the situs radio broadcasting.
of compensation is the place of performance of As a rule, the situs of rental income is the place
the services. where the property is located. The situs of royalty
income is where the rights are exercised.
PAGE 65 OF 275
UP LAW BOC TAXATION 1 TAXATION LAW
Abroad Philippines Income from The exclusion of income should not be confused
Within with the reduction of gross income by the
application of allowable deductions. While
** in other words, the situs of the income from the
exclusions are simply not taken into account in
sale of personal property is the place of sale.
determining gross income, deductions are
subtracted from gross income to arrive at net
income. [De Leon]
Exceptions:
(a) Gain from the sale of shares of stock in a
domestic corporation Items of Exclusions representing return of capital
(b) Treated as derived entirely from sources Amount of capital is generally recovered through
within the Philippines regardless of deduction of the cost or adjusted basis of the
where the said shares are sold. property sold from the gross selling price or
(c) Gains from the sale of (manufactured) consideration, or through the deduction from
personal property: gross income of depreciation relating to the
(d) produced (in whole or in part) by the property used in trade or business before it is sold.
taxpayer within and sold without the
It may also related to indemnities, such as
Philippines, or
proceeds of life insurance paid to the insured’s
(e) produced (in whole or in part) by the beneficiaries and return of premiums paid by the
taxpayer without and sold within the insurance company to the insured under a life
Philippines insurance, endowment or annuity contract.
(f) Treated as derived partly from sources
within and partly from sources without Damages, in certain instances, may also be
the Philippines. exempt because they represent return of capital.
(8) Shares of Stock of Domestic Corporation Items of Exclusions because they are expressly
Treated as derived entirely from sources within exempt from income tax
the Philippines regardless of where the said (1) Under the Constitution
shares are sold.
(2) Under a tax treaty
(3) Under special laws
i. Rationale for the Exclusions
B.3.6. Exclusions from gross income
The term “exclusions” refers to items that are not
Exclusions from gross income refer to income included in the determination of gross income
received or earned but is not taxable as income because:
because it is exempted by law or by treaty. Such
tax-free income is not to be included in the (a) They represent return of capital or are not
income tax return unless information regarding it income, gain or profit;
is specifically called for. Receipts which are not in (b) They are subject to another kind of
fact income are, of course, excluded from gross internal revenue tax;
income.
(c) They are income, gain or profit expressly
exempt from income tax under the
PAGE 66 OF 275
UP LAW BOC TAXATION 1 TAXATION LAW
Constitution, tax treaty, Tax Code, or a v. Exclusions Under the Tax Code (Sec. 32(b),
general or special law. [Mamalateo] NIRC)
(a) Proceeds of life insurance policies.—
ii. Taxpayers Who May Avail of the Exclusions General rule: The proceeds of life insurance
policies paid to his estate or to any beneficiary
Exclusion Taxpayer
(but not a transferee for a valuable consideration),
Return of capital All taxpayers since directly or in trust, upon the death of the insured,
there is no income. are excluded from the gross income of the
beneficiary. However, if such amounts are held
Already subject to All taxpayers unless
by the insurer under an agreement to pay interest
internal revenue tax provided that income
thereon, the interest payments received by the
is to be included.
insured shall be included in gross income. The
Express exclusion As expressly provided. interest income shall be taxed at the graduated
income tax rates.
PAGE 68 OF 275
UP LAW BOC TAXATION 1 TAXATION LAW
PAGE 69 OF 275
UP LAW BOC TAXATION 1 TAXATION LAW
Prizes and awards made primarily in recognition to arrive at net income subject to tax. [Sec. 65,
of charitable, literary, educational, artistic, Rev. Reg. No. 2]
religious, scientific, or civic achievement are not
Deductions are in the nature of an exemption
taxable, provided:
from taxation; they are strictly construed against
Recipient was selected without any action on his the claimant, who must point to a specific
part to enter the contest or proceeding; and provision allowing them and who has the burden
of proving that they falls within the purview of
Recipient is not required to render substantial
such provision. Thus, all deductions must be
future services as a condition to receiving the
substantiated, except when the law dispenses
prize or award
with the records, documents or receipts to
support the deductions.
vi. Exclusions Under Special Laws If the exemption is not expressly stated in the law,
(a) Personal Equity and Retirement Account the taxpayer must at least be within the purview
of the exemption by clear legislative intent
Under R.A. 6657 (Comprehensive Agrarian [Commissioner of Customs v. Philippine
Reform Package Law), gain arising from the Acetylene Co., G.R. No. L-22443 May 29, 1971]
transfer of agricultural property covered by the
However, if there is an express mention in the law
law shall be exempt from capital gains tax.
or if the taxpayer falls within the purview of the
Under R.A. 6938 (Cooperative Code of the exemption by clear legislative intent, the rule on
Philippines), as amended by R.A. 9520, strict construction will not apply. [Commissioner
cooperatives transacting business with both v. Anoldus Caprentry Shop, G.R. No. 71122 March
members and non-members shall not be subject 25, 1988]
to tax on their transactions with members. In
The purpose of deductions from gross income is
relation to this, the transactions of members with
to provide the taxpayer a just and reasonable tax
the cooperative shall not be subject to any taxes
amount as the basis of income tax. It is because
and fees, including but not limited to final taxes
many taxpayers spend adequate expenditures in
on members' deposits.
order to obtain a legitimate income.
Under R.A. 7916 (PEZA Law), as amended, PEZA-
registered enterprises are given income tax
holidays of six or four years from the date of Types of deductions
commercial operations, depending on whether There are three (3) types of deductions from gross
their activities are considered pioneer or non- income:
pioneer.
itemized deductions in Section 34(A) to (J) and
Under R.A. 9178 (Barangay Micro Business (M) available to all kinds of taxpayers engaged in
Enterprises Act of 2002), BMBEs shall be exempt trade or business or practice of profession in the
from income tax for income arising from the Philippines;
operation of the enterprise.
optional standard deduction in Section 34(L)
available only to individual taxpayers deriving
business, professional, capital gains and passive
income not subject to final tax, or other income;
and
B.4. DEDUCTIONS FROM GROSS INCOME the special deductions in Sections 37 and 38 of
the NIRC, and in special laws like the BOI law (E.O.
Deductions are items or amounts which the law 226).
allows to be deducted from the gross of income
of a taxpayer in order to arrive at taxable income. B.4.1. General rules
In general, deductions or allowable deductions (a) Deductions must be paid or incurred in
are business expenses and losses incurred which connection with the taxpayer’s trade,
the law allows to reduce gross business income business or profession
PAGE 70 OF 275
UP LAW BOC TAXATION 1 TAXATION LAW
for the purpose of realizing a profit or minimizing CONNECTION or relation of the expense being
a loss deducted to the development, management,
operation and/or conduct of the trade, business
Paid or incurred during the taxable year;
or profession of the taxpayer.
Others: (not in the SC syllabus)
When to ACCRUE expenses: “all–events test”
(b) Paid or incurred in carrying on or which are states that under the accrual method of
directly attributable to the development, accounting, expenses are deductible in the
management, operation and/or conduct of the taxable year in which: (1) all events have occurred
trade, business or exercise of profession; which determine the liability; and (2) the amount
of liability can be determined with reasonable
accuracy.
(c) Substantiated by adequate proof –
documented by official receipts or adequate
Kinds of business expenses
records, which reflect the amount of expense
deducted and the connection or relation of the These are:
expense to the business/trade of the taxpayer); (a) Salaries, wages and other forms of
Legitimately paid (not a BRIBE, kickback, or compensation for personal services
otherwise contrary to law, morals, public policy); actually rendered, including the grossed-
up monetary value of the fringe benefit
If subject to withholding tax, the tax required to subjected to fringe benefit tax which tax
be withheld on the expense paid or payable is should have been paid (Compensation
shown to have been properly withheld and for
remitted to the BIR on time; (b) Travelling expenses
Amount must be reasonable. (c) Cost of materials
(d) Rentals and/or other payments for use or
Note: The expenses allowable to a non-resident possession of property
alien or a foreign corporation consist of only such (e) Repairs and maintenance
expenses as are incurred in carrying on any (f) Expenses under lease agreements
business or trade conducted within the (g) Expenses for professionals
Philippines exclusively. [Sec. 77 RR 2] (h) Entertainment expenses
(i) Political campaign expenses
COHAN Rule: This relief will apply if the taxpayer (j) Training expenses
has shown that it is usual and necessary in the (k) Others
trade to entertain and to incur similar kinds of
expenditures, there being evidence to show the
amounts spent and the persons entertained, (2) Salaries, wages and other forms of
though not itemized. In such a situation, compensation for personal services actually
deduction of a portion of the expenses incurred rendered, including the grossed-up monetary
might be allowed even if there are no receipts or value of the fringe benefit subjected to fringe
vouchers. Absence of invoices, receipts or benefit tax which tax should have been paid
vouchers, particularly lack of proof of the items
Given for personal services must be actually
constituting the expense is fatal to the allowance
rendered and reasonable.
of the deduction [Gancayco v. Collector, G.R. No.
L-13325, (1961)] For income payment to be allowed as deduction,
the withholding tax must have been paid [RR No.
12-2013].
Substantiation requirement – Sec. 34(A)(1)(b),
NIRC: No deduction from gross income shall be
allowed unless the taxpayer shall substantiate Bonuses are deductible when:
with sufficient evidence, such as official receipts (1) made in good faith
or other adequate records: (1) the AMOUNT of the (2) given as additional compensation for
expense being deducted, and (2) the DIRECT personal services actually rendered
PAGE 72 OF 275
UP LAW BOC TAXATION 1 TAXATION LAW
(3) such payments, when added to the period of use. On cash basis, rent is deductible
stipulated salaries, do not exceed a when it is incurred and paid.
reasonable compensation for the services
If the advance payment is a prepaid rental, such
rendered
payment is taxable income to the lessor in the
year when it was received. However, an advance
(3) Traveling expenses payment is not deductible expense of the lessee
until the period is used. [Valencia and Roxas]
This include transportation expenses and meals
and lodging [Sections 65 and 66, Rev. Reg. No.
2] (6) Repairs and maintenance
(1) Expenses must be reasonable and Incidental or ordinary repairs are deductible.
necessary. Repairs which neither materially add to the value
(2) Must be incurred or paid “while away of the property nor appreciably prolong its life,
from home” but keep it in an ordinarily efficient working
condition, may be deducted as expenses,
(3) Tax home is the principal place of
provided the plant or property account is not
business, when referring to “away from
increased by the amount of such expenditure.
home”
The life of the asset referred to is the probable,
(4) Incurred or paid in the conduct of trade or normal, useful life for the purpose of the
business. allowance for the return of the capital investment
– not what the life that would have been if no
Note: However, necessary transportation repairs had been made after the property was
expenses of the taxpayer (which are different damaged by a casualty. Since the repairs
from the transportation expenses included in the prolonged the lives of the said vessels of
term “travel expenses”) in its “tax home” are petitioners, the disallowance must be sustained.
deductible. Thus, a taxpayer operating its [Visayan Transportation Co. v. CTA, CTA Case No.
business in Manila is allowed transportation 1119, (1964)]
expenses from its office to its customers’ place of
business and back. But the transportation
expenses of an employee from his residence to its Extraordinary repairs are not deductible – they
office and back are not deductible as they are are capital expenditures
considered personal expenses. Repairs which add material value to the property
or appreciably prolong its life
(4) Cost of materials Repairs in the nature of replacement, to the
Deductible only to the amount that they are extent that they arrest deterioration and
actually consumed and used in operation during appreciably prolong the life of the property,
the year for which the return is made, provided should be charged against the depreciation
that their cost has not been deducted in reserves if such account is kept. [Sec. 68, Rev.
determining the net income for any previous year. Regs. 2]
All maintenance expenses on account of non-
(5) Rentals and/or other payments for use or depreciable vehicles for taxation purposes are
possession of property disallowed in its entirely. [RR No. 12-2012]
(3) Taxpayer has not taken or is not taking 10-02, in no case to exceed 0.50% of net
title to the property or has no equity other sales for sellers of goods or properties or
than that of lessee, user, or possessor. 1% of net revenues for sellers of services,
including taxpayers engaged in the
exercise of profession and use or lease of
(8) Expenses for professionals properties)
Deductible in the year the professional services (5) Not incurred for purposes contrary to law,
are rendered, not in the year they are billed, morals, public policy or public order.
provided that the “all events” is present.
(6) Must be substantiated with sufficient
“All events test” requires: evidence such as receipts and/or
Fixing a right to income or liability to pay; and adequate records.
The availability of reasonably accurate
determination of such income or liability. Exclusions from EAR expenses:
The “all-events test” does not demand that the (a) Expenses which are treated as
amount of income or liability be known compensation or fringe benefits for
absolutely; it only requires that a taxpayer has at services rendered under an employer-
its disposal the information necessary to employee relationship
compute the amount with reasonable accuracy,
which implies something less than an exact or (b) Expenses for charitable or fund raising
completely accurate amount. [Commissioner v. events
Isabela Cultural Corporation, GR. 172231, Feb. 12, (c) Expenses for bona fide business meeting
2007] of stockholders, partners or directors
A professional may claim as deductions the cost (d) Expenses for attending or sponsoring an
of supplies used by him in the practice of his employee to a business league or
profession, expenses paid in the operation and professional organization meeting
repair of transportation equipment used in
making professional calls, dues to professional (e) Expenses for events organized for
societies and subscriptions to professional promotion marketing and advertising,
journals. [Mamalateo] including concerts, conferences,
seminars, workshops, conventions and
other similar events; and
(9) Entertainment/Representation expenses (f) Other expenses of a similar nature.
These are entertainment, amusement and
recreation (EAR) expenses incurred or paid
during the year that are directly connected to the (10) Political campaign expenses
development, management and operation of the Amount expended for political campaign
trade, business or profession of the taxpayer. purposes or payments to campaign funds are
NOT deductible either as business expenses or as
contribution [CTA Case No. 695, April 30, 1969,
Requisites for deductibility: citing Mertens]
(1) Reasonable in amount.
(2) Paid or incurred during the taxable (11) Training expenses
period.
Under Section 30 of the Tax Code, as
(3) Directly connected to the development, implemented by Sec. 20 of the Revenue
management, and operation of the trade, Regulations No. 2, organization and pre-
business or profession of the taxpayer, or operating expenses of a corporation (including
that are directly related to or in training expenses) are considered as capital
furtherance of the conduct thereof. expenditures and are therefore, not deductible in
(4) Not to exceed such ceiling as the the year they are paid or incurred. But taxpayers
Secretary of Finance prescribe (under RR who incur these expenses and subsequently enter
PAGE 74 OF 275
UP LAW BOC TAXATION 1 TAXATION LAW
the trade or business to which the expenditures (3) The indebtedness is connected with the
relate can elect to amortize these expenditures taxpayer‘s trade, profession, or business.
over a period not less than sixty (60) months. [BIR
(4) The interest must be legally due.
Ruling 102-97, Sept. 29, 1997]
(5) The interest must be stipulated in writing.
(6) The taxpayer is LIABLE to pay interest on
This rule, however, does not apply to a situation
the indebtedness.
where an existing corporation incurs these same
expenditures for the purpose of expanding its (7) The indebtedness must have been paid or
business in a new line of trade, venture or activity. accrued during the taxable year.
(8) The interest payment arrangement must
not be between related taxpayers
(12) Others
(9) The interest must not be incurred to
Expenses Allowable to Private Educational
finance petroleum operations.
Institutions:
(10) In case of interest incurred to acquire
In addition to the expenses allowable as
property used in trade, business or
deductions under the NIRC, a private proprietary
exercise of profession, the same was not
educational institution may at its OPTION, elect
treated as a capital expenditure,
either:
To deduct expenditures otherwise considered as
capital outlays or depreciable assets incurred Limitation: The taxpayer's allowable deduction
during the taxable year for the expansion of for interest expense shall be reduced by an
school facilities, OR amount equal to 33% of the interest income
subjected to final tax (see chapter on taxation of
To deduct allowances for depreciation thereof.
passive income for interest income); effective
January 1, 2009.
Thus, where the expansion expense has been
claimed as a deduction, no further claims for
(2) Non-deductible interest expense.—
yearly depreciation of the school facilities are
allowed. (a) Interest paid in advance by the taxpayer who
reports income on cash basis shall only be
allowed as deduction in the year the
Advertising Expenses indebtedness is paid.
The media advertising expenses which were (b) If the indebtedness is payable in periodic
found to be inordinately large and thus, not amortizations, only the amount of interest which
ordinary, and which were incurred in order to corresponds to the amount of the principal
protect the taxpayer’s brand franchise which is amortized or paid during the year shall be
analogous to the maintenance of goodwill or title allowed as deduction in such taxable year.
to one’s property, are not ordinary and necessary
(c)Interest payments made between related
expenses but are capital expenditures, which
taxpayers.
should be spread out over a reasonable period of
time. [CIR v. General Foods Phils. Inc, GR No. (d) Interest on indebtedness incurred to finance
143672, April 24, 2003] petroleum exploration.
PAGE 75 OF 275
UP LAW BOC TAXATION 1 TAXATION LAW
(b) Except in case of distributions in A capital expenditure for which the taxpayer may
liquidation, between an individual and a claim only as a deduction the periodic
corporation, where the individual owns amortization of such expenditure.
directly or indirectly more than 50% of
Should the taxpayer elect to deduct the interest
the outstanding stock of the corporation
payments against its gross income, the taxpayer
(c) Except in the case of distributions in cannot at the same time capitalize the interest
liquidation, between two corporations payments. In other words, the taxpayer is not
where: entitled to both the deduction from gross income
and the adjusted (increased) basis for
(i) Either one is a personal holding
determining gain or loss and the allowable
company of a foreign personal
depreciation charge. [Paper Industries Corp. v.
holding company with respect to
Commissioner, 250 SCRA 434]
the taxable year preceding the
date of the sale of exchange; and
(ii) More than 50% of the (d) Reduction of interest expense/interest
outstanding stock of each is arbitrage
owned, directly or indirectly, by or
The taxpayer's allowable deduction for interest
for the same individual; or
expense shall be reduced by an amount equal to
(d) Between parties to a trust – Grantor and 33% of the interest income subjected to final tax;
Fiduciary; or effective January 1, 2009. [RA 9337]
(e) Fiduciary of a trust and fiduciary of This limitation is apparently intended to counter
another trust if the same person is a the tax arbitrage scheme where a taxpayer
grantor with respect to each trust; or obtains an interest-bearing loan and places the
proceeds of such loan in investments that yield
(f) Fiduciary and Beneficiary
interest income subject to preferential tax rate of
20% final withholding tax. [Valencia and Roxas]
(3) Interest subject to special rules.
(a) Interest paid in advance (c) Taxes
No deduction shall be allowed if within the
taxable year an individual taxpayer reporting Taxes Proper: Refers to national and local taxes;
income on cash basis incurs an indebtedness on
(1) Requisites for deductibility
which an interest is paid in advance through
discount or otherwise. Such tax must be:
But the deduction shall be allowed in the year the (1) Paid or incurred within the taxable year;
indebtedness is paid
(2) Paid or incurred in connection with the
(b) Interest periodically amortized taxpayer‘s trade, profession or business;
If the indebtedness is payable in periodic (3) Imposed directly on the taxpayer;
amortizations, the amount of interest which
(4) Not specifically excluded by law from
corresponds to the amount of the principal
being deducted from the taxpayer‘s gross
amortized or paid during the year shall be
income.
allowed as deduction in such taxable year
The following taxes are deductible:
a) Import duties;
(c)Interest expense incurred to acquire property
for use in trade/business/profession b) Business tax;
At the option of the taxpayer, interest expense on c) Professional/occupation tax;
a capital expenditure may be allowed as:
d) Privilege and excise tax;
A deduction in full in the year when incurred; e) DST;
PAGE 76 OF 275
UP LAW BOC TAXATION 1 TAXATION LAW
f) Motor vehicle registration fees; Tax credit – amount allowed by law to reduce the
Philippine income tax due, subject to limitations,
g) Real property tax;
on account of taxes paid or accrued to a foreign
h) Electric energy consumption tax; and country
i) Interest on delinquent taxes.
Tax Credit Tax Deduction
(2) Non-deductible taxes Taxes are deductible Taxes are deductible
from the Phil. Income from gross income in
General Rule: All taxes, national or local, paid or tax itself computing the
incurred during the taxable year in connection taxable income
with the taxpayer's profession, trade or business,
are deductible from gross income Effect: Reduces Effect: Reduces
Philippine income tax taxable income upon
Exceptions: liability which the tax liability
a) Philippine income tax, except Fringe is calculated
Benefit Taxes; Sources: Only foreign Sources: Deductible
b) Income tax imposed by authority of any income taxes may be taxes (e.g. business
foreign country, if taxpayer avails of the claimed as credits tax, excise tax)
Foreign Tax Credit (FTC) against Philippine
income tax.
Exception to exception: When the taxpayer does
NOT signify his desire to avail of the tax credit for
taxes of foreign countries, the amount may be An amount subtracted from an individual's or
allowed as a deduction from gross income of entity's tax liability to arrive at the total tax
citizens and domestic corporations subject to the liability. A tax credit reduces the taxpayer's
limitations set forth by law. liability, compared to a deduction which reduces
taxable income upon which the tax liability is
calculated. A credit differs from deduction to the
(3) Treatments of surcharges/interests/fines for extent that the former is subtracted from the tax
delinquency while the latter is subtracted from income before
The amount of deductible taxes is limited to the the tax is computed. [CIR v. Bicolandia Drug Corp.
basic tax and shall not include the amount for any G.R. No. 148083, (2006)]
surcharge or penalty on delinquent taxes.
However, interest on delinquent taxes, although
not deductible as tax, can be deducted as interest The following may claim tax credits:
expense at its full amount. [CIR v Palanca, 18 (a) Resident citizens
SCRA 496]
(b) Domestic corporations, which include all
Although interest payment for delinquent taxes is partnerships except general professional
not deductible as tax, the taxpayer is not partnerships
precluded thereby from claiming said interest
payment as deduction as such. [CIR v. Vda. de (c) Members of general professional
Prieto, 1960] partnerships
(d) Beneficiaries of estates or trusts
(4) Treatment of special assessment.
Special assessments and other taxes assessed The following may NOT claim tax credits:
against local benefits of a kind tending to (a) Non-resident citizens
increase the value of the property assessed are
non-deductible from gross income. (b) Aliens, whether resident or non-resident
(c) Foreign corporations, whether resident
on non-resident
(5) Tax credit vis-à-vis deduction.—
PAGE 77 OF 275
UP LAW BOC TAXATION 1 TAXATION LAW
Note: Tax credits for foreign taxes are allowed (a) Actual FTC
only for income derived from sources outside the (b) For taxes paid to one foreign country
Philippines. The above taxpayers are not entitled (c) For taxes paid to 2 or more foreign
to tax credit; they are taxable only on income countries
derived from Philippine sources.
Limitations on Tax Credit. (d) Losses
(a) [Per Country Limit] The amount of tax
(1) Requisites for deductibility.—
credit shall not exceed the same
proportion of the tax against which such (1) Loss must be that of the taxpayer (e.g.,
credit is taken, which the taxpayer's losses of the parent corp. cannot be
taxable income from sources within such deducted by its subsidiary);
country bears to his entire taxable (2) Actually sustained and charged off within
income for the same taxable year; and the taxable year;
(b) [Worldwide Limit] The total amount of (3) Incurred in trade, business or profession;
the credit shall not exceed the same (4) Of property connected with the trade,
proportion of the tax against which such business, or profession, if the loss arises
credit is taken, which the taxpayer's from fires, storms, shipwreck or other
taxable income from sources without the casualties, or from robbery, theft, or
Philippines taxable bears to his entire embezzlement;
taxable income for the same taxable year. (5) Sustained in a closed and completed
transaction;
Formula: (6) Not compensated for by insurance or
other form of indemnity;
Limit #1
(7) Not claimed as a deduction for estate tax
Taxable Limit on purposes;
Income Per amount (8) In case of casualty loss, filing of notice of
Foreign of tax loss with the BIR within 45 days from the
Phil.
Country x Income = credit date of the event that gave rise to the
Tax casualty; and
Worldwide (Per
Country (9) The taxpayer must prove the elements of
Taxable the loss claimed, such as the actual
Income Limit)
nature and occurrence of the event and
amount of the loss.
Limit #2 In case a non-depreciable vehicle is sold at a loss,
the loss incurred from the sale of non-
Taxable Limit on depreciable vehicle is not allowed as a deduction.
Income For amount [RR No. 2-2013]
all Foreign of tax
Phil.
Countries x Income = credit
No loss is recognized in the following.—
Tax (World
Worldwide (a) Merger, consolidation, or control
Taxable Wide
Limit) securities (where no gains are recognized
Income either);
(b) Exchanges not solely in kind;
Note: Computation of FTC: Limit #2 applies (c) Related taxpayers (see above – (c)
where taxes are paid to two or more foreign Interest expense incurred to acquire
countries. Allowable tax credit is the lower property for use in
between the tax credit computed under Limit #1 trade/business/profession)
and that computed under Limit#2. (d) Wash sales;
(e) Illegal transactions
FTC Limitations – lowest of the 3:
PAGE 78 OF 275
UP LAW BOC TAXATION 1 TAXATION LAW
PAGE 79 OF 275
UP LAW BOC TAXATION 1 TAXATION LAW
(b) Domestic and resident foreign (3) Debt was not sustained in a transaction
corporations subject to the normal entered into between related parties;
income tax (e.g., manufacturers and
(4) Actually ascertained to be worthless and
traders) or preferential tax rates under
uncollectible as of the end of the taxable
the Code (e.g., private educational
year (taxpayer had determined with
institutions, hospitals, and regional
reasonably degree of certainty that the
operating headquarters) or under special
claim could not be collected despite the
laws (e.g., PEZA-registered companies)
fact that the creditor took reasonable
Note: Domestic and resident foreign steps to collect); and
corporations taxed during the taxable
(5) Actually charged off the books of
year with Minimum Corporate
accounts of the taxpayer as of the end of
Income Tax cannot enjoy the benefit of NOLCO. the taxable year
However, the three-year period for the expiry of
General rule: Taxpayer must ascertain and
the NOLCO is not interrupted by the fact that the
demonstrate with reasonable certainty the
corporation is subject to MCIT during such three-
uncollectibility of debt
year period.
Exceptions:
Other Losses: (a) Banks as creditors – BSP Monetary Board
shall ascertain the worthlessness and
(a) Abandonment losses in petroleum
uncollectibility of the debt and shall
operation and producing well.
approve the writing off
(b) Losses due to voluntary removal of
building incident to renewal or (b) Receivables from an insurance or surety
replacements are deductible from gross company (as debtor) may be written off
income. as bad debts only when such company is
(c) Loss of useful value of capital assets due declared closed due to insolvency or
to charges in business conditions is similar reason
deductible only to the extent of actual The taxpayer must show that the debt is indeed
loss sustained (after adjustment for uncollectible even in the future. He must prove
improvement, depreciation and salvage that he exerted diligent efforts to collect:
value)
(1) Sending of statement of accounts
(d) Losses from sales or exchanges of
property between related taxpayers are (2) Collection letters
not recognized, but the gains are taxable. (3) Giving the account to a lawyer for
(e) Losses of farmers incurred in the collection
operation of farm business are deductible.
(4) Filing the case in court [Phil. Refining
Corp. v. CA, G.R. No. 118794, May 8, 1996]
(e) Bad debts
In ascertaining the debt to be worthless, it is not
Debts resulting from the worthlessness or enough that the taxpayer acted in good faith. He
uncollectibility, in whole or in part, of amounts must show that he had reasonably investigated
due the taxpayer actually ascertained to be the relevant facts from which it became evident,
worthless and the corresponding receivable in the exercise of sound, objective business
should have been written off or charged off within judgment, that there remained no practical, but
the taxable year. only a vague prospect that the debt would be
paid [Collector v. Goodrich, G.R. No. L-22265
(1) Requisites for deductibility.— (1967)]
An annual reasonable allowance to reduce the Actually PAID or made to the ENTITIES or
wasteful value of the tangible fixed assets institutions specified by law;
resulting from wear and tear and normal Made within the TAXABLE year.
obsolescence
It must be EVIDENCED by adequate receipts or
For intangible assets, the annual allowance to records.
rduce their useful value is called amortization.
PAGE 81 OF 275
UP LAW BOC TAXATION 1 TAXATION LAW
(3) Taxpayer signifies in his return his deducted not from his gross income but from his
intention to elect this deduction; gross sales/receipts; and,
otherwise he is considered as having
The OSD being in lieu of the itemized deductions
availed of the itemized deductions;
allowed in computing taxable income as defined
(4) Election is irrevocable for the year in under Section 32 of the Tax Code, it will answer
which made; however, he can change to for both the items of deduction allowed to the
itemized deductions in succeeding years. GPP and its partners.
Since one-layer of income tax is imposed on the
income of the GPP and the individual partners
(b) Corporations, except non-resident foreign
where the law had placed the statutory incidence
corporations
of the tax in the hands of the latter, the type of
The option to elect Optional Standard Deduction deduction chosen by the GPP must be the same
granted is now granted to corporations (domestic type of deduction that can be availed of by the
and resident foreign corporations) by virtue of RA partners. Accordingly, if the GPP claims itemized
9504. The OSD is 40% of its gross income. deductions, all items of deduction allowed under
Sec. 34 can be claimed both at the level of the
The domestic and resident foreign corporation
GPP and at the level of the partner in order to
shall keep such records pertaining to his gross
determine the taxable income. On the other
income as defined in Sec. 32 of the NIRC during
hand, should the GPP opt to claim the OSD, the
the taxable year, as may be required by the rules
individual partners are deemed to have availed
and regulations promulgated by the Secretary of
also of the OSD because the OSD is in lieu of the
Finance upon recommendation of the CIR.
itemized deductions that can be claimed in
Corporations availing of OSD are still required to computing taxable income.
submit their financial statements when they file
If the partner also derives other gross income
their annual ITR and to keep such records
from trade, business or practice of profession
pertaining to its gross income. (RR 2-2010).
apart and distinct from his share in the net
income of the GPP, the deduction that he can
(c) Partnerships claim from his other gross income would follow
the same deduction availed of from his
General Co-Partnership partnership income as explained in the foregoing
For purposes of taxation, the Code considers rules. Provided, however, that if the GPP opts for
general co-partnerships as corporations. Hence, the OSD, the individual partner may still claim
rules on OSD for corporations are applicable to 40% of its gross income from trade, business or
general co-partnerships. practice of profession but not to include his share
from the net income of the GPP. (RR 2-2010)
General Professional Partnerships (GPP)
If the GPP availed of itemized deductions, the B.4.5. Personal and additional exemptions
partners are not allowed to claim the OSD from
their share in the net income because the OSD is
a proxy for all the items of deductions allowed in (a) Basic personal exemptions
arriving at taxable income. This means that the According to RA 9504 (Minimum Wage Earner
OSD is in lieu of the items of deductions claimed Law, effective July 6, 2008) basic personal
by the GPP and the items of deduction claimed by exemption is Fifty thousand pesos (P50,000) for
the partners. each individual taxpayer, regardless of status, i.e.,
If the GPP avails of OSD in computing its net whether single, married or head of the family.
income, the partners comprising it can no longer But note Sec 35(A) of NIRC – In the case of
claim further deduction from their share in the married individuals where only one of the
said net income for the following reasons: spouses is deriving gross income, only such
The partners’ distributive share in the GPP is spouse shall be allowed the personal exemption.
treated as his gross income not his gross
sales/receipts and the 40% OSD allowed to
individuals is specifically mandated to be
PAGE 84 OF 275
UP LAW BOC TAXATION 1 TAXATION LAW
(b) Additional exemptions for taxpayer with (4) Not more than 21 years old, unmarried
dependents and not gainfully employed or
An individual, whether single or married, shall be (5) Regardless of age, is incapable of self-
allowed an additional exemption of P25,000 for support because of mental or physical
each qualified dependent child (QDC), provided defect. [Sec 35(B), NIRC]
that the total number of dependents for which
Note: Only children (not parents) may be
additional exemptions may be claimed shall not
considered “dependent” for purposes of
exceed 4 dependents (depends on the number of
additional exemptions.
qualified dependent children)
The definition of the term “dependent” under
Married Individuals: Additional exemptions for
Section 35(B) of the NIRC now includes a “Foster
QDC are claimed by only one spouse.
Child” or a child placed under planned temporary
Generally, the spouse who is the gross substitute parental care by a Foster Parent or a
compensation earner is the claimant of the Foster Family. [RMC No. 41-20i3, Jan. 23, 2013]
additional exemptions.
Where the husband and wife are both
Who may claim personal exemptions?
compensation income earners: the husband is
the proper claimant of the additional exemptions Citizens (whether resident or non-resident) and
EXCEPT if there is an express waiver by the resident aliens
husband in favor of his wife, as embodied in the
Non-resident aliens engaged in trade or business
application for registration (BIR Form No. 1902)
are entitled personal exemptions subject to
or in the Certificate of Update of Exemption and
reciprocity. (See below)
of Employer’s and Employee’s Information (BIR
Form No. 2305), whichever is applicable.
When the spouses have business and/or (c) Status-at-the-end-of-the-year rule
professional income only: either may claim the Change of Status [Sec 35(C), NIRC]
additional exemptions at the end of the year.
(a) If taxpayer marries during taxable year,
The employed spouse shall be automatically taxpayer may claim the corresponding
entitled to claim the additional exemptions for BPE in full for such year (i.e., no need to
children in the following instances: pro-rate the exemption).
(a) spouse is unemployed (b) If taxpayer should have additional
(b) spouse is a non-resident citizen deriving dependent(s) during taxable year,
income from foreign sources taxpayer may claim corresponding AE in
full for such year.
Legally separated spouses: Additional
exemptions can be claimed by the spouse with (c) If taxpayer dies during taxable year, his
custody of the child or children (but the total estate may claim BPE and AE as if he died
amount for the spouses shall not exceed the at the close of such year.
maximum of four). [Sec 35(B), NIRC] (d) If during the taxable year spouse dies; or
If the taxpayer should have additional any of the dependents dies or marries,
dependents during the taxable year, he may turns 21 years old or becomes gainfully
claim the corresponding additional exemption, employed, taxpayer may still claim same
as the case may be, in full for such year. exemptions as if the spouse or any of the
dependents died, or married, turned 21
Who is a dependent for purposes of additional
years old or became gainfully employed
exemptions?
at the close of such year.
(1) A taxpayer’s child, whether legitimate,
Note: When it comes to change of status, the
illegitimate or legally adopted child status beneficial to the taxpayer is used for
(2) Chiefly dependent for support upon on purposes of claiming deductions as long as the
the taxpayer taxpayer achieved such status at any time during
the taxable period.
(3) Living with the taxpayer
PAGE 85 OF 275
UP LAW BOC TAXATION 1 TAXATION LAW
PAGE 86 OF 275
UP LAW BOC TAXATION 1 TAXATION LAW
Summary Table for Taxation of Individuals (all individual taxpayers, including non-resident aliens)
Basic Personal Additional Personal
Classification Taxable Income Tax Rates
Exemption Exemption
Income from
sources within and
Resident Citizen Allowed Allowed 5%-32%
outside the
Philippines
Income from
Non-Resident Citizen sources within the Allowed Allowed 5%-32%
Philippines
Income from
Resident Alien sources within the Allowed Allowed 5%-32%
Philippines
Lower amount
between PE allowed
Non-resident Alien Income from to Filipinos in the
No specific
Engaged in Trade or sources within the foreign country 5%-32%
provision
Business Philippines where he resides v.
PE in the
Philippines
PAGE 87 OF 275
UP LAW BOC TAXATION 1 TAXATION LAW
includes, but is not limited to salaries and (5) It should have been availed of for
wages, commissions, tips, allowances, the first time.
bonuses, Fringe Benefits of rank and file EEs
Separation pay – taxable if voluntarily availed
and other forms of compensation.
of. It shall not be taxable if involuntary i.e.
Death, sickness, disability, reorganization
/merger of company and company at the brink
i. Inclusions
of bankruptcy or for any cause beyond the
(a) Monetary compensation – If compensation control of the said official or employee
is paid in cash, the full amount received is the
measure of the income subject to tax.
(3) Bonuses, 13th month pay, and other
benefits not exempt
(1) Regular salary/wage
Tips and Gratuities – those paid directly to the
Salary – earnings received periodically for a employee (usually by a customer of the
regular work other than manual labor, such as employer) which are not accounted for by the
monthly salary of an employee employee to the employer. (taxable income
but not subject to withholding tax) [RR NO. 2-
Wages – all remuneration (other than fees
98, Sec. 2.78.1]
paid to a public official) for services performed
by an employee for his employer, including the Thirteenth month pay and other benefits - Not
cash value of all remuneration paid in any taxable if the total amount received is
medium other than cash. [Sec. 78A, NIRC] P82,000 or less. Any amount exceeding
P82,000 is taxable. [Sec. 32(7)(e), NIRC]
Overtime Pay – premium payment received for
(2) Separation pay/retirement benefit not
working beyond regular hours of work which is
otherwise exempt
included in the computation of gross salary of
Retirement pay – a lump sum payment employee. It constitutes compensation.
received by an employee who has served a
company for a considerable period of time and
has decided to withdraw from work into (4) Directors’ fees
privacy. [RR 6-82, Sec. 2b]
Fees – received by an employee for the
General rule: Retirement pay is taxable services rendered to the employer including a
director’s fee of the company, fees paid to the
Exceptions:
public officials such as clerks of court or
(a) SSS or GSIS retirement pays. sheriffs for services rendered in the
(b) Retirement pay (R.A. 7641) due to old performance of their official duty over and
age provided the following above their regular salaries.
requirements are met:
(1) The retirement program is (b) Nonmonetary compensation - If services
approved by the BIR are paid for in a medium other than money,
Commissioner; the fair market value of the thing taken in
(2) It must be a reasonable benefit payment is the measure of the income subject
plan. (fair and equitable) to tax.
is not tax-exempt, then the value of such (a) Benefits received by government
fringe benefit shall be considered as part of employees under RA 6686
the compensation income of such employee
(b) Benefits received by employees
subject to tax payable by the employee.
pursuant to PD 851 (13th Month Pay
[Domondon]
Decree)
(c) Benefits received by employees not
ii. Exclusions covered by PD 851 as amended by
Memorandum Order No. 28; and,
(a) Fringe benefit subject to tax
(d) Other benefits such as productivity
(See Chapter on Gross Income for the
incentives and Christmas bonus
discussion of Taxable and Non-taxable fringe
benefits)
Where the recipient of the fringe benefit is not Iii. Deductions
a rank and file employee, and the said benefit
(a) Personal and additional exemptions (See
is not tax-exempt, then the same shall not be
the Chapter on Deductions for the full
included in the compensation income of such
discussion of Personal and additional
employee subject to tax. The fringe benefit
exemptions)
[tax] is instead levied upon the employer, who
is required to pay. [Domondon]
Basic Personal Exemptions
Convenience of the ER Rule According to RA 9504 (effective July 6, 2008)
basic personal exemption is Fifty thousand
If meals, living quarters, and other facilities
pesos (P50,000) for each individual taxpayer,
and privileges are furnished to an employee
regardless whether single, married or head of
for the convenience of the employer, and
the family.
incidental to the requirement of the
employee’s work or position, the value of that
privilege need not be included as
Additional Exemptions
compensation [Henderson v. Collector (1961)]
Depends on the number of qualified
dependent children
(b) De minimis benefits Amount allowed as a deduction P25,000
Facilities or privileges of relatively small value per dependent child, but not to exceed four
furnished by an employer to his employees children [RA 9504]
and are as a means of promoting the health,
goodwill, contentment, or efficiency of his
employees. (b) Health and hospitalization insurance
These are exempt from fringe benefit tax and Premium Paid on Health or Hospitalization
compensation income tax. Insurance [Sec.34 (M)]
Amount of premium paid on health and/or
hospitalization by an individual taxpayer
(c) 13th month pay and other benefits and
(head of family or married), for himself and
payments specifically excluded from taxable
members of his family during the taxable year.
compensation income
Gross benefits received by employees of public
and private entities provided that the total Requisites for Deductibility
exclusion shall not exceed P82,000 (amounts (1) Insurance must have actually been
in excess are considered compensation taken
income)
(2) The amount of premium deductible
Benefits include: does not exceed P2,400 per family or
PAGE 90 OF 275
UP LAW BOC TAXATION 1 TAXATION LAW
P200 per month whichever is lower deposit substitutes, trust funds and
during the taxable year. similar arrangements - 20% final tax
(3) That said family has a gross income of (b) under the expanded foreign currency
not more than P250,000 for the deposit system (EFCDS) - 7.5% final
calendar year. tax for residents, exempt if non-
residents
(4) In case of married individual, only the
spouse claiming additional exemption
shall be entitled to this deduction.
Treatment of income from long-term deposits
Note: The spouse claiming the additional
On long-term deposit or investment
exemptions for qualified dependent children
certificates (LTDIC) in banks (e.g., savings,
shall be the same spouse to claim the
common or individual trust funds, deposit
deductions for premium payments.
substitutes, investment management
The following may avail of the deduction accounts and other investments, which have
maturity of 5 years or more) – exempt
(a) Individual taxpayers earning purely
compensation income during the year. Should LTDIC holder pre-terminate LTDIC
before the 5th year, a final tax shall be
(b) Individual taxpayer earning business
imposed on the entire income based on the
income or in practice of his profession.
remaining maturity:
4 years to less than 5 years 5%
C.1.3. Taxation of Business Income/Income
3 years to less than 4 years 12%
From Practice of Profession
less than 3 years 20%
All income obtained from doing business
and/or engaging in the practice of a
profession shall be included in the
(b) Royalties
computation of taxable income. (5-32% For
citizens, resident aliens & NRA Engaged in (See summary table)
trade or business; 25% in case of NRANETB)
(d) Prizes and other winnings Passive income not subject to tax
Interest income from long-term deposit or
(a) Winnings, except Philippine Charity investment in the form of savings, common or
sweepstakes / lotto winnings – 20% individual trust funds, deposit substitutes,
(b) Prizes exceeding P10,000 – 20% investment management accounts and other
investments evidenced by certificates in such
Prize, differentiated from winnings form prescribed by the BSP shall be exempt
A prize is the result of an effort made (e.g., from tax
prize in a beauty contest), while winnings are
the result of a transaction where the outcome But should the holder of the certificate pre-
depends upon chance (e.g., betting). terminate the deposit or investment before
the 5th year, a final tax shall be imposed on
For interest from foreign currency loans the entire income and shall be deducted and
granted by FCDUs to residents other than withheld by the depository bank from the
Offshore Banking Units (OBUs) or other proceeds of the long-term deposit or
depository banks under the expanded system investment certificate based on the remaining
– tax rate is 10% if payors are RESIDENTS, maturity thereof:
whether individuals or corporations. Four (4) years to less than five (5) years - 5%;
For interest from foreign currency loans Three (3) years to less than four (4) years -
granted by OBUs to residents other than OBUs 12%; and
PAGE 92 OF 275
UP LAW BOC TAXATION 1 TAXATION LAW
𝐻𝐼𝐺𝐻𝐸𝑅 𝑜𝑓 𝐺𝑟𝑜𝑠𝑠 𝑠𝑒𝑙𝑙𝑖𝑛𝑔 𝑝𝑟𝑖𝑐𝑒 At 30% corporate income tax, if the seller is a
𝐴𝑚𝑜𝑢𝑛𝑡 𝑢𝑛𝑢𝑡𝑖𝑙𝑖𝑧𝑒𝑑
[ 𝑜𝑟 ] 𝑥 [ 𝐺𝑟𝑜𝑠𝑠 𝑠𝑒𝑙𝑙𝑖𝑛𝑔 𝑝𝑟𝑖𝑐𝑒 ] corporation.
𝐹𝑀𝑉 @ 𝑠𝑎𝑙𝑒 Rule: Capital gain/loss is recognized in full.
Capital assets shall refer to all real properties
The historical cost or adjusted basis of the real held by a taxpayer, whether or not connected
property sold or disposed shall be carried over with his trade or business, and which are not
to the new principal residence built or included among the real properties
acquired. considered as ordinary assets under Section
Computation for the basis of new principal 39(A)(1) of the NIRC.
residence: Ordinary assets shall refer to all real
XXX properties specifically excluded from the
definition of capital assets under Section
Historical cost of old principal 39(A)(1) of the NIRC, namely:
residence
Stock in trade of a taxpayer or other real
Add: Additional cost to XXX property of a kind which would properly be
acquire new principal included in the inventory of the taxpayer if on
residence* hand at the close of the taxable year; or
Adjusted cost bases of the XXX Real property held by the taxpayer primarily
new principal residence for sale to customers in the ordinary course of
his trade or business; or
Real property used in trade or business (i.e.,
*Additional cost to acquire
buildings and/or improvements) of a
new principal residence:
character which is subject to the allowance for
Cost to acquire new principal XXX depreciation provided for under Sec. 34(F) of
residence the Code; or
Less: Gross selling price of old (XXX) Real property used in trade or business of the
principal residence taxpayer
Additional cost to acquire new XXX
principal residence
C.2. INCOME TAX ON NON-RESIDENT
ALIENS ENGAGED IN TRADE OR BUSINESS
A non-resident alien is an individual whose
residence and citizenship is not in the
(3) Income from the sale, exchange, or other Philippines.
disposition of other capital assets One who comes to the Philippines for a
definite purpose which, in its nature, may be
Other properties shall be subject to income tax promptly accomplished is a transient. But if
his purpose is of such a nature that an
(a) At the graduated income tax rates, if extended stay may be necessary for its
the seller is an individual; accomplishment, and to that end the alien
(b) Long-term capital gains: only 50% is makes his home temporarily in the Philippines,
recognized. he becomes a resident, though it may be his
(c) Short-term capital asset transactions: intention at all times to return to his domicile
100% subject to tax. [Sec. 39(B), abroad when the purpose of which he came
NIRC] has been consummated or abandoned. [Sec. 5,
RR No. 2]
Determination of whether short- or long-term: In general, a non-resident alien individual who
Short-term if held for 12 months or less; shall come to the Philippines and stay therein
otherwise, it is a long-term capital gain. for an aggregate period of more than 180 days
during any calendar year shall be deemed a
PAGE 94 OF 275
UP LAW BOC TAXATION 1 TAXATION LAW
non-resident alien doing business in the (2) Cinematographic films and similar works
Philippines. shall be subject to twenty-five percent (25%)
Intended stay in the Philippines: of the gross income
(3) Interest income from long-term deposit or
a) Up to 180 days – Non-resident alien investment in the form of savings, common or
not engaged in trade or business individual trust funds, deposit substitutes,
b) More than 180 days but less than 1 investment management accounts and other
year – Non-resident alien engaged in investments evidenced by certificates in such
trade or business form prescribed by the Bangko Sentral ng
Pilipinas (BSP) shall be exempt from the tax
c) 1 year or more – Resident alien But should the holder of the certificate pre-
terminate the deposit or investment before
General Rule: Subject to an income tax in the the fifth (5th) year, a final tax shall be imposed
same manner as an individual citizen and a on the entire income and shall be deducted
resident alien individual on taxable income and withheld by the depository bank from the
from all sources within the Philippines. proceeds of the long-term deposit or
investment certificate based on the remaining
Cash and/or property dividends maturity thereof:
The following shall be subject to an income (i) Four (4) years to less than five (5) years -
tax of twenty percent (20%) on the total 5%;
amount thereof:
(ii) Three (3) years to less than four (4) years -
(a) Cash and/or property dividends from: 12%; and
(1) A domestic corporation;
(iii) Less than three (3) years - 20%.
(2) A joint stock company;
(3) An insurance or mutual fund Capital gains
company;
Capital gains realized from sale, barter or
(4) A regional operating headquarter of exchange of shares of stock in domestic
multinational company;
corporations not traded through the local
(5) The share of a nonresident alien stock exchange, and real properties shall be
subject to the similar tax prescribed on
individual in the distributable net income
citizens and resident aliens.
after tax of a partnership (except a general (a) Sale, barter or exchange of Shares of stock
professional partnership) of which he is a in domestic corporation not traded –
partner; (1) Net over P100,000 – 5% of net capital
(6) The share of a nonresident alien gains realized
individual in the net income after tax of an (2) On any amount in excess of P100,000 –
association, a joint account, or a joint 10% of net capital gains realized
venture taxable as a corporation of which (b) Sale, barter or exchange of real properties
he is a member or a co-venturer; – 6% of gross selling price or current FMV
(b) Interests
whichever is higher
(c) Royalties (in any form); and
(d) Prizes (except prizes amounting to Ten
thousand pesos (P10,000) or less which shall C.3. INCOME TAX ON NON-RESIDENT
be subject to graduated tax) and other ALIENS NOT ENGAGED IN TRADE OR
winnings (except Philippine Charity BUSINESS
Sweepstakes and Lotto winnings) (1) Alien individuals employed by:
(a) Regional or Area Headquarters
Except: (RAHQ) and Regional Operating
(1) The following Royalties shall be subject to Headquarters (ROHQ) established in the
a final tax of ten percent (10%) on the total Philippines by multinational companies
amount thereof:
(a) On books as well as other literary Multinational company: a foreign firm or
works; and
(b) On musical compositions entity
engaged in international trade
with affiliates or subsidiaries or branch
PAGE 95 OF 275
UP LAW BOC TAXATION 1 TAXATION LAW
offices in the Asia-Pacific Region and issuances and any issuance that may be issued
other foreign markets. from time to time, before payment of the
related income. The tax exemption certificate
(b) Offshore Banking Units established in or ruling must explicitly recognize the grant of
the Philippines tax exemption, as well as the corresponding
exemption from imposition of withholding tax.
(2) Alien individuals who are permanent Failure on the part of the taxpayer to present
residents of a foreign country but who are the said tax exemption certificate or ruling as
employed and assigned in the Philippines by a herein required shall subject him to the
foreign service contractor or by a foreign payment of appropriate withholding taxes due
service subcontractor engaged in petroleum on the transaction. [RMC No. 8-2014]
operations in the Philippines.
C.4.1 Senior Citizens
Tax Rate and Base - 15% of gross income Who are covered: any resident citizen— (a) At
received as salaries, wages, annuities, least 60 years old,and
compensation, remuneration and other (b) Who are considered minimum wage
emoluments, such as honoraria and earners under RA 9504 (Sec. 4 (b) RA 7432, as
allowances. amended by RA 9994) and/or the aggregate
amount of gross income earned by the senior
The same tax treatment shall apply to citizen during the taxable year does not
Filipinos employed and occupying the same exceed the amount of his personal exemptions
positions as those of aliens employed by these (BPE and APE).
multinational companies, offshore banking
units and petroleum service contractors and C.4.2. Minimum Wage Earners
subcontractors.
Rule: they shall be exempt from payment of
Note that the coverage of the special income tax on their taxable income.
classification (and the corresponding tax rate) Limit: However, if he receives “other benefits”
is limited to income received as wages. Hence, in excess of the allowable statutory amount of
any income earned from all other sources P82,000, then he shall be taxable on the
within the Philippines by the alien employees exceeds benefits as well as his salaries, wages,
shall be subject to the pertinent income tax and allowances, just like an employee
(example: sale of real property in the receiving compensation income beyond the
Philippines is subject to 6% capital gain tax, statutory minimum wage.
imposed on the gross selling price or fair
market value of the property at the time of the Taxation of compensation income of a
sale, whichever is higher) minimum wage earner
(1) Statutory minimum wage – earner shall
C.4. INDIVIDUAL TAXPAYERS EXEMPT refer to rate fixed by the Regional Tripartite
FROM INCOME TAX Wage and Productivity Board, as defined by
the Bureau of Labor and Employment
Individual Taxpayers exempt from income tax Statistics (BLES) of the Department of Labor
are: and Employment. [Sec.22 GG, as amended by
(1) Senior Citizens
RA 9504]
(2) Minimum wage earners
(2) Minimum wage earner – shall refer to a
(3) Exemptions granted under international worker in the private sector paid the statutory
agreements
minimum wage, or to an employee in the
public sector with compensation income of
All individuals and entities claiming not more than the statutory minimum wage in
exemption from imposition of taxes on income the non-agricultural sector where he/she is
and, consequently, from withholding taxes are assigned. [Sec.22 HH, as amended by RA
required to provide a copy of a valid, current 9504]
and subsisting tax exemption certificate or
ruling, as per existing administrative
PAGE 96 OF 275
UP LAW BOC TAXATION 1 TAXATION LAW
PAGE 97 OF 275
UP LAW BOC TAXATION 1 TAXATION LAW
PAGE 98 OF 275
UP LAW BOC TAXATION 1 TAXATION LAW
PAGE 99 OF 275
UP LAW BOC TAXATION 1 TAXATION LAW
such corporation commenced its business Net Sales is gross sales less sales returns,
operations. For purposes of the MCIT, the discounts and allowances
taxable year in which business operations
commenced shall be the year when the Direct cost of services includes salaries of
corporation registers with the BIR (not in personnel rendering the services, expenses on
which the corporation started commercial the facilities directly utilized, cost of supplies,
operations).
and the like. “Direct costs and expenses” shall
(2) Tax rate: 2% of the Gross Income
only pertain to those costs exclusively and
directly incurred in relation to the revenue
Imposition of MCIT realized by the sellers of services. These refer
Gross Sales xxx to costs which are considered indispensable to
Less: Sales Returns xxx the earning of the revenue such that without
such costs, no revenue can be generated.
Sales Discounts xxx
Allowances xxx Pointers
Cost of Goods Sold xxx xxx MCIT is in the nature of a tax credit, not an
MCIT GI xxx allowable deduction. Its purpose is to prevent
corporations from escaping being taxed by
including frivolous expenses in their
Computation of gross income statement of income.
The term “Gross Income” shall be equivalent
to gross sales less sales returns, discounts and Is the Minimum Corporate Income Tax (MCIT)
allowances and cost of goods sold. “Cost of an addition to the regular or normal income
goods sold” shall include all business tax?
expenses directly incurred to produce the No, the MCIT is not an additional tax. The
merchandise to bring them to their present MCIT is compared with the regular income tax,
location and use. which is due from a corporation. If the regular
income is higher than the MCIT, then the
If apart from deriving income from core corporation does not pay the MCIT.
business activities there are other items of
gross income realized or earned by the Who are covered by MCIT?
taxpayer which are subject to the normal The MCIT covers domestic and resident
corporate income tax, they must be included foreign corporations which are subject to the
as part of gross income for computing MCIT. regular income tax. The term “regular income
[Sec. 27 (E), NIRC; RR 12-2007] tax” refers to the regular income tax rates
under the Tax Code. Thus, corporations which
This means that the term “gross income” will are subject to a special corporate tax system
also include all items of gross income do not fall within the coverage of the MCIT.
enumerated under Section 32(A) of the NIRC,
except: (a) income exempt from income tax, These special corporations are:
and (b) income subjected to FWT. (1) Corporations that are subject to ten
percent
(10%) preferential tax rate:
Computation by type of business
(a) Merchandising/Manufacturing Concerns Proprietary educational institutions, nonprofit
hospitals, Offshore Banking Units (OBUs) on
Net Sales xxx their income from foreign currency
Less: Cost of Goods Sold xxx transactions which has been subjected to a
final income tax at 10% of such income, and
Gross Income xxx
depository banks under the expanded foreign
currency deposit system on their income from
(b) Service Concerns foreign currency transactions which has
subjected to final income tax at 10%; RFCs
Gross Receipts/Revenue xxx engaged in business as Regional Operating
Less: Direct Cost of Services xxx
Headquarters
Gross Income xxx
(2) Firms under special income tax regime payments under the normal income tax; and
such as those under the PEZA law [RA 7916], (c) MCIT paid in the previous taxable
the Bases Conversion Development Act [RA quarter(s).
7227] and forms enjoying Income Tax Holiday
(ITH) under EO No. 226;
Excess MCIT from the previous taxable year/s
(3) International carriers subject to tax at 2 shall not be allowed to be credited against the
½ % of their gross Philippine billings;
quarterly MCIT tax due.
forward on an annual basis. The excess can be Arrow pointing
downward means that the
credited against the normal income tax in the normal tax is higher so that there can be an
nextthree (3) succeeding taxable years. [Sec. excess MCIT carry-forward against it.
27(E)(2)] In the year to which carried forward,
the normal tax should be higher than the MCIT. *Cannot carry forward an amount higher than
the NT, hence the excess of 60K from Year 4
Illustration: was reduced to 40K. The unused P20,000
A domestic corporation had the following data cannot be used in Year 8 because Year 8 was
on computations of the normal tax (NT) and beyond three years from Year 4.
the minimum corporate income tax (MCIT) for
five years. Relief from the MCIT under certain conditions
(Sec. 27 (E)(3), NIRC)
The Secretary of Finance,
Yr 4 Yr 5 Yr 6 Yr 7 Yr 8 upon the recommendation of the
MCIT 80K 50K 30K 40K 35K Commissioner, may suspend the imposition of
NT 20K 30K 40K 20K 70K the MCIT upon submission of proof by the
applicant- corporation that the corporation
The excess MCIT over NT carry-forward is sustained substantial losses on account of the
shown as follows: following
(LMB):
(1) Prolonged labor dispute (losses from a
strike staged by employees that lasts for more
than 6 months and caused the temporary
shutdown of operations), or
(2) Force majeure (acts of God and other
calamity; includes armed conflicts like war or
insurgency), or
(3) Legitimate business reverses (substantial
losses due to fire, robbery, theft or other
economic reasons).
recommendation of the Secretary of Finance, (6) Non- taxable joint ventures; and
may, effective January 1, 2000, allow domestic (7) Enterprises that are registered:
corporations the option to be taxed at fifteen (a) with the Philippine Economic Zone
percent (15%) of gross income as defined Authority (PEZA) under R.A. 7916;
therein, after the following conditions have (b) pursuant to the Bases Conversion and
been satisfied: Development Act of 1992 under R.A.
7227; and
Tax effort ratio 20% of GNP
(c) under special economic zones
Ratio of income tax 40% declared by law which enjoy payment of
collection to total tax special tax rate on their registered
revenues operations or activities in lieu of other
VAT tax effort 4% of GNP
taxes, national or local.
Ratio of Consolidated 0.90%
Public Sector Financial
Applicability of the MCIT where a corporation is
Position (CPSFP) to GNP
governed both under the regular tax system
Ratio of the corporation’s Does not and a special income tax system
Cost of Sales to Gross exceed 55%
For corporations whose operations or
Sales activities are partly covered by the regular
income tax and partly covered under special
income tax system, the MCIT shall apply on
Gross Sales xxx
operations by the regular income tax system.
Less: Sales Returns xxx
Sales Discounts xxx Resident Foreign Corporations
Allowances xxx
Cost of Goods Sold xxx xxx The discussion with respect to this topic
(income subject to normal tax, MCIT, or GIT)
GI xxx
under the subheading of domestic
corporations is equally applicable to resident
foreign corporations, both as to concepts and
The election of the gross income tax option by computations, except that RFCs are taxed
the corporation shall be irrevocable for three only on income from sources within the
(3) consecutive taxable years during which the Philippines.
corporation is qualified under the scheme. (a) Normal Corporate Income Tax Rate 30%
of net taxable income from sources within
For purposes of gross income tax, gross
the Philippines [RA 9337] (b) Minimum
income should be the same as gross income
for purposes of MCIT in cases of trading, Corporate Income Tax
(MCIT) 2% of MCIT
merchandising and manufacturing concern Gross Income from sources within the
business. However, for service enterprises, Philippines. The MCIT is imposed on RFCs
gross income means gross receipts less sales under the same conditions as domestic
returns, discounts, allowances and cost of corporations. [Sec. 28(A)(2), NIRC]
services. (c) Gross Income Tax (GIT) The President,
upon the recommendation of the Secretary of
Note: At present, the OGIT has not been Finance, may allow resident foreign
implemented in the Philippines. corporations the option to be taxed at fifteen
percent (15%) of gross income within the
Corporations exempt from the MCIT: Philippines, under the same conditions as
(1) Banks and other non-bank financial domestic corporations. [Sec. 28(A)(1), NIRC]
intermediaries;
D.1.3. Branch Profit Remittance Tax
(2) Insurance companies;
Taxable transaction – any profit remitted by a
branch of a multinational corporation to its
(3) Publicly-held corporations;
head office
(4) Taxable partnerships;
(5) General professional partnerships;
PAGE 105 OF 275
UP LAW BOC TAXATION 1 TAXATION LAW
Tax Rate and Base – 15% final tax based on the But by virtue of RA 9504, it now also applies
total profits applied or earmarked for to corporations, except non-resident foreign
remittance without any deduction for the tax corporation.
component. The 15% final tax should Moreover, the rate was increased from 10% to
excluding: (a) profits on activities which are 40%.
registered with the Philippine Economic Zone
Authority (PEZA) and (b) passive income gains D.1.5. Taxation of Passive Income
and profits received not directly connected
with the conduct of its trade or business in the Domestic Corporations
Philippines.
Passive Income Subject to Tax
Income not treated as branch profits unless (1) Interest from deposits and yield or any
effectively connected with the conduct of
other monetary benefit from deposit
trade or business in the Philippines: substitutes and from trust funds and similar
(1) Interests, dividends, rents, royalties arrangements and royalties
remuneration for technical services
(2) Capital gains from the sale of shares of
(2) salaries, wages premiums, annuities, stock not traded in the stock exchange
emoluments
(3) Income derived from depository bank
(3) other fixed or determinable annual, under the expanded foreign currency deposit
periodic or casual gains, profits, income system
(4) capital gains received during each (4) Inter-corporate dividends
taxable year from all sources within the (5) Capital gains realized from the sale,
Philippines
exchange, or of lands and/or buildings
D.1.4. Allowable Deductions Capital gains from the sale of shares of stock
i. Itemized Deductions not traded in the stock exchange
(1) Bad debts
On sale, barter, exchange or other disposition
(2) Expenses
of shares of stockof a domestic corporation not
listed and traded through a local stock
(3) Losses
exchange, held as a capital asset:
(4) Taxes
(5) Depreciation
On the net capital gain:
(6) Interest
(1) First P100,000: Final Tax of 5%
(7) Depletion of oil and gas wells and mines
(2) On any amount in excess of P100,000: plus
(8) Charitable and other contributions
10% Final tax on the excess
(9) Research and development
Income derived from depository bank under the
(10) Pension trusts
expanded foreign currency deposit system
Under the expanded foreign currency deposit
ii. Optional Standard Deductions (OSD)
system (EFCDS) - 7.5%
Before RA 9504, effective July 6, 2009, OSD
only applied to individuals except non-
Inter-corporate dividends
resident aliens.
Dividends received from another domestic
corporation - exempt
Note: Tax treatment is the same as that of (a) Intercorporate Dividend – 15%, as long as
individuals.
the country in which the nonresident foreign
The capital gains tax is applied on the gross corporation is domiciled allows a tax credit for
selling price, or the current fair market value taxes “deemed paid” in the Philippines
at the time of the sale, whichever is higher. equivalent to at least 15%
Any gain or loss on the sale is immaterial (b) 15% represents the difference between the
because there is a conclusive presumption by regular income tax of 30% on corporations
law that the sale resulted in a gain. and the 15% tax on dividends (“tax sparing
credit”)
Resident Foreign Corporations (c) If the country within which the NRFC is
domiciled does NOT allow a tax credit, a final
Capital gain from sale of shares of stock not withholding tax at the rate of30% is imposed
traded in the stock exchange
on the dividends received from a domestic
On sale, barter, exchange or other disposition corporation.
of shares of stock of a domestic corporation
not listed and traded through a local stock Capital gains from sale of shares of stock not
exchange, held as a capital asset: traded in the stock exchange
On sale, barter, exchange or other disposition
On the net capital gain:
of real property or on shares of stock of a
(a) First P100,000: Final Tax of 5%
domestic corporation not listed and traded
(b) On any amount in excess of P100,000: plus through a local stock exchange, held as a
10% Final tax on the excess capital asset:
On the net capital gain:
(a) First P100,000 Final Tax of 5%
D.2. INCOME TAX ON NON-RESIDENT (b) On any amount in excess of P100,000 plus
FOREIGN CORPORATIONS Final Tax of 10% on the excess
Tax Rate and Base – 10% on net income functions may be subject to tax. Where it is
(except on income subject to capital gains tax done precisely to fulfill a constitutional
and passive income subject to final tax) within mandate and national policy, no one can
and without the Philippines doubt its wisdom. [Mactan Cebu Airport v
Marcos, 1996]
Caveat: If gross income from unrelated trade
or business or other activity exceeds 50% of If the taxing authority is the local gov’t unit
total gross income derived from all sources, RA 7160 expressly prohibits LGUs from levying
the tax rate of 30% shall be imposed on the tax on the Nat’l Gov’t, its agencies and
entire taxable income. instrumentalities and other LGUs.
Unrelated trade, business or other activity – iv. Depositary Banks (Foreign Currency Deposit
any trade, business or other activity, the Units)
conduct of which is not substantially related to Income derived from a depository bank under
the exercise or performance by such the expanded foreign currency deposit system
educational institution or hospital of its Under the expanded foreign currency deposit
primary purpose or function. system (EFCDS) – Final tax of 7.5%
corporation engaged in trade or business
in iv. Regional or Area Headquarters and
the country.
Regional Operating Headquarters of
(b) The absence of flight operations within the Multinational Companies
Philippine territory cannot alter the fact that Regional or area headquarters: not subject to
income tax
the income received was derived from
activities within the Philippines.
Regional or area headquarters – a branch
(c) The test of taxability is the source, and the established in the Philippines by multinational
source is that activity which produced the companies and which headquarters do not
income.
earn or derive income from the Philippines and
which act as supervisory, communications and
In the case of International Shipping, GPB coordinating center for their affiliates,
means:
subsidiaries, or branches in the Asia-Pacific
Gross revenue whether for passenger, cargo or Region and other foreign markets.
mail originating from the Philippines up to
final destination, regardless of the place of Regional operating headquarters
sale or payments of the passage or freight (a) 10% of their taxable income
documents. (b) a branch established in the Philippines by
multinational companies which are engaged
ii. Off-shore Banking Units
in any of the following services:
Coverage of the Rule
(1) general administration and planning
Only income derived by offshore banking units
(2) business planning and coordination
from foreign currency transactions with:
(3) sourcing and procurement of raw
(1) non-residents,
materials and components
(2) other offshore banking units
(4)
corporate finance advisory services
(3) local commercial banks including (5) marketing control and sales promotion
branches
of foreign banks that may be (6) training and personnel management
authorized by the Bangko Sentral ng Pilipinas (7) logistic services
(BSP) to transact business with offshore
banking units.
(8) research and development services and
product development
Tax Rate (9)
technical support and maintenance
Exempt from all taxes, except net income from (10) data processing and communications,
such transactions as may be specified by the
and
Secretary of Finance, upon recommendation
(11) business development.
by the Monetary Board to be subject to the
regular income tax payable by banks.
stock owned, directly or indirectly, by or for his earnings, the Regulations adhere to the so-
family, or by or for his partner.
called “Immediacy Test” under American
jurisprudence as adopted in this jurisdiction.
For purposes of this paragraph, the ‘family of Accordingly, the term “reasonable needs of
an individual’ includes his brothers or sisters the business” means the immediate needs of
(whether by whole or half-blood), spouse, the business, including reasonably
ancestors and lineal descendants.
anticipated needs. In either case, the
corporation should be able to prove: (a) an
(3) Option to Acquire Stocks. - If any person immediate need for the accumulation of the
has an option to acquire stock, such stock earnings and profits, or (b) the direct
shall be considered as owned by such person. correlation of anticipated needs to such
accumulation of profits. Otherwise, such
accumulation would be deemed to be not for
For purposes of this paragraph, an option to
the reasonable needs of the business, and the
acquire such an option and each one of a
penalty tax would apply.
series of option shall be considered as an
option to acquire such stock.
D.5 EXEMPTION FROM TAX ON
(4) Constructive Ownership as Actual CORPORATIONS
Ownership. - Stock constructively owned by
reason of the application of (a) or (c) shall, for Tax exempt corporations
purposes of applying (1) or (2), be treated as (1) Nonprofit labor, agricultural or
actually owned by such person.
horticultural organizations
(2) Non-stock/ non-profit mutual savings
But stock constructively owned by the
bank or non-stock/ non-profit cooperative
individual by reason of the application of (b)
shall NOT be treated as owned by him for bank
purposes of again applying such paragraph in (3)
Associations, orders, beneficiary
order to make another the constructive owner societies operating for the exclusive benefits
of such stock. of their members
(4) Cemetery company owned and operated
BIR Ruling 025-02 exclusively for the benefit of its members
The ownership of a domestic corporation for (5) Non-stock corporation or association
purposes of determining whether it is a closely
organized and operated exclusively for
held corporation or a publicly held corporation religious, charitable, scientific, athletic, or
is ultimately traced to the individual cultural purposes or for the rehabilitation of
shareholders of the parent company. veterans, provided that no individual person
Where at least 50% of the outstanding capital owns its assets or no individual person
stock or at least 50% of the total combined receives benefit on its earnings
voting power of all classes of stock entitled to (6) Non-profit business league, chamber of
vote in a corporation is owned directly or commerce, or board of trade
indirectly by at least 21 or more individuals, the (7) Non-profit civic league or organization
corporation is considered as a publicly-held operating exclusively for the promotion of
corporation, thus, exempt from IAET. social welfare
(8) Non-stock and non-profit educational
Determination of reasonable needs of the
institutions
business
(9)
Government educational institutions
An accumulation of earnings or profits
(10) Organizations with a purely local
(including undistributed earnings or profits of
operation whose income is derived only from
prior years) is unreasonable if it is not
assessment, duties and fees collected from
necessary for the purpose of the business,
their members to meet operational expenses
considering all the circumstances of the case.
such as fire insurance company, farmers’ or
other mutual typhoon associations, mutual
To determine the “reasonable needs” of the
business in order to justify an accumulation of
PAGE 113 OF 275
UP LAW BOC TAXATION 1 TAXATION LAW
Period Due Date for Filing Return Individuals whose sole income has been
Q1 Return May 31 of the same year subjected to final withholding tax pursuant to
Q2 Return August 31 of the same Sec. 57(A) of the Tax Code.
year
Q3 Return November 30 of the same Individuals who are exempt from income tax
year pursuant to the provisions of the Tax Code and
Annual Return April 15 of the following other laws, general or special (Sec. 51, NIRC).
year
Special Provisions
Income of non-resident aliens not engaged in
E.3. PERSONS LIABLE TO FILE INCOME TAX trade or business in the Philippines is subject to
RETURNS withholding income tax to be withheld by the
payor thereof.
E.3.1. Individual Taxpayers
i. General Rule and Exceptions (Sec. 51(A), In the case of married persons, whether
NIRC) citizens or aliens, residents or not, who do not
General Rule: The following are required to file derive income purely from compensation, only
income tax returns: one consolidated return to cover the income of
(a) Every Filipino citizen residing in the both spouses for the taxable year shall be filed
Philippines by either spouse; where it is impracticable for
(b) Every Filipino citizen residing outside the the spouses to file one consolidated return,
Philippines on his income from sources each may file a separate return but the returns
within the Philippines so filed shall be consolidated for the purpose
(c) Every alien residing in the Philippines, on of verification. The husband shall be deemed
income derived from sources within the the head of family entitled to claim the
Philippines additional exemption in respect of dependent
(d) Every non-resident alien engaged in children, unless he explicitly waives his right in
trade or business or in the exercise of favor of the wife in the withholding exemption
profession in the Philippines. certificate (Sec. 79 (F)(1), NIRC).
Note: A grant of tax exemption is not The income of unmarried minors is a tax
necessariliy an excuse from the requirement to liability of the minor but where such income is
file a tax return [Garrison v. CA, 187 SCRA 525]. derived from property received from a living
parent, the income shall be included in the
Exceptions: return of the parent except (a) when the
Individuals whose gross income (not donor’s tax has been paid on such property, or
necessarily from compensation income) does (b) when the transfer of such property is
not exceed his total personal and additional exempt form the donor’s tax.
exemptions for dependents, except citizens
and alien individuals engaged in business or If the taxpayer is unable to make his return,
practice of profession within the Philippines such as when he suffers from disability, the
who shall file income tax returns regardless of return may be made by his duly authorized
the amount of gross income. agent or representative or by the guardian or
other person charged with the care of the
Individuals with respect to pure compensation taxpayer or his property, the principal and his
income derived from sources within the representative or guardian incurring the
Philippines, the income tax on which has been penalties for erroneous, false or fraudulent
withheld except when such compensation has returns.
been derived from more than one employer.
ii. Substituted Filing
A minimum wage earner as defined in Sec. Substituted filing of tax returns is required
22(HH) of the NIRC, as amended by R.A. No. where (i) an employee receives purely
9504. compensation income from a single or one
employer who deducted and remitted to the residence or place of business in the
BIR the (ii) correct amount of withholding tax Philippines, with the Office of the
form the employee’s compensation income Commissioner (Sec. 51(B), NIRC)
during the year, and said employee has (iii) no
taxable other income subject to income tax (2) Corporations
under the global tax system. In lieu of the The return shall be filed at the place where the
regular tax returns to be filed by the corporation’s principal office is located and
employees, the employer shall file BIR Form where its books of accounts and other date are
2316 (Certificate of Income Tax Withheld on kept; otherwise, the returns shall be filed and
Compensation) with the BIR on or before the tax paid thereon with the Office of the
January 31 of the following year. BIR Form Commissioner of Internal Revenue.
2316 shall contain a certification to the effect
that the employer’s filing of BIR Form 1604-CF E.5. PENALTIES FOR NON-FILING OF
shall be considered as a substituted filing of RETURNS
the employee’s income tax return to the extent
that the amount of compensation and tax (a) For failure to file any return and pay the tax
withheld in BIR Form 1604-CF as filed with due: a penalty equivalent to 25% of the
BIR is consistent with the corresponding amount due (Sec. 248(A)(1), NIRC).
amounts indicated in BIR Form 2316. However, (b) In case of willful neglect to file the return:
non-resident citizens who receive purely a penalty equivalent to 50% of the tax or of the
income from foreign sources are no longer deficiency tax, in case, any payment has been
required to file their Philippine income tax made on the basis of such return before the
return, although they must still file an income discovery of the falsity or fraud (Sec. 248(B),
tax return covering income from sources NIRC).
within the Philippines.
tax, the tax paid or withheld is not deducted (b) The income recipient is still required to file
from the tax base, except when the law clearly an income tax return, to report the income
spells out in defining the tax base. and/or pay the difference between the tax
withheld and the tax due on the income.
The duty to withhold is different from the duty (c) Taxes withheld on income payments
to pay income tax. The revenue officers covered by the expanded withholding tax and
generally disallow the expenses claimed as compensation income are creditable in nature.
deduction from gross income, if no
withholding of tax as required by law or the
regulations was withheld and remitted to the Withholding of VAT
BIR within the prescribed dates. (1) On gross payments for the purchase of
goods
In addition, the withholding tax that should
(2) On gross payments for the purchase of
have been withheld and remitted to the BIR as
services
well as the penalties for non-, late or
erroneous payment of the withholding tax (3) Payments made to government public
such as surcharges and deficiency interest are works contractors
assessed by the BIR. [Mamalateo] (4) Payments for lease or use of property or
property rights to non-resident owners
F.2. KINDS OF WITHHOLDING TAXES
TAXATION LAW
TAXATION 2
It is a transfer tax, i.e., an excise tax on the right Art. 777, Civil Code. The rights to the
of transmitting property, not a property tax. succession are transmitted from the moment
Compared to old inheritance, this was a tax on of the death of the decedent.
the right to transfer and not the right to inherit
property. The decedent’s estate includes property to the
extent of the interest therein of the decedent at
D. PURPOSE OR OBJECT the time of his death. (Sec. 85(A)) N.B. – It is the
interest of the decedent on the property, not the
Purpose: To tax the shifting of economic benefits actual property itself. In some cases, however,
and enjoyment of property from the dead to the they may be the same.
living.
Estate taxation is governed by the statute in force
Taxable objects/subjects: at the time of death of the decedent. Estate tax
PAGE 121 OF 275
UP COLLEGE OF LAW TAXATION 2 TAXATION LAW
accrues as of the death of the decedent and the (ii) That before his death, the transfer should be
accrual of the tax is distinct from the obligation to revocable by the transferor at will, ad
pay the same. Upon the death of the decedent, nutum; but revocability may be provided for
succession takes place and the right of the State indirectly by means of a reserved power in
to tax the privilege to transmit the estate vests the donor to dispose of the properties
instantly upon death. (Sec. 3, RR 2-2003) conveyed;
N.B. – Note that in transfers for insufficient (iii) That the transfer should be void if the
consideration, the value to be included in the transferor should survive the transferee.
estate is the excess of the FMV at time of death
over the value of the consideration received at the (2) Transfers Inter Vivos. Gratuitous transfers
time of transfer. that take effect during the lifetime of the
donor. (See Donor’s Tax for requisites)
Despite the transfer of properties and rights at
the time of death, the executor or administrator General Rule: Donation Inter Vivos are subject to
shall not deliver a distributive share to any party Donor’s Tax.
interested in the estate, unless there is a
certification from CIR that estate tax has been Exceptions: Donation Inter Vivos are subject to
paid. (Sec.94) Estate Tax when it is treated by law as substitutes
for testamentary dispositions (i.e., transfers
Time of death governs: which are inter vivos in form but mortis causa in
(1) The determination of the extent of the substance)
decedent’s interest for computing his gross (a) Transfers in Contemplation of Death [Sec.
estate. 85(B), NIRC]
(2) The statute that governs estate taxation. (b) Revocable transfers [Sec. 85(C), NIRC]
(3) The accrual of the estate tax. (c) Transfers of property arising under general
power of appointment [Sec. 85(D), NIRC]
Taxable Transfers (d) Transfers for insufficient consideration [Sec.
85(G), NIRC]
Taxable transfers are complete when the
transferor divests himself of all economic Note: These transfers would be included in the
beneficial interest in himself or his estate. computation of the gross value of estate. See
further discussion in the valuation of Gross Estate.
(1) Transfers Mortis Causa – These are gratuitous
transfers that take effect after death, either F. CLASSIFICATION OF DECEDENT
testate or intestate. These transfers are
subject to estate tax. Estate Tax applies only to individuals. The
decedent may be classified into:
A donation which purports to be one inter (1) Citizen (RC/NRC)
vivos but withholds from the donee the right to (2) Resident alien (RA); or
dispose of the donated property during the (3) Non-resident alien (NRA).
donor's lifetime is in truth one mortis causa. In a
donation mortis causa, the right of disposition is F.1. CONCEPT OF RESIDENCE
not transferred to the donee while the donor is For purposes of estate taxation, “residence”
still alive. The requisites of a testamentary refers to domicile, the permanent home or the
disposition should be fulfilled. place to which whenever absent, one intends to
return (animus revertendi), and depends on facts
Characteristics: (Maglasang v Heirs of and circumstances, in the sense that they
Cabatingan, 2002) disclose intent. It is therefore, not necessarily the
(i) It conveys no title or ownership to the actual place of residence. (Corre v Tan Corre,
transferee before the death of the transferor; 1956)
or what amounts to the same thing, that the
transferor should retain the ownership (full Situs of Intangible Personal Properties
or naked) and control of the property while General Rule: Mobilia Sequuntur Personam
alive; Principle: Taxation of intangible personal
PAGE 122 OF 275
UP COLLEGE OF LAW TAXATION 2 TAXATION LAW
Exceptions:
(1) Rule of Reciprocity
(2) When it is inconsistent with express
provisions of law
(3) When justice does not demand that it should
be, as where the property in fact has a situs
elsewhere
Summary of the Composition of the Gross Estate and Exclusions, Deductions therefrom
RC/NRC/RA NRA
Composition and Determination of GROSS Estate
The value at the time of his death of all the The value at the time of his death of all the
deceased’s: deceased’s:
a. Real property wherever situated a. Real property located in the Phil.
b. Tangible personal property wherever situated b. Tangible personal property located in the Phil.
c. Intangible personal property wherever c. Intangible personal property with a situs in the
situated Phil. (subject to the rule of reciprocity)
Note: If there is reciprocity, intangible assets
are excluded from gross estate
Exclusions from Gross Estate(Sec 85(H) and Sec 87)
a. Separate property of the surviving spouse (Sec. 85 (H))
b. GSIS proceeds/ benefits
c. Accruals from SSS
d. Proceeds of life insurance where the beneficiary is irrevocably appointed
e. Proceeds of life insurance under a group insurance taken by employer
f. War damage payments and Benefits received from US Veterans Administration
g. Transfer by way of bona fide sales
h. Transfer of property to the National Government or to any of its political subdivisions
i. Merger of usufruct in the owner of the naked title (Sec. 87 (A))
j. Properties held in trust by the decedent. Transmission of inheritance or legacy by fiduciary heir or
legatee to the fideicommissay (Sec. 87 (B))
PAGE 124 OF 275
UP COLLEGE OF LAW TAXATION 2 TAXATION LAW
RC/NRC/RA NRA
k. Transmission from the first heir, legatee, or done in favour of another beneficiary, in accordance
with the desire of their predecessor (Sec. 87 (C))
l. Acquisition and/or transfer expressly declared as not taxable
m. Bequests, devises, legacies or transfers to social welfare, cultural and charitable institutions,
provided that not more than 30% of said transfer shall be used for administration purposes (Sec.
87 (D))
Deductions from GROSS estate to arrive at the NET estate
Ordinary deductions Ordinary deductions1
(1) Expenses, losses, indebtedness, taxes. (ELIT) (1) Proportionate deductions for (ELIT)2
(a) Funeral expenses (a) Funeral expenses
(b) Judicial expenses (b) Judicial expenses
(c) Claims against the estate (c) Claims against the estate
(d) Claims against insolvent persons (d) Claims against insolvent persons
(e) Unpaid mortgage and debt (e) Unpaid mortgage and debt
(f) Taxes (f) Taxes
(g) Losses (g) Losses
1 No deduction shall be allowed for NRA, if the executor, administrator, or anyone of the heirs, DID NOT include in the
return required to be filed under Section 90 of the Code the value at the time of the decedent’s death of that part of his
gross estate NOT situated in the Philippines. [Sec. 86 (D), NIRC; Sec 7, RR 2-2003]
Gross Estate Phil
2 Formula for Proportionate Deductions of NRA: Allowable Deduction =
Gross Estate World
x ELIT
(c) The claim must be a debt or claim which is its receivable showing the unpaid balance
valid in law and enforceable in court; of the decedent-debtor
(d) The indebtedness must not have been
condoned by the creditor or the action to In case the creditor is an individual who is
collect from the decedent must not have no longer required to file ITRs with the
prescribed. Bureau, a duly notarized declaration by
(e) They must be reasonably certain in the creditor of his capacity to lend at the
amount, and substantiated. time when the loan was granted without
prejudice to verification that may be made
Substantiation Requirements by the BIR to substantiate such
declaration of the creditor.
In case of simple loan (including advances):
(1) The debt instrument must be duly If the creditor is a non-resident, the
notarized at the time the indebtedness executor/ administrator or any of the legal
was incurred, such as promissory note or heirs must submit a duly notarized
contract of loan, except for loans granted declaration by the creditor of his capacity
by financial institutions where to lend at the time when the loan was
notarization is not part of the business granted, authenticated or certified to as
practice/policy of the financial institution- such by the tax authority of the country
lender. where the non-resident creditor is a
resident
(2) Duly notarized Certification from the
creditor as to the unpaid balance of the (4) A statement under oath executed by the
debt, including interest as of the time of administrator or executor of the estate
death. If the creditor is: reflecting the disposition of the proceeds
- CORPORATION: sworn certification of the loan if it was contracted within 3
should be signed by the President, or Vice- years prior to the death of the decedent.
President, or other principal officer of the
corporation. If the unpaid obligation arose from purchase
- PARTNERSHIP: sworn certification of goods or services:
should be signed by any of the general (1) Pertinent documents evidencing the
partners. purchase of goods or service, such as sales
- BANK/FINANCIAL INSTITUTIONS: invoice/delivery receipt (for sale of goods),
Certification shall be executed by the or contract for the services agreed to be
branch manager of the bank/financial rendered (for sale of services), as duly
institution which monitors and manages acknowledged, executed and signed by
the loan of the decedent-debtor. decedent-debtor and creditor, and
- INDIVIDUAL: sworn certification should statement of account given by the creditor
be signed by him. as duly received by the decedent-debtor
In any of these cases, the one who should (2) Duly notarized certification from the
certify must not be a relative of the creditor as to the unpaid balance of the
borrower within the 4th civil degree, either debt, including interest as of the time of
by consanguinity or affinity, except when a death.
copy of the promissory note or other
evidence of the indebtedness must is filed (3) Certified true copy of the latest audited
with the RDO having jurisdiction over the balance sheet of the creditor with a
borrower within 15 days from the detailed schedule of its receivable
execution thereof. showing the unpaid balance of the
decedent-debtor. Moreover, a certified
(3) Proof of financial capacity of the creditor to true copy of the updated latest subsidiary
lend the amount at the time the loan was ledger/records of the debtor-decedent,
granted, as well as its latest audited should likewise be submitted.
balance sheet with a detailed schedule of
PAGE 131 OF 275
UP COLLEGE OF LAW TAXATION 2 TAXATION LAW
Where the settlement is made through the mortgaged property, to the extent of the
Court in a testate or intestate proceeding, decedent’s interest therein, should always
pertinent documents filed with the Court form part of the taxable gross estate. (RR 2-
evidencing the claims against the estate, 2003)
and the Court Order approving the said
claims, if already issued, in addition to the Unpaid Taxes
documents mentioned in the preceding Requisites for Deductibility
paragraphs. (a) Taxes which have accrued as of or before
the death of the decedent (if it was
iv. CLAIMS AGAINST INSOLVENT PERSONS incurred after, it is chargeable to the
(Sec. 86 (A)(1)(d)) income of the estate), and
These are claims of the estate (i) against (b) Unpaid as of the time of his death,
insolvent persons (ii) which are not collectible. regardless of whether or not it was
To be deductible from the gross estate: incurred in connection with trade or
business
Additional Requirements:
(a) The incapacity of the debtor to pay his Not included:
obligation should be proven, although a (a) Income tax upon income received after
judicial declaration of insolvency is not death, or
required; (b) Property taxes not accrued before his
(b) The full amount owed by the insolvent death, or
must first be included in the decedent’s (c) The estate tax due from the transmission
gross estate; and of his estate
(c) If the insolvent could only pay a partial
amount, the full amount owed shall be Casualty Losses
included in the gross estate, and the Requisites for Deductibility
amount uncollectible shall be allowed as (a) Incurred during the settlement of the
a deduction. estate
N.B. – Unpaid claims on funeral expenses in (b) Arising from fires, storms, shipwreck, or
excess of 200K cannot be designated as other casualties from robbery, theft, or
claims against the estate. embezzlement
(c) Not compensated by insurance or
v. UNPAID MORTGAGES, LOSSES AND TAXES otherwise
(Sec. 86(A)(1)(e)) (d) At the filing of the estate tax return, such
losses have not been claimed as a
Unpaid Mortgages deduction for income tax purposes in an
Requisites for Deductibility [Sec. 6-A5(a), RR income tax return
2-2003] (e) Incurred not later than the last day for the
(a) The value of the decedent’s interest payment of the estate tax as prescribed by
therein, undiminished by such mortgage law. 6 MONTHS (or +30 days if an
or indebtedness, is included in the value of extension is granted) after death.
the gross estates. Therefore, all casualty losses AFTER 6
(b) The mortgages were contracted bona fide months (or +30 days) are not deductible.
and for an adequate and full consideration
in money or money’s worth. Casualty loss can be allowed as deduction in
one instance only, either for income tax
In case the loan of the decedent is only an purposes or estate tax purposes. (Sec. 6(A)(5)),
accommodation loan where the loan proceeds Rev. Reg 2-2003)
went to another person, the value of the
unpaid loan must be included as a receivable NOTE: See Formula for computing Ordinary
of the estate. If there is a legal impediment to Deductions of NRA above.
recognize the same as a receivable of the
estate, the said unpaid obligation shall not be 1.B. Property Previously Taxed [Sec. 86(A)(2)]
allowed as a deduction. In all instances, the a.k.a. VANISHING DEDUCTIONS
Limitations
(1) Value of property – The deduction is
limited by the value of property previously
(4) The decedent was married or if single, was nor (iii) any unpaid amount for medical
a head of the family. expenses incurred prior to the one-year period
(5) Along with the decedent, any of the from date of death be allowed to be deducted
beneficiaries must be dwelling in the from the gross estate under “Claims against
family home. the estate”. (RR 2-2003, Sec. 6-F)
(6) The family home as well as the land on
which it stands must be owned by the (D) Net Share of Surviving Spouse in CPG/ACP
decedent. Therefore, the FMV of the family (Sec. 86(C),; Sec. 6(H), RR 2-2003)
home should have been included in the
computation of the decedent’s gross (Compare with Capital of Suriving Spouse
estate. which is excluded from the gross estate).
Beneficiaries of a Family Home The amount deductible is the net share of the
(1) The husband and wife, or an unmarried surviving spouse in the CPG. The net share is
person who is the head of a family; and equivalent to ½ of 50% of the conjugal
(2) Their parents, ascendants, descendants, property after deducting the obligations
brothers and sisters, whether the chargeable to such property. Net share of the
relationship be legitimate or illegitimate, surviving spouse is neither an ordinary nor a
who are living in the family home and who special deduction.
depend upon the head of the family for
legal support. N.B. – There are three deductions with ceilings:
(1) Funeral expenses at P200,000; (2) Medical
Limitation: P1,000,000 expenses at P500,000, and (3) Family home at
1M.
(B) Standard Deduction (Sec. 86(A)(5), Sec.
6(E), RR 2-2003) L. EXCLUSIONS FROM ESTATE
An amount equivalent to one million pesos
(P1,000,000) shall be deducted from the Capital of the Surviving Spouse (Sec. 85(H))
gross estate without need of substantiation. Capital: property of the spouses brought into
marriage. Strictly speaking, capital under the
Civil Law refers to the property brought by the
(C) Medical Expenses (Sec. 86(A)(6); Sec. 6(F), husband to the marriage while that brought
RR 2-2003) into the marriage by the wife known is as
All medical expenses (cost of medicine, paraphernal property. (Domondon)
hospital bills, doctors’ fees, etc.) incurred
(whether paid or unpaid). Exclusive Property of Each Spouse
If ACP governs If CPG governs
Requisites for Deductibility property relations property relations
1. The expenses were incurred by the decedent
within 1 year prior to his death The community of The husband and wife
2. The expenses are duly substantiated with property shall consist place in a common
receipts and other documents in support of all the property fund the proceeds,
thereof owned by the spouses products, fruits, and
at the time of the income from their
Limitation Provided, that in no case shall the celebration of the separate properties
deductible medical expenses exceed Five marriage or acquired and those acquired by
Hundred Thousand Pesos (P500,000). thereafter. (Art. 91 either or both
Family Code) spouses through their
Not allowed as deduction: (i) Any amount of efforts or by chance,
medical expenses incurred within one year (1) The following are and, upon dissolution
from death in excess of P500,000 shall no excluded from of the marriage or of
longer be allowed as a deduction under this the community the partnership, the
subsection. Neither can (ii) any unpaid amount property: net gains or benefits
thereof in excess of the P500,000 threshold (a) Property obtained by either or
acquired by both spouses shall be
PAGE 135 OF 275
UP COLLEGE OF LAW TAXATION 2 TAXATION LAW
Limitations on Credit
A. For Estate Taxes paid to one foreign country (Specific Country Limitation)
The amount of the credit in respect to the tax paid to any country shall not exceed the same proportion of
the tax against which such credit is taken, which the decedent's net estate situated within such country
taxable under the tax code bears to his entire net estate.
Compare the tax credit allowed under Limitation A and Limitation B. The lower of the two amounts is the
final allowable tax credit. In this case, the amount computed under Limitation A (4,400) is lower, thus it
becomes the final allowable tax credit.
If there is only one foreign country involved, both limitations will yield the same answer.
The resulting amount will be compared to the actual tax paid to the foreign country. The lower amount will
be the final allowable tax credit.
Illustration:
Net taxable estate is P500,000 (1,050,000 + 300,000 + 150,000 – 1,000,000 standard deduction). The
Philippine estate tax on P500,000 is P15,000
Solution – Limitation A
(1) Apply Formula A. The result after applying the formula above is compared to the tax actually paid for
each foreign country.
(2) The lower of the two amounts for each foreign country will be added to get the total tax credit allowed
under Limitation A.
Solution – Limitation B:
(1) Apply Formula B. The result after applying the formula above is compared to the tax actually paid in
total to foreign countries.
(2) The lower of the two amounts will be added to get the total tax credit allowed under Limitation B.
Contents Where to file the estate tax return and pay the
The executor, or the administrator, or any of tax due (Sec. 9, RR 2-2003)
the legal heirs, as the case may be, shall file a Resident Citizen (RC and RA)
return under oath in duplicate, setting forth: The executor or administrator shall register
(1) The value of the gross estate of the the estate of the decedent and secure a new
decedent at the time of his death, or in TIN from the RDO where the decedent was
case of a nonresident, not a citizen of the domiciled at the time of his death and shall file
Philippines, of that part of his gross estate the estate tax return and pay the
situated in the Philippines; corresponding estate tax with:
(2) The deductions allowed from gross estate (1) An authorized agent bank (AAB), or
in determining the net taxable estate; and (2) Revenue District Officer (RDO), or
(3) Such part of such information as may at (3) Collection Officer,
the time be ascertainable and such (4) Duly authorized Treasurer of the city or
supplemental data as may be necessary to municipality in which the decedent was
establish the correct taxes. domiciled at the time of his death, or
Tax Rates:
If the Net Estate is
Over But not Over The Tax Shall be Plus Of the Excess Over
P 200,000.00 Exempt
P 200,000.00 500,000.00 0 5% P 200,000.00
500,000.00 2,000,000.00 P 15,000.00 8% 500,000.00
2,000,000.00 5,000,000.00 135,000.00 11 % 2,000,000.00
5,000,000.00 10,000,000.00 465,000.00 15 % 5,000,000.00
10,000,000.00 1,215,000.00 20 % 10,000,000.00
It shall not apply unless and until there is a NRA = liable for donor’s tax only if the property
completed gift. The transfer of property by gift is donated is within the Philippines.
perfected from the moment the donor knows of
the acceptance by the donee; it is completed by E. REQUISITES OF VALID DONATION
delivery, either actually or constructively, of the (Art 725, NCC)
donated property, to the donee. Thus, the law in
force at the time of the perfection/completion of Requisites of a VALID and COMPLETE donation
the donation shall govern the imposition of the (1) Donative intent of the donor3
donor’s tax. (Sec. 11, RR 2-2003) (2) Capacity of the donor
(3) Delivery of the donated property
B. DEFINITION (4) Acceptance of the donee
(5) Donation must be in the proper form
A donor’s tax is levied, assessed, collected and (a) Movable: orally or in writing if value is
paid upon the transfer by any person, resident or equal to or less than P5,000. Otherwise,
nonresident, of the property by gift. (Sec. 98(A), it shall be in writing.
NIRC). It shall apply whether the transfer is in (b) Immovable: must be made in a public
trust or otherwise, whether the gift is direct or document.
indirect, and whether the property is real or Re: acceptance (Sec. 11, RR 2-2003)
personal, tangible or intangible. [Sec. 98(B), (1) For movables exceeding 5K – Acceptance
NIRC] shall be in writing (Art. 748, Civil Code)
(2) For immovable (Art. 749, Civil Code) –
It is the tax on donations. Thus, it is a tax on (i) an (a) Must be in the same deed of donation; or
act of the donor disposing gratuitously of a (b) In a separate public document – the
thing/right in favour of a done located within the donor shall be notified thereof in an
Philippines, and on (ii) sales/exchanges of authentic form, and this step shall be
properties, other than real property (defined in noted in both instruments
Sec 24D) classified as capital asset within the (c) But it shall not take effect unless it is
Philippines, for less than adequate and full done during the lifetime of the donor.
consideration in money or money’s worth.
A gift that is incomplete because of reserved
C. NATURE powers becomes complete when either:
(a) the donor renounces the power OR
Donor’s tax is not a property tax but a tax (b) his right to exercise the reserved power
imposed on the transfer of property by way of gift ceases because of the happening of some
inter vivos. [Sec 11, RR 2-2003 citing Lladoc v. CIR event or contingency or the fulfillment of
(1965)] some condition, other than because of
the donor’s death. [Sec. 11, RR 2-2003]
D. PURPOSE OR OBJECT
F. TRANSFERS WHICH MAY BE and the fair market value of the property, if any,
CONSTITUTED AS DONATION received as consideration shall be deemed a gift
subject to the donor’s tax under Sec. 100 of the
(1) Sale, exchange or transfer of property for Tax Code, as amended.”
insufficient consideration
(2) Condonation or remission of debt where the G. TRANSFER FOR LESS THAN ADEQUATE
debtor did not render service in favor of the AND FULL CONSIDERATION
creditor
In order for the rule to apply, there must be 1) a
Condonation or remission of debt is defined transfer of property, other than real property
as an act of liberality, by virtue of which, classified as a capital asset and subject to capital
without receiving any equivalent, the creditor gains tax under Sec. 24 (D) and 2) the transfer
renounces the enforcement of the obligation, was for less than an adequate and full
which is extinguished in its entirety or in that consideration in money or money’s worth.
part or aspect of the same to which the
remission refers. It is an essential In this case, the amount by which the fair market
characteristic of remission that it be value of the property exceed the value of the
gratuitous, that there is no equivalent consideration shall be considered a gift.
received for the benefit given; once such
equivalent exists, the nature of the act H. CLASSIFICATION OF DONOR
changes. It may become dation in payment
when the creditor receives a thing different Donor’s Tax applies to individuals and
from that stipulated; or novation, when the corporations (in their secondary purpose). They
object or principal conditions of the may be classified into:
obligation should be changed; or (a) Residents (RC/RA/DC/RFC)
compromise, when the matter renounced is (b) Non-Residents (NRC/NRA/NRFC)
in litigation or dispute and in exchange of Such classification is important in determining
some concession which the creditor receives. the deductions from the gross gift of the donor,
(Dizon v CTA, 2008) and in filing the return.
(3) Renunciation in favor of other heirs (Sec 11, Situs of Intangible Personal Properties
RR 2-2003) General Rule: Mobilia Sequuntur Personam
(a) Renunciation by the surviving spouse of Principle: Taxation of intangible personal
their share in the ACP/CPG after the properties (such as credits, bills, bank deposits
dissolution of the marriage in favor of promissory notes, and corporate stocks) follows
heirs of the deceased spouse or any other the residence/domicile of owner thereof. Situs is
person/s the domicile or residence of the owner. (Collector
(b) Renunciation by an heir, specifically and v Fisher)
categorically in favor of identified heir/s Exceptions:
to the exclusion or disadvantage of the (1) When it is inconsistent with express
other co-heirs in the hereditary estate provisions of law
However, general renunciation by an heir, (2) When justice does not demand that it should
including the surviving spouse, of their be, as where the property in fact has a situs
share in the hereditary estate left by the elsewhere
decedent is NOT subject to DT
Rule of Reciprocity
(4) Sale of shares not listed and traded in a local Same as in Estate Tax. See discussion above.
stock exchange below FMV. Sec. 7.c.1.4, RR 6-
2008 provides: “In case the fair market value of
the shares of stock sold, bartered, or exchanged
is greater than the amount of money and/or fair
market value of the property received, the excess
of the fair market value of the shares of stock sold,
bartered or exchanged over the amount of money
PAGE 145 OF 275
UP COLLEGE OF LAW TAXATION 2 TAXATION LAW
RC/NRC/RA NRA
Composition and Determination of Gross Gift
(a) Real property wherever situated (a) Real property located in the Phil.
(b) Tangible personal property wherever situated (b) Tangible personal property located in the Phil.,
(c) Intangible personal property wherever situated (c) Intangible personal property with a situs in the
Phil. (subject to the rule of reciprocity)
(2) Gifts made to or for the use of the National Government or any entity created by any of its agencies
which is not conducted for profit, or to any political subdivision of the said Government.
(3) Gifts in favor of an educational and/or charitable, religious, cultural or social welfare corporation,
institution, accredited nongovernment organization, trust or philanthropic organization or research
institution or organization, Provided not more than 30% of said gifts will be used by such donee for
administration purposes.
Common Exemptions
(1) Encumbrances on the property donated if assumed by the donee in the deed of donation.
(2) Donations made to entities exempted under special laws
NOT SUBJECT TO DONOR’S TAX liability value is the indicated value of the
(1) Contributions to candidate or political party equity.
for campaign purposes duly reported to
COMELEC Note:
(2) Gift to Parish Priest or Church (applies only to Where property is transferred for less than an
real property tax) adequate and full consideration in money or
(3) Onerous Donations or Donations in exchange money’s worth, then the amount by which the
for goods/services (since they are subject to FMV of the property at the time of the execution
income tax) of the Contract to Sell or execution of the Deed of
Sale which is not preceded by a Contract to Sell
SUBJECT TO DONOR’S TAX exceeded the value of the agreed or actual
Gratuitous Donations to Homeowners’ consideration or selling price shall be deemed a
Association gift, and shall be included in computing the
amount of gifts made during the calendar year.
J. VALUATION OF GIFTS MADE IN [Sec. 11, RR 2-2003]
PROPERTY N.B. – Applies also to sale, barter, or exchange of
shares of stock not listed and traded in a local
Taxable Base: stock exchange at prices below the FMV. (Sec. 7,
Net gifts i.e., net economic benefit from the RR 6-2008)
transfer that accrues to the donee AT THE TIME
OF DONATION However, where the consideration is fictitious, the
(1) If gift is personal property = FMV at the time entire value of the property shall be subject to
of donation donor’s tax.
(2) If gift is real property = whichever is HIGHER
(a) FMV as determined by the CIR (Zonal Donation to a Political Candidate
Value) or Prior to RA 7166, a donation for a political
(b) FMV in the latest schedule of values fixed candidate was subject to donor’s tax. (ACCRA v
by the provincial and city assessor (MV CIR)
per Tax Declaration)
Under RA 7166, contributions duly reported to the
NOTE: Real property considered as capital assets BIR are not subject to donor’s tax, as long as it is
under the Tax Code are exempted from this rule utilized in his campaign.
because the taxable value taken into account in
the computation of tax is the higher of either the Unutilized/excess campaign funds, that is,
zonal value or the assessor’s value; not the campaign contributions net of the candidate’s
consideration. Therefore, the insufficiency and campaign exepnditures, shall be considered as
inadequacy of the consideration paid would not subject to income tax and as such, must be
affect the computation of the tax due and included in the candidate’s taxable income as
payable [Sec. 100 in relation to Sec. 24(d), NIRC] stated in his/her ITR filed for the subject taxable
year (Sec. 2, RR 7-2011)
Under Section 24(d), the fair market value itself,
if higher than the gross selling price, is the basis
for computing the capital gains tax imposed
upon the sale of such capital assets.
2. Worldwide Limit
L. EXEMPTIONS OF GIFTS FROM DONOR’S (5) Relationship of the donor to the donee;
TAX (6) Such further information as the CIR may
(See table above) require.
General Formula
Gross Gifts
Less: Deductions from gross gifts
-----------------------------------------------------
Net gifts
Multiply by: Tax rate
-----------------------------------------------------
= Estate Tax Due
Less: Tax Credit, if any
-----------------------------------------------------
= Donor’s Tax Due, if any
Tax Rate
(1) IF NOT A STRANGER
Net Gift Over But not Over The Tax Shall be Plus Of the Excess Over
100,000.00 Exempt
100,000.00 200,000.00 0 2% 100,000.00
200,000.00 500,000.00 P 2,000.00 4% 200,000.00
500,000.00 1,000,000.00 14,000.00 6% 500,000.00
1,000,000.00 3,000,000.00 44,000.00 8% 1,000,000.00
3,000,000.00 5,000,000.00 204,000.00 10% 3,000,000.00
5,000,000.00 10,000,000.00 404,000.00 12% 5,000,000.00
10,000,000.00 and over 1,004,000.00 15% 10,000,000.00
(1) Rate applicable shall be based on the law prevailing at the time of donation.
(2) When the gifts are made during the same calendar year but on different dates, the donor's tax shall be
computed based on the total net gifts during the year.
Donation made to a stranger is subject to 30% of the net gift. A stranger is a person who is not a:
Brother, sister (whether by whole or half blood), spouse, ancestor and lineal descendants; or
Relative by consanguinity in the collateral line within the fourth degree of relationship.
TRANSFER TAXES
Estate Tax Donor’s Tax
Time for filing a return and payment of tax
FILED: within six (6) months from the decedent's NOTE: separate return is filed for each gift made on
death. different dates during the year reflecting therein
E: not exceeding 30 days (in meritorious cases) any previous net gifts made in the same calendar
year.
NB: Written notice of death to CIR w/in 2 mos.
After death FILED: within thirty (30) days after the gift
(donation) is made
PAID: before the delivery of the distributive share
in the inheritance to any heir or beneficiary; upon In case of donation to relatives, only one return shall
filing of return. be filed for several gifts by the donor to the different
E: extension (when payment on the due date donees on the same date.
would impose undue hardship) not to exceed
1. 5 years, in case the estate is settled through the If the gift involves CPG, each spouse shall file
courts; or separate return wrt his/her respective share in the
2. 2 years in case the estate is settled extra- CPG.
judicially.
Exception:
Exception: If NRA/NRC, (1) If no AAB = to the RCO or duly Authorized City
If w/ Aor, Eor in Phil = to the AAB of the RDO or Municipal Treasurer where the donor was
where such Aor,Eor is registered/domiciled, if not domiciled at the time of the transfer,
yet registered with the BIR.
If w/o Aor,Eor in Phil = to AAB under the (2) If no legal residence in Phil or NRA = with
jurisdiction of RDO No. 39 Revenue District No. 39 - South Quezon City or
with the Philippine Embassy or Consulate in the
country where donor is domiciled at the time of
the transfer.
Non-resident
(1) The Philippine Embassy or Consulate in the
country where he is domiciled at the time of the
transfer, or
(2) Directly with the Office of the Commissioner.
Who should file
(1) The Eor/Aor or any of the legal heirs of the Any person, natural or juridical, resident or non-
decedent, whether resident or non-resident of resident, who transfers or causes to transfer
the Philippines, under any of the following property by gift, whether in trust or otherwise,
situations: whether the gift is direct or indirect and whether the
(a) In all cases of transfers subject to estate property is real or personal, tangible or intangible.
tax;
(b) Where though exempt from estate tax, the
gross value of the estate exceeds two
hundred thousand (P200,000) pesos; or
(c) Regardless of the gross value of the
estate, where the said estate consists of
registered or registrable property such as
real property, motor vehicle, shares of
stock or other similar property for which a
clearance from the BIR is required as a
condition precedent for the transfer of
ownership therof in the name of the
transferee; or
(2) If there is no executor or administrator
appointed, qualified, and acting within the
Philippines, then any person in actual or
constructive possession of any property of the
decedent.
NB: Eor/Aor has the primary obligation to pay the
estate tax but the heir or beneficiary has subsidiary
liability for the payment of that portion of the
estate which his distributive share bears to the
value of the total net estate. The extent of his
liability, however, shall in no case exceed the value
of his share in the inheritance.
ESTATE TAX
**Proportionate Deduction
Initial Basis
=
Value of GE of present decedent
x (ELIT+TPU)
partnership’s profit earned on/before and received after, accrued interest and rents on/before and collected after death
7
Beneficiary must be the estate of the decedent, E/Aor or a third person. If premiums are paid using conjugal funds, part
of conjugal funds.
8 Full amount of the receivable. However, the uncollectible amount may be deducted from GE under ELIT.
Philippine Gross Estate
9 If NRA, Allowable Deduction wrt ELIT =
World Gross Estate
x ELIT
PAGE 153 OF 275
UP COLLEGE OF LAW TAXATION 2 TAXATION LAW
Net Estate
Less: (Special Deductions10)
Standard Deduction
Family Home
Medical Expenses
Amounts received by heirs If only 1 country is involved: (whichever is lower)
DONOR’S TAX
ON FIRST DONATION
OR
Net Donation w/o
Net Dontations w/in and w/o
x Philippine Donor ' s Tax
ESTATE TAX
DONOR’S TAX
Nature – VAT is a tax on consumption levied not it sells exclusively to members or their
on the sale, barter, exchange or lease of goods guests), or government entity.
or properties and services in the Philippines
and on importation of goods into the N.B. – Services rendered by non-resident
Philippines. foreign persons shall be considered as being
rendered in the course of trade or business,
This rule shall likewise apply to existing even if the performance of services is not
contracts of sale or lease of goods, properties regular (Section 4.105-3, RR No. 16-2005)
or services at the time of the effectivity of RA
No. 9337. However, in the case of importation, D. IMPACT OF TAX V. INCIDENT OF TAX
the importer is the one liable for the VAT. (Sec.
4.105.2, RR 16-2005) Impact Incidence
The statutory One who bears the
General Features: taxpayer, the one burden of taxation
(1) VAT uses the Tax Credit Method from whom the
(2) All goods, properties and services (except government
exempt transactions) including goods collects.
subject to excise taxes, and use or lease of Seller/Importer – Buyer/Final
properties, whether real or 158ersonal, are Seller/Importer is Consumer – the
subject to tax at all levels of distribution. the one who collects buyer is the one who
(3) Although tax is levied at all stages, the the tax and pays to bears the burden of
cumulative effect is that the final value of the government the taxation.
the goods sold to the ultimate consumers
is taxed only once. E. TAX CREDIT METHOD
(4) VAT, as a general rule, follow the
destination principle (goods and services A taxpayer’s tax payable is the excess of
are taxed only in the country where they output tax over input tax:
are consumed). Therefore, no VAT shall be
imposed to form part of the cost of goods OUTPUT VAT – INPUT VAT = VAT PAYABLE
destined for consumption outside the
territorial border of the taxing authority. Under the VAT method of taxation, which is
invoice-based, an entity can subtract from the
Elements of a VAT-taxable transaction in VAT charged on its sales or outputs the VAT it
general paid on its purchases, inputs and imports. [CIR
1. There must be a sale, barter, exchange, or v. Seagate (2005)].
lease in the Philippines
2. The subject matter must be taxable Input tax – the VAT due on or paid by a VAT-
goods or properties or services registered person on importation of goods or
GR: The sale must be made by a taxable local purchases of goods, properties, or
person in the course of trade or business services, including lease or use of properties,
or in the furtherance of their profession. in the course of his trade or business.
Exception: In the case of importation of (1) It includes the transitional input tax and
goods, the transaction is taxable whether the presumptive input tax as determined
or not done in the course of business. in accordance with Section 111 of the Code.
(2) It includes input taxes which can be
Meaning of “in the course of trade or business” directly attributed to transactions subject
Means the regular conduct of pursuit of a to the VAT plus a ratable portion of any
commercial or an economic activity, including input tax which cannot be directly
transactions incidental thereto, by any person attributed to either the taxable or exempt
regardless of whether or not the person activity.
engaged therein is a nonstock, nonprofit (3) Input tax must be evidenced by a VAT
private organization (irrespective of the invoice or official receipt issued by a VAT-
disposition of its net income and whether or registered person in accordance with Secs.
113 and 237 of the Code. [RR 16-2005]
PAGE 158 OF 275
UP COLLEGE OF LAW TAXATION 2 TAXATION LAW
14 Services other than those mentioned in the outside the Philippines when the services were
preceding paragraph rendered to a person engaged performed, the consideration for which is paid for in
in business conducted outside the Philippines or a acceptable foreign currency and accounted for in
nonresident person not engaged in business who is accordance with the rules and regulations of the BSP.
PAGE 159 OF 275
UP COLLEGE OF LAW TAXATION 2 TAXATION LAW
The term “person” refers to any individual, (i) Actual/deemed sale for a valuable
trust, estate, partnership, corporation, joint consideration
venture, cooperative or association (Sec. (ii) For use or consumption in the Phil
4.105-1, RR 16-2005). (regardless of the payment arrangements)
(iii) Not exempt from VAT (NIRC, special law,
General Rule: VAT and Percentage Tax cannot special agreement)
be charged together. It’s either the transaction
is under VAT or Other Percentage Tax. Special rules
Sale of Real Properties (RP)
Exception: When one erroneously declares Casual Sale Subject to CGT (6%)
himself to VAT registered. (Capital
Assets)
H. VAT ON SALE OF GOODS OR Regular Sales
PROPERTIES (Ordinary
Assets)
Sale of goods or properties in general Commercial Subject to 12% VAT
Rate: 12% VAT beginning 1 February 2006 Property
[RMC No. 7-06] (Sale/Lease)
Transactions: Residential If monthly rental ≤ 12,800
1. Every sale, barter or exchange (actual Units = VAT and OPT-exempt
sale) (Lease) If monthly rental > 12,800
2. Transactions “deemed sale” of taxable but aggregate annual
goods or properties (RR 16-2005) (See rentals ≤1,919,500 =
also Sec. J, infra) subject to OPT
Basis: Gross selling price or gross value in If monthly rental > 12,800
money of the goods or properties sold, and aggregate annual
bartered or exchanged. rentals > 1,919,500 =
Who Pays: Paid by SELLER/TRANSFEROR. subject to VAT
(Sec. 106, NIRC); N.B. – the end-user is the one Residential If SP > 1,919,500.00 =
who is actually burdened with the tax since the Lot subject to VAT
tax is passed on to him. IF SP ≤ 1,919,500.00 =
VAT-exempt
Residential If SP > 3,199,200.00 =
Meaning of goods or properties House and subject to VAT
Goods or properties – all tangible and Lot IF SP ≤ 3,199,200.00 =
intangible objects which are capable of VAT-exempt
pecuniary estimation, including:
(1) Real properties held primarily for sale to Sales of real properties subject to VAT – Sale of
customers or held for lease in the ordinary real properties held primarily for sale to
course of trade or business; customers or held for lease in the ordinary
(2) The right or the privilege to use patent, course of trade or business of the seller shall
copyright, design, or model, plan, secret be subject to VAT. (Sec. 4.106-3, RR 16-2005)
formula or process, goodwill, trademark,
trade brand or other like property or right;
(3) The right or the privilege to use in the Types of sales of real estate; Effects
Philippines of any industrial, commercial 1. Cash sale – entire selling price taxable in
or scientific equipment; the month of the sale.
(4) The right or the privilege to use motion 2. Installment sales
picture films, films tapes and discs; a. Meaning of installment sale –
(5) Radio, television, satellite transmission initial payments of which in the
and cable television time. year of sale ≤ 25% GSP
b. Effect – the real estate dealer
Goods/Personal Properties shall be subject to VAT on the
installment payments, including
PAGE 160 OF 275
UP COLLEGE OF LAW TAXATION 2 TAXATION LAW
interest and penalties, actually price, charges for packing, delivery and
and/or constructively received by insurance
the seller.
3. Deferred sales If goods/personal properties,
a. Meaning – initial payments GSP = amount paid in consideration
exceed 25% of the GSP IF DEEMED SALE: FMV at the time of the
b. Effect – Treated as a cash sale transaction
which makes the entire selling NB: in retirement/cessation, inventory (raw
price taxable in month of sale materials, finished goods, machinery,
4. Tax free exchanges under Sec. 40[C][2] equipment, furniture, fixture), tax base =
are not subject to VAT. whichever is lower,
i. acquisition cost
Reference: Sec. 4.106-3, RR 16-2005 ii. current market price of goods
Meaning of GSP – total amount of money or its N.B.: CIR has the power to determine the
equivalent which the purchaser pays or is appropriate tax base in 1) SBE in deemed sales
obligated to pay to the seller in consideration and 2) when GSP is unreasonably lower than
of the sale, barter or exchange of the goods or AMV16
properties, excluding VAT. The excise tax, if
any, on such goods or properties shall form Not taxable: [Sec. 109 (P)(Q)]
part of the gross selling price. (1) Not primarily held for sale or lease in the
course of trade or business
In the case of sale, barter or exchange of real (2) Low cost or socialized housing
property subject to VAT, GSP shall mean: (3) Residential lot when value does not
1. The consideration stated in the sales exceed P1,919,500
document or (4) House and lot/other residential dwelling <
2. The fair market value (FMV) whichever is P3,199,200
higher. (5) Lease (rental per unit < 12,800/month
and total rental from all units <
Meaning of FMV – Whichever is higher of the P1,919,500/ year)
following: (6) Transmission to a trustee (Except:
1. The fair market value as determined by the transmission is deemed sale transaction)
CIR (zonal value) or General Rule: Transmission of property
2. The fair market value as shown in to a trustee shall NOT be subject to VAT if
schedule of values of the Provincial and the property is to be merely held in trust
City Assessors (real property tax for the trustor and/or beneficiary.
declaration). Exception: However, if the property
transferred is originally intended for sale,
General Rule: GSP is the total amount of lease or use in the ordinary course of trade
money paid in consideration of sale, barter, or business AND the transfer constitutes a
exchange, or lease. completed gift, the transfer is subject to
VAT as a deemed sale transaction. The
Excludes: VAT, sales discounts and, transfer is a completed gift if the
allowances and returns (See Section on transferor divests himself absolutely of
Allowable Discounts) control over the property, i.e., irrevocable
transfer of corpus and/or irrevocable
Includes: Excise tax paid, initial payments 15 , designation of beneficiary.
interests and penalties (if instalment),
commission income (if exported), purchase
15 16
Initial payments does not include the amount of GSP is unreasonably lower than the actual market
mortgage on RP sold (except excess when mortgage value if it is lower than 30% of AMV of the same
exceeds the cost of the property), notes and other goods of the same quantity or quality sold in the
evidence on=f indebtedness issued by the purchaser immediate locality or the nearest date of sale.
at the time of the sale
PAGE 161 OF 275
UP COLLEGE OF LAW TAXATION 2 TAXATION LAW
accreditation under the rules & products, whether paid for in foreign
regulations of Export Development currency or not.
Act, RA 7844 (RR 7-95) (5) Sales by a VAT-registered supplier to a
(4) Sale of gold to the Bangko Sentral ng manufacturer/producer whose products
Pilipinas (BSP) are 100% exported are considered export
(5) The sale of goods, supplies, equipment sales. A certification to this effect must be
and fuel to persons engaged in issued by the Board of Investment which
international shipping or international air shall be good for 1 year unless
transport operations (RA 9337) subsequently re-issued. (RR 16-2005)
(a) Limited to goods, supplies, equipment
and fuel pertaining to or attributable Export sales of registered export traders
to the transport of goods and shall include commission income, and
passengers from a port in the Phil. that exportation of goods on
directly to a foreign port without consignment shall not be deemed export
docking or stopping at any other port sales until the export products consigned
in the Phil. are in fact sold by the consignee.
(b) If any portion of such fuel, goods, or
supplies is used for purposes other Foreign Currency Denominated Sale (FCDS)
than that mentioned, such portion of (1) (i) Sale to a nonresident of goods (except
fuel, goods, and supplies shall be those mentioned in Sections 149 and 150
subject to 12% VAT. (RR 16-2005) i.e., automobiles and non-essential goods
(6) Those considered export sales under the like jewelry, perfume, and yachts), (ii)
Omnibus Investment Code of 1987, and assembled or manufactured in the
other special laws (ex. Bases Conversion & Philippines (iii) for delivery to a resident in
Development Act of 1992) the Philippines (iv) paid for in acceptable
foreign currency AND (v) accounted for in
Under Omnibus Investment Code (EO 226): accordance with the rules and regulations
Considered Export Sales of the BSP.
(1) Phil. port FOB value of export products (2) (i) Sales of locally manufactured or
exported directly by a registered export assembled goods (ii) for household and
producer; OR personal use (iii) to Filipinos abroad and
(2) Net selling price of export products sold other non-residents of the Philippines as
by a registered export producer to well as returning Overseas Filipinos under
another export producer, or to an export the Internal Export Program of the
trader that subsequently exports the government (iv) paid for in convertible
same (only when actually exported by the foreign currency AND (v) accounted for in
latter) evidenced by landing certificates. accordance with the rules and regulations
of the BSP shall also be considered export
Constructive Exports (without actual sales. (RR 16-2005)
exportation):
(1) Sales to bonded manufacturing Effectively Zero-Rated Sales
warehouses of export-oriented (1) Sales to persons or entities whose
manufacturers; exemption under special laws or
(2) Sales to export processing zones (RA international agreements to which the
7916); Philippines is a signatory effectively
(3) Sales to registered export traders subjects such sales to zero rate.
operating bonded trading warehouses
(2) (i) The local sale of goods and properties
supplying raw materials in the
(ii) by a VAT-registered person (iii) to a
manufacture of export products (RA
person or entity who was granted indirect
7227)
tax exemption under special laws or
(4) Sales to diplomatic missions and other
international agreement. (RR 16-2005)
agencies and/or instrumentalities
granted tax immunities, of locally
manufactured, assembled or repacked ECOZONES
The ECOZONES shall be managed and (b) Sale of Services by a PEZA registered
operated by the PEZA as separate customs enterprise to a buyer from the
territory. (Sec. 8, RA 7916 “Special Economic Customs Territory – this is NOT
Zone Act of 1995”). Consequently, sales made embraced by the 5% special tax
by a person in the customs territory to a PEZA- regime, hence, such seller shall be
registered entity are considered exports to a SUBJECT TO 12% VAT.
foreign country and thus, zero-rated.
(c) Sale of Goods by a PEZA registered
Conversely, sales by a PEZA-registered entity
enterprise to Another PEZA registered
to a person in the customs territory are
enterprise (ie Intra-ECOZONE Sales of
deemed imports from a foreign country.
Goods) – this shall be EXEMPT from
VAT.
Tax treatment of sales to & by PEZA-
registered enterprise within & without the
ecozone [RMC 74-99]: (4) Sale of Services by ECOZONE enterprise,
(1) Any sale of goods, property or services to Another ECOZONE enterprise (Intra-
made by a VAT registered supplier from ECOZONE enterprise Sale of Service)
the Customs Territory** to any registered (a) if PEZA registered seller is subject to
enterprise operating in the ecozone, 5% special tax regime - EXEMPT from
REGARDLESS of the class or type of the VAT
latter’s PEZA registration, is actually (b) if PEZA registered seller is subject to
qualified and thus LEGALLY ENTITLED TO taxes under NIRC (ie not subject to 5%
THE 0% VAT. special tax regime) – subject to 0%
VAT pursuant to “cross border
“Customs Territory” shall mean the national doctrine”
territory of the Philippines outside of the
proclaimed boundaries of the ECOZONES Difference between Zero-rated and VAT-
except those areas specifically declared by exempt
other laws and/or presidential proclamations Zero-rated VAT-exempt
to have the status of special economic zones It is a taxable Not subject to output
and/or free ports. [Sec. 2(g), Rule 1, Part I, RA transaction but does tax
7916-IRR] not result in an output
tax
(2) By a VAT-Exempt Supplier from the The input VAT on the The seller in an
Customs Territory to a PEZA registered purchases of a VAT- exempt transaction is
enterprise registered person with not entitled to any
zero-rated sales may input tax on his
Sale of goods, property and services by VAT- be allowed as tax purchases despite the
Exempt supplier from the Customs Territory to credits or refunded issuance of a VAT
a PEZA registered enterprise shall be treated invoice or receipt;
EXEMPT FROM VAT, regardless of whether or
Persons engaged in Registration is
not the PEZA registered buyer is subject to
transactions which are optional for VAT-
taxes under the NIRC or enjoying the 5%
zero-rated, being exempt persons.
special tax regime.
subject to VAT, are
required to register
(3) By a PEZA Registered Enterprise
(a) Sale of Goods by a PEZA registered
enterprise to a buyer from the J. TRANSACTIONS DEEMED SALE (SEC.
Customs Territory (i.e., domestic 106 (B)
sales) -- this case shall be treated as a
technical IMPORTATION made by the Rate: 12% VAT
buyer. Such buyer shall be treated as Basis: Market value of the goods deemed sold
an IMPORTER thereof and shall be as of the time of the occurrence of the
imposed with the corresponding VAT. transactions or as the CIR shall prescribe. In
the case of retirement/cessation of business,
the tax base shall be the acquisition cost or the
PAGE 164 OF 275
UP COLLEGE OF LAW TAXATION 2 TAXATION LAW
current market price of the goods or With respect to ALL goods on hand, whether
properties, whichever is lower. In the case of a capital goods, stock-in-trade, supplies or
sale where the gross selling price is materials, as of the date of such retirement or
unreasonably lower than the fair market cessation, whether or not the business is
value, the actual market value shall be the tax continued by the new owner or successor ARE
base. The gross selling price is unreasonably CONSIDERED DEEMED SALES
lower than the actual market value if it is lower
by more than 30% of the actual market value Examples: change of ownership of the
of the same goods of the same quantity and business (e.g., when a sole proprietorship
quality sold in the immediate locality on or incorporates, or the proprietor sells his entire
nearest the date of sale. (RR 16-2005) business) and dissolution of a partnership and
creation of a new partnership which takes over
Transactions Deemed Sale the business. (RR 16-2005)
(1) Transfer, use or consumption not in the
course of business of goods or properties K. CHANGE OR CESSATION OF STATUS
originally intended for sale or for use in the AS VAT-REGISTERED PERSON (SEC
course of business. 106[C])
Example: when a VAT-registered person
withdraws goods from his business for his Rate: 12% VAT
personal use. (RR 16-2005) Basis: the acquisition cost or the current
(2) Distribution or transfer to shareholders, market price of the goods or properties,
investors or creditors whichever is LOWER.
(a) Shareholders or investors as share in
the profits of the VAT-registered VAT shall apply to goods disposed of or
persons; existing as of a certain date if under the
(b) Creditors in payment of debt; circumstances to be prescribed in rules and
(3) Consignment of goods if actual sale is not regulations to be promulgated by the
made within 60 days following the date Secretary of Finance, upon recommendation
such goods were consigned of the CIR, the status of a person as a VAT-
(4) Retirement from or cessation of business, registered person changes or is terminated.
with respect to inventories of taxable
goods existing as of such retirement or Subject to output VAT (RR 16-2005, Sec. 4.106
cessation (b))
12% VAT is applicable to goods/properties
Distribution or transfer to shareholders, originally intended for sale or use in business
investors or creditors and capital goods which are existing as of the
As regards distribution to shareholders or occurrence of the following:
investors as share in the profits of the VAT- (1) Change of business activity from VAT
registered persons, property dividends which taxable status to VAT-exempt status
constitute stocks in trade or properties Example: A VAT-registered person
primarily held for sale or lease declared out of engaged in a taxable activity like
retained earnings on or after Jan. 1, 1996 and wholesaler or retailer who decides to
distributed by the company to its shareholders discontinue such activity and engages
shall be subject to VAT based on the zonal instead in life insurance business or in any
value or FMV at the time of the distribution, other business not subject to VAT.
whichever is applicable. (RR 16-2005) (2) Approval of request for cancellation of a
registration due to reversion to exempt
Consignment of goods status
Consigned goods returned by the consignee (3) Approval of request for cancellation of
within the 60-day period are not deemed sold. registration due to desire to revert to
(RR 16-2005) exempt status after lapse of 3 consecutive
years from the time of registration by a
Retirement from or cessation of business person who voluntarily registered despite
being exempt under Sec. 109 (2)
PAGE 165 OF 275
UP COLLEGE OF LAW TAXATION 2 TAXATION LAW
(4) Approval of request for cancellation of non-exempt persons or entities who acquire
registration of one who commenced tax-free imported goods from exempt
business with the expectation of gross persons, entities or agencies (RR 16-2005)
sales/receipts exceeding P1,919,500 (per
RR 16-2011) but who failed to exceed this Importation of Goods
amount during the first 12 months of Importation of goods BEGINS when the
operation carrying vessel/aircraft enters the Philippine
jurisdiction with an intention to unload its
Not Subject to Output Vat – goods or cargoes. It ENDS when there is already
properties existing as of the occurrence of the payment of duties/taxes/other charges and
following: issuance of permit to withdraw.
(1) Change of control of a corporation by the Note: Importation of goods to bonded
acquisition of the controlling interest of warehouse for processing is not importation.
such corporation by another stockholder Importation connotes permanency and gain.
(individual or corporate) or group of Thus, if goods are only for exhibit, such goods
stockholders. are VAT-exempt.
Note: Exchange of goods or properties
including the real estate properties used Customs duty – amount of customs duty
in business or held for sale or for lease by legally due and paid by the importer.
the transferor, for shares of stocks, Therefore, if importer is entitled to 90%
whether resulting in corporate control or customs duty exemption, the 10% duty paid
not, is SUBJECT TO VAT (RR 10-11) should be the base in computation of the VAT.
(2) Change in the trade or corporate name of
the business Other similar chargers – specific charges
(3) Merger or consolidation of corporations. which an importer has to pay.
The unused input tax of the dissolved (a) Other taxes (special import tax)
corporation, as of the date of merger or (b) Bank charges
consolidation, shall be absorbed the (c) Arrastre charges
surviving or new corporation. (d) Wharfage dues
Note: The INPUT VAT of the dissolved (e) Brokerage fees
corporation will be absorbed by the (f) All other charges or expenses
surviving corporation
(4) Inventory used for promotions and Office Landed Cost - invoice amount including costs
Supplies of loading, shipping and unloading, customs
duties, freight, insurance, other charges,
L. VAT ON IMPORTATION OF GOODS excise tax (if any)
cargoes from one place in the Philippines executed if the property is leased or used in the
to another place in the Philippines Philippines.
(13) Sales of electricity by generation, (1) The lease or the use of or the right or
transmission, and/or distribution privilege to use any copyright, patent,
companies design or model, plan secret
EXCEPT sale of power or fuel (2) formula or process, goodwill, trademark,
generated through renewable sources of trade brand or other like property or right
energy, such as, but not limited to, (3) The lease of the use of, or the right to use
biomass, solar, wind hydropower, of any industrial, commercial or scientific
geothermal, ocean energy, and other equipment
emerging energy sources using (4) The supply of scientific, technical,
technologies such as fuel cells and industrial or commercial knowledge or
hydrogen fuels, which shall be subject to information
0% rate of VAT (zero-rated). (5) The supply of any assistance that is
(14) Franchise grantees of electric utilities, ancillary and subsidiary to and is furnished
telephone and telegraph, radio and/or as a means of enabling the application or
television broadcasting and all other enjoyment of any such property, or right as
franchise grantees (including PAGCOR is mentioned in #2 or any such knowledge
and its licensees/franchisees) or information as is mentioned in #3
EXCEPT franchise grantees of radio (6) The supply of services by a nonresident
and/or television broadcasting whose person or his employee in connection with
annual gross receipts of the preceding the use of property or rights belonging to,
year do not exceed Ten Million Pesos or the installation or operation of any
(P10,000,000.00) (which shall be subject brand, machinery or other apparatus
to 3% franchise tax under Sec. 119, subject purchased from such nonresident person
to optional registration), and franchise (7) The supply of technical advice, assistance
grantees of gas and water utilities (under or services rendered in connection with
Sec. 109, subject to 2% franchise tax) technical management or administration
With respect to franchise grantees of of any scientific, industrial or commercial
telephone and telegraph services, undertaking, venture, project or scheme
amounts received for overseas dispatch, (8) The lease of motion picture films, films,
message, or conversation originating from tapes and discs
the Philippines are subject to the (9) The lease or the use of or the right to use
percentage tax under Sec. 120 and hence radio, television, satellite transmission
exempt from VAT and cable television time
(15) Non-life insurance companies including
surety, fidelity, indemnity and bonding Additional services subject to VAT:
companies; (1) Services performed in the exercise or
EXCEPT crop insurance, life and practice of profession or calling by
disability insurance, and health and individuals subject to professional tax
accident insurance under the LGC, and professional services
Insurance and reinsurance rendered by general professional
commissions, as opposed to premiums, partnerships (GPPs);
whether life or non-life, are subject to VAT (2) Services performed by actors/actresses,
while non-life insurance premiums are talents, singers, emcees, radio/television
subject to VAT. broadcasters, choreographers,
(16) Similar services regardless of whether or musical/radio/movie/television/stage
not the performance thereof calls for the directors, and professional athletes;
exercise or use of the physical or mental (3) Services rendered by customs, real estate,
faculties stock, immigration and commercial
brokers;
“Lease of Properties“: subject to the VAT (4) Services rendered by doctors, and lawyers.
imposed irrespective of the place where the (5) Association dues or membership fees and
contract of lease or licensing agreement was other assessment or charges for the
(9) Services rendered by individuals pursuant lease in the ordinary course of trade or
to an employer-employee relationship; business.
(10) Services rendered by regional or area However, even if the real property
headquarters established in the is not primarily held for sale to
Philippines by multinational corporations customers or held for lease in the
which act as supervisory, communications ordinary course of trade or
and coordinating centers for their business but the same is used in
affiliates, subsidiaries or branches in the the trade or business of the seller,
Asia-Pacific Region and do not earn or the sale thereof shall be subject to
derive income from the Philippines; VAT being a transaction incidental
(11) Transactions which are exempt under to the taxpayer’s main business.
international agreements to which the [RR 4-2007]
Philippines is a signatory or under special (b) Sale of real properties utilized for low-
laws, except those under PD No. 529 cost housing as defined by RA 7279,
(Petroleum Exploration Concessionaires ("Urban Development and Housing
under the Petroleum Act of 1949); Act of 1992") and other related laws,
(12) Sales by agricultural cooperatives duly such as RA 7835 and RA 8763;
registered with the Cooperative “Low-cost housing" refers to
Development Authority (CDA) to their housing projects intended for
members, as well as sale of their produce, homeless low-income family
whether it is original state or processed beneficiaries, undertaken by the
form, to non-members; their importation Government or private developers,
of direct farm inputs, machineries and which may either be a subdivision
equipment, including spare parts thereof, or a condominium registered and
to be used directly and exclusively in the licensed by the Housing and Land
production and/or processing of their Use Regulatory Board/Housing
produce. (HLURB) under BP 220, PD 957 or
Sale by agricultural cooperatives to any other similar law, wherein the
non-members can only be exempted unit selling price is within the
from VAT if the producer of the selling price ceiling per unit of
agricultural products sold is the P750,000.00 under RA 7279, and
cooperative itself. If the cooperative is other laws, such as RA 7835 and
not the producer (e.g., trader), then RA 8763.
only those sales to its members shall (c) Sale of real properties utilized for
be exempted from VAT. [RR 16-2005] socialized housing as defined under
(13) Gross receipts from lending activities by RA 7279, and other related laws, such
credit or multi-purpose cooperatives duly as RA 7835 and RA 8763, wherein the
registered with the CDA price ceiling per unit is P225,000 or as
(14) Sales by non-agricultural, non- electric may from time to time be determined
and non-credit cooperatives duly by the HUDCC and the NEDA and
registered and in good standing with the other related laws.
CDA; Provided, that the share capital "Socialized housing" refers to
contribution of each member does not housing programs and projects
exceed P15,000 and regardless of the covering houses and lots or home
agrgregate capital and net surplus ratably lots only undertaken by the
distributed among the members. BUT Government or the private sector
their importation of machineries and for the underprivileged and
equipment, including spare parts thereof, homeless citizens which shall
to be used by them are SUBJECT to VAT. include sites and services
(15) Export sales by persons who are not VAT- development, long-term
registered; financing, liberated terms on
(16) Sale of real properties as follows: interest payments, and such other
(a) Sale of real properties NOT primarily benefits in accordance with the
held for sale to customers or held for
PAGE 171 OF 275
UP COLLEGE OF LAW TAXATION 2 TAXATION LAW
Q. SOURCES OF INPUT TAX Tax base: The value allowed for income tax
purposes on inventories shall be the basis for the
(1) Purchase or importation of goods (evidenced computation of the 2% transitional input tax,
by VAT invoice/receipt) EXCLUDING goods that are exempt from VAT
(a) For sale; or under Sec. 109 of the Tax Code. (RR 16-2005)
(b) For conversion into or intended to form
part of a finished product for sale Note: A real estate dealer is entitled to claim
including packaging materials; or transitional input VAT based on the value of the
(c) For use as supplies in the course of entire (including the value of the land and the
business; or improvements thereon) real property sold
(d) For use as materials supplied in the sale regardless of whether there was in fact actual
of service; or payment of VAT on the purchase of the real
(e) For use in trade or business for which property. At the time the purchase was made,
deduction for depreciation or there was still no VAT imposed. (Fort Bonifacio
amortization is allowed under the Code. Development Corp. v. CIR)
(2) Purchase of real properties for which VAT has
actually been paid R. PERSONS WHO CAN AVAIL OF INPUT
(3) Purchase of services in which VAT has TAX CREDIT
actually been paid
(4) Transactions deemed sale Input tax on domestic purchase or importation of
(5) Presumptive Input Tax goods or properties shall be creditable:
(6) Transitional Input Tax (1) To the purchaser upon consummation of sale
and on importation of goods or properties;
Presumptive Input Tax (Sec. 111(B)) and
Persons or firms engaged in the processing of (2) To the importer upon payment of the VAT
sardines, mackerel and milk, and in prior to the release of the goods from the
manufacturing refined sugar and cooking oil and custody of the Bureau of Customs.
packed noodle based instant meals, shall be (a) The input tax on goods purchased or
allowed a presumptive input tax, creditable imported in a calendar month for use in
against the output tax, equivalent to FOUR trade or business for which deduction for
PERCENT (4%) of the gross value in money of depreciation is allowed under the Code,
their purchases of primary agricultural products shall be spread evenly over the month of
which are used as inputs to their production. acquisition and the fifty-nine (59)
succeeding months if the aggregate
“Processing” means pasteurization, canning and acquisition cost for such goods, excluding
activities which through physical or chemical the VAT component thereof, exceeds One
process alter the exterior texture or form or inner million pesos (P1,000,000). If the
substance of a product in such manner as to aggregate acquisition cost does not
prepare it for special use to which it could not exceed P1,000,000, the total input taxes
have been put in its original form or condition. will be allowable as credit against output
tax in the month of acquisition.19
Transitional Input Tax (Sec 111) (b) However, if the estimated useful life of
Who may avail: (i) By a person who becomes VAT- the capital good is less than five (5) years,
liable for the 1st time, or (ii) any person who elects as used for depreciation purposes, then
to be a VAT-registered person the input VAT shall be spread over such a
Rate: 2% Input VAT of the value of the beginning shorter period
inventory on hand or actual VAT paid on such, (3) To the purchaser of services or the lessee or
goods, materials and supplies, whichever is licensee upon payment of the compensation,
HIGHER, which amount shall be creditable rental, royalty or fee.
against the output tax of VAT-registered person.
Input tax on purchase of services, lease or use of
properties shall be creditable:
(1) To the purchaser upon payment of the other adjustments, such as purchase returns
compensation, royalty or fee or allowances and input tax attributable to
(2) To lessee or licensee upon payment of the exempt sale.
compensation, royalty or fee
(2) The claim for tax credit referred to includes
Claiming of input Tax on motor vehicles subject to not only those filed with the BIR but also
the following conditions: those filed with other government agencies,
(1) Purchase of vehicle must be substantiated such as the Board of Investments the Bureau
with official receipts and other records; of Customs.
(2) Taxpayer has to prove the direct connection
of the motor vehicle to the business; S.3. ALLOCATION OF INPUT TAX ON MIXED
(3) Only one vehicle for land transport is allowed TRANSACTIONS20
for the use of an official/employee with value
not exceeding P2.4 million; There are four possible transactions a VAT-
(4) No depreciation shall be allowed for yachts, registered person may enter into:
helicopters, airplanes (i) VAT taxable,
(ii) VAT-exempt,
S. DETERMINATION OF OUTPUT/INPUT (iii) zero-rated VAT and
TAX; VAT PAYABLE; EXCESS INPUT TAX (iv) sale to governments.
CREDITS
A VAT-registered person who is also engaged in
transactions not subject to VAT shall be allowed
to recognize input tax credit on transactions
Output VAT – Input VAT = VAT Payable
subject to VAT as follows:
(1) All the input taxes that can be directly
attributed to transactions subject to VAT may
S.1. DETERMINATION OF OUTPUT TAX be recognized for input tax credit. Input taxes
(RR 16-2005) that can be directly attributable to VAT
taxable sales of goods and services to the
Output VAT in a sale of goods/properties shall be Government or any of its political
computed by multiplying the total amount subdivisions, instrumentalities or agencies,
indicated in the invoice or receipt by 12%. including GOCCs shall not be credited
against output taxes arising from sales to
OUTPUT VAT= non-Government entities
Gross Selling Price x Rate of VAT (or 12%) (2) If any input tax cannot be directly attributed
to either a VAT taxable or VAT-exempt
Output VAT in a sale of services shall be transaction, the input tax shall be pro-rated
computed by multiplying the total amount to the VAT taxable and VAT-exempt
indicated in the invoice or receipt by 12%. transactions and ONLY the ratable portion
pertaining to transactions subject to VAT may
OUTPUT VAT= be recognized for input tax credit.
Gross Receipts x Rate of VAT (or 12%)
T. SUBSTANTIATION OF INPUT TAX
S.2. DETERMINATION OF INPUT TAX CREDITS
CREDITABLE
(1) INPUT TAXES must be substantiated and
(1) The sum of the excess input tax carried over supported by the following documents, and
from the preceding month or quarter and the must be reported in the information returns
input tax creditable to a VAT-registered required to be submitted to the Bureau:
person during the taxable month or quarter (a) For the importation of goods = Import
shall be reduced by the amount of claim for entry or other equivalent document
refund or tax credit for value-added tax and
Example regarding the input tax on goods where deduction for depreciation is allowed from RR 16-2005
Illustration: LBH Corporation sold capital goods on installment on October 1, 2005. It is agreed that
the selling price, including the VAT, shall be payable in five (5) equal monthly installments. The data
pertinent to the sold assets are as follows:
Accounting:
SELLER BUYER
Oct. 1, 2005 Oct. 1, 2005
Cash P 1,100,000.00 Asset P 5,000,000.00
Installment Receivable Input Tax 500,000.00
4,400,000.00 AccumulatedDepreciation
1,000,000.00 Cash 1,100,000.00
Output Tax Installment Payable 4,400,000.00
500,000.0
0 Asset 3,000,000.00
Gain on sale of asset 3,000,000.00
------------
To Record VAT Liability:
Output Tax 500,000.00
Input Tax 100,000.00
VAT Payable 400,000.00
Periodic Subsequent Payment:
Periodic Receipt of Installment: Installment Payable 1,100,000.00
Cash 1,100,000.00 Cash 1,100,000.00
Installment Receivable 1,100,000.00
* The input tax of P 500,000.00 on the bought capital goods worth P 5,000,000.00 shall be spread
evenly over a period of 60 months starting the month of purchase.
If the depreciable capital good is sold/transferred within a period of five (5) years or prior to the
exhaustion of the amortizable input tax thereon, the entire unamortized input tax on the capital goods
sold/transferred can be claimed as input tax credit during the month/quarter when the sale or transfer
was made but subject to the limitation prescribed under Sec. 4.110-7 of these Regulations.
Example regarding the allocation of input tax on mixed transactions from RR 16-2005
Illustration: ERA Corporation has the following sales during the month:
A. The creditable input tax for the month shall be computed as follows:
Taxable sales (0% and 12%) X Amount of input tax not directly attributable
Total Sales
B. The input tax attributable to sales to government for the month shall be computed as follows:
Taxable sales to the government X Amount of input tax not directly attributable
Total Sales
C. The input tax attributable to VAT-exempt sales for the month shall be computed as follows:
U. REFUND OR TAX CREDIT OF EXCESS (iii) The claimed input tax must not have been
INPUT TAX (CF REFUND OF applied to any output tax during the period
ERRONEOUSLY PAID TAXES) covered and subsequent periods covered by
the claim.
Who may claim for refund/apply for issuance of (iv) The claimed input tax must have been
tax credit certificate declared from the VAT quarterly return.
(1) Zero-Rated Sales (Sec. 112(A), NIRC) (v) The claimed input tax are directly
(a) Any VAT-registered person, whose sales are attributable to 0%-rated transactions.
zero-rated or effectively zero-rated may (vi) Acceptable foreign currency exchange
apply for the issuance of a tax credit proceeds must have been duly accounted for
certificate/refund of creditable input tax due (vii) Claimed input tax must be duly supported by
or paid attributable to such sales, EXCEPT VAT invoices/receipts.
transitional input tax, to the extent that such (viii) VAT returns for the succeeding quarters
input tax has not been applied against must have been submitted.
output tax, within two (2) years after the
close of the taxable quarter when the sales (2) Cancellation of VAT Registration.
were made. The input tax that may be (a) A person whose registration has been
subject of the claim shall exclude the portion cancelled due to (i) retirement from or
of input tax that has been applied against cessation of business, or due to changes in or
the output tax. (ii) cessation of status under Section 106(C)
(b) The acceptable foreign currency exchange of the Code may, within two (2) years from
proceeds must have been duly accounted for the date of cancellation, apply for the
in accordance with the rules and regulations issuance of a tax credit certificate for any
of the Bangko Sentral ng Pilipinas (BSP) in unused input tax which may be used in
the case of zero-rated transactions paid for payment of his other internal revenue taxes.
in acceptable foreign currency and requiring (b) He shall be entitled to a refund if he has no
that such be accounted for in accordance internal revenue tax liabilities against which
with BSP rules & regulations (Secs. the tax credit certificate may be utilized.
106(A)(2)(a)(1) and (2), and Sec. 106(A)(2)(b)
and Sec. 108(B)(1) and (2), NIRC). Period to file claim/apply for issuance of tax credit
(c) Where the taxpayer is engaged in zero-rated certificate
or effectively zero-rated sale and also in This period must be distinguished from normal
taxable or exempt sale of goods of tax refunds for erroneous payments where an
properties or services, and the amount of administrative claim and judicial claim may be
creditable input tax due or paid cannot be made together, and the reckoning point of the 2
directly and entirely attributed to any one of years is from the date of the erroneous payment.
the transactions, it shall be allocated (1) Application for issuance of tax credit
proportionately on the basis of the volume of certificate or refund of creditable input tax
sales. (except transitional input tax)
(d) In the case of a person engaged in the WITHIN 2 YEARS after the close of the
transport of passenger and cargo by air or taxable quarter when the sale was made,
sea vessels from the Philippines to a foreign not from the payment of the VAT. Sec.
country, the input taxes shall be allocated 229 is not applicable in claiming refunds
ratably between his zero-rated sales and for VAT.
non-zero-rated sales (sales subject to If the VAT registration has been cancelled
regular rate, subject to final VAT withholding due to retirement or cessation of business,
and VAT-exempt sales). (RR 16-2005) or change of status, the 2 year period
shall be after the date of cancellation
Requirements: (Summary) (2) Administrative Claim
(i) The claimant should be a VAT-registered The CIR shall grant the tax credit/refund
person within 120 days from the date of
(ii) There should be an application filed with the submission of complete documents in
BIR or DOF center, as the case may be, support of the application
within 2yrs after close of taxable quarter.
PAGE 182 OF 275
UP COLLEGE OF LAW TAXATION 2 TAXATION LAW
Consequences of issuing erroneous VAT shall be filed and the taxes paid not later
invoice or VAT official receipt than the 20th day following the end of
each month.
Issuance of a VAT Invoice or VAT Receipt by a
non-VAT person Note: VAT paid on a monthly basis. Payments
If a person who is not a VAT-registered person in the monthly VAT declarations shall be
issues an invoice or receipt showing his credited in the quarterly VAT return to arrive at
Taxpayer Identification Number (TIN), the net VAT payable or excess input tax/over-
followed by the word "VAT", the erroneous payment as of the end of a quarter.
issuance shall result to the ff:
(1) The non-VAT person shall be liable to: Administrative and Penal Provisions (Sec 115)
Percentage taxes applicable to his (1) Suspension of business operations. In
transactions; addition to other administrative and penal
VAT due on transactions under sanctions provided for in the Tax Code and
Section 106 or 108 of the Code, implementing regulations, the CIR or his
without the benefit of any input tax duly authorized representative may order
credit; and suspension or closure of a business
A 50% surcharge under Section 248 establishment for a period of not less than
(B) of the code; five (5) days for any of the following
(2) The VAT shall, if the other requisite violations:
information required is shown on the (a) Failure to issue receipts and invoices.
invoice/receipt, be recognized as an input (b) Failure to file VAT return as required
tax credit to the purchaser. under the provisions of Sec. 114 of the
Tax Code.
Issuance of a VAT Invoice or VAT Receipt on an (c) Understatement of taxable sales or
Exempt Transaction by a VAT-registered receipts by 30% or more of his correct
Person taxable sales or receipt for the taxable
If a VAT-registered person issues a VAT invoice quarter.
or VAT official receipt for a VAT-exempt (d) Failure of any person to register as
transaction, but fails to display prominently on required under the provisions of Sec.
the invoice or receipt the term "VAT-exempt 236 of the Tax Code.
Sale: (2) Surcharge, interest and other penalties.
(1) the transaction shall become taxable and The interest on unpaid amount of tax, civil
the penalties and criminal penalties imposed
(2) issuer shall be liable to pay VAT thereon. in Title XI of the Tax Code shall also apply
(3) The purchaser shall be entitled to claim an to violations of the provisions of Title IV of
input tax credit on his purchase. [RR 16- the Tax Code (VAT).
05]
X. WITHHOLDING OF FINAL VAT ON
W. FILING OF RETURN AND PAYMENT SALES TO GOVERNMENT
(Sec 114) (RR 16-2005)
VAT returns - VAT paid on a monthly basis. General Rule: Withholding tax does not apply
Payments in the monthly VAT declarations on transactions subject to VAT.
shall be credited in the quarterly VAT return to Exceptions:
arrive at the net VAT payable or excess input (1) Gross payments by the government shall
tax/over-payment as of the end of a quarter. be subject to the 5% final withholding tax;
(1) Filed by person liable to pay the VAT (2) Gross payments by resident VAT-
(2) Quarterly return of the amount of his gross taxpayers to non-resident foreign persons
sales or receipts within twenty-five (25) of rentals, royalties, reinsurance
days after the close of each taxable premiums, and services done in the
quarter prescribed for each taxpayer. Philippines—12% (Sec. 114(c), NIRC)
(3) The monthly VAT Declarations of
taxpayers whether large or non-large
PAGE 185 OF 275
UP COLLEGE OF LAW TAXATION 2 TAXATION LAW
* Beginning Nov. 1, 2005, when R.A. 9337 (3) Other services rendered in the Philippines
became effective, all sales of goods, by non-residents
properties, or services to the government shall
be subject to the 5% final withholding tax. The
government shall, before making payment on
account of each purchase of goods and/or
services taxed at 12% VAT (Sec. 106 and 108)
deduct and withhold a final VAT due at the
rate of 5% of the gross payment thereof.
(Mamalateo, Reviewer on Taxation, 2008)
Sales to Government
(1) The Government or any of its political
subdivisions, instrumentalities or
agencies, including GOCCs shall, before
making payment on account of each
purchase of goods and services which are
subject to the VAT (Secs. 106 and 108,
NIRC), deduct and withhold a final VAT
due at the rate of five percent (5%) of the
gross payment thereof.
The payment for lease or use of properties or
property rights to nonresident owners shall be
subject to 12% withholding tax at the time of
payment.
(a) The payor or person in control of the
payment is considered as the withholding
agent.
(b) The VAT withheld shall be remitted
within ten (10) days following the end of
the month the withholding was made.
The 5% final VAT shall represent the net VAT
payable of the seller. The remaining 7%
effectively accounts for the standard input
VAT, in lieu of the actual input VAT directly
attributable or ratably apportioned to such
sales. (This means that where the 5% final
VAT applies, the basic formula of output tax
less input tax does not apply.)
MONTHLY RETURN
Gross Sales/Receipts for the Month xxx
Multiplied by VAT rate 12%
Output VAT xxx
Less Input Taxes:
Transitional/Presumptive Input Tax xxx
On taxable goods/services xxx xxx
Net VAT Payable xxx
Add Penalties:
Surcharge xxx
Interest xxx
Compromise xxx xxx
Total Amount Payable xxx
INVOLVING GOVERNMENT
When Actual Input VAT > Standard Input VAT: excess forms part of seller’s expense/cost
When Actual Input VAT < Standard Input VAT: difference is treated as taxable other income
Sales xxx
Output VAT (Sales x 12%) xxx
Purchases xxx
Input VAT (Purchases x 12%) xxx
21 Sec 106
22
23 Sec 108
PAGE 188 OF 275
UP COLLEGE OF LAW TAXATION 2 TAXATION LAW
(iv) Non-stock, non-profit corporations engaged in SBE of real properties ICT/B, regardless of
disposition of income
(v) Gov’t inc GOCCs in SBEL of RP ICT/B
(2) Renders services
(3) Imports goods
if importer is tax-exempt/VAT-exempt AND goods are subsequently SBE to non-exempt persons,
purchasers/recipients = importer
if the Philippine branch of an NRFC “imported”, first local buyer = importer
o IF ON INSTALLMENT:
GSP = down payments received + interests + penalties + other charges – amount of
mortgage (paid)
NB: If zonal/FMV, tax base =
Actual Consideration (exclusive VAT)
x zonal value or FMV, higher
Agreed Consideration (exclusive VAT)
Upon full collection, if a difference is uncovered because the zonal value or market value at
the date of sale is higher than the total receipts or collections based on the agreed
consideration, the additional VAT shall be paid accordingly (RMC 03-96)
NB:
o IF DEFERRED Deferred Payments (initial > 25%
GSP)
GSP = entire selling price or zonal/FMV, whichever is higher Instalment Plan (initial ≤ 25% GSP)
NB: CIR has the power to determine the appropriate tax base in 1) SBE in deemed sales
and 2) when GSP is unreasonably lower than AMV26
(3) Gross Receipts derived from transaction: total amount of money/equivalent = contract price +
compensation + service fee + rental fee + royalties + amount charged for materials supplied with the
24 It should be determined at the time of the sale, indicated in the invoice and granting does not depend on the happening
of a future event
25 Initial payments does not include the amount of mortgage on RP sold (except excess when mortgage exceeds the cost
of the property), notes and other evidence on=f indebtedness issued by the purchaser at the time of the sale
26 GSP is unreasonably lower than the actual market value if it is lower than 30% of AMV of the same goods of the same
quantity or quality sold in the immediate locality or the nearest date of sale.
PAGE 189 OF 275
UP COLLEGE OF LAW TAXATION 2 TAXATION LAW
services + deposits and advanced payments actually or constructively received + costs items of
construction projects – (VAT + amounts earmarked for payments to unrelated 3rd party + amounts
received as reimbursement + monies/receipts held in trust w/c do not redound to the benefit of
taxpayer + universal charge passed on and collected by distribution companies and electric coop (if
sale of electricity) + receivables + local taxes)
Rates of VAT
(A) Output Tax (Sale/Barter/Exchange/Lease)
(1) 12% standard rate: applied directly to TB
(2) 0%: applied directly to TB
(B) Input Tax (Purchase from VAT-registered businesses/Importation of goods)
(1) 12% standard rate: applied directly to TB
(2) 0%: applied directly to TB
(3) 2% transitional VAT (: applied to the (inventory on hand) value of goods (exc. VAT-exempt good)
existing at the date a person commences business and/or becomes liable to VAT) or 12% actual
input tax rate, higher
(4) 4% presumptive input tax rate: applies to purchases of VAT-exempt goods used as inputs by a VAT-
registered person in manufacturing or processing certain food products
(5) 7% FWT (standard input VAT, when government), 5% withholding
SALE OF SERVICES
VAT-Exempt 0% VAT
NB: There are 31 VAT-exempt sales of services (Sec (1) Processing, manufacturing, repacking goods
109 and special laws) to non-resident (5)
(2) Processing, manufacturing, repacking goods
(1) For lease of property =exempt to export-oriented (3)
if advance payment = loan, option money, (3) Services other than processing,
security deposit manufacturing, repacking (4)
NB: if security deposit is applied to rental = (4) Services to exempted persons (3): effectively 0-
VAT rate
(2) For persons engaged in milling, processing, (5) Sale of power/fuel-generated through
manufacturing or repacking goods = exempt renewable resources (3)
if palay rice; corn corn grits; sugar (6) Services rendered to int’l shipping/air
cane raw sugar transport (2)
(3) For franchise grantees of electric utilities, (7) Transport of passengers and cargo by air from
telephone and telegraph, radio and/or Phil to Foreign (3)
television broadcasting = exempt (8) Transactions of VAT-reg person to foreign
if annual gross receipts <= 10M; embassies (2)
franchise grantees of gas and water
utilities; of telephone & telegraph
services, amounts received for
overseas dispatch from Phil.
(4) For PREMIUMS of insurance companies =
exempt IF
life and disability insurance;
(included are only those with exceptions) Exceptions to the Exemptions (Subject to VAT)
1. Sale/import of agricultural & marine food (1) Livestock and poultry DOES NOT INCLUDE
products in their original state; livestock and fighting cocks, race horses, zoo animals and
poultry (used/yield for human consumption); pets
breeding stock and genetic materials (2) DOES NOT INCLUDE vehicles, vessels,
2. Import of professional instruments, aircrafts, machineries, and other goods for use
implements, wearing apparel, domestic in manufacturing in commercial quantities
animals, and personal household effects (3) DOES NOT INCLUDE those under Petroleum
3. Transactions exempt pursuant to special laws Exploration Concessionaires under Petroleum
4. Cooperatives Act of 1949
5. Residential lots ≥ 1,919,500 & lot & dwellings (4) For sales by agricultural coops to non-
≥ 3,199,200 members, if seller is the member = VAT
6. lease of residential units, For sales by non-agri, non-electric and non-
if ≤ 12,800/unit/month (regardless of credit, importation of machineries and
aggregate amount); equipment = VAT
if ≥ 12,800/unit/month (AND aggregate (5) DOES NOT INCLUDE parking lot
amount is ≥ 1,919,500) (6) If any portion of such goods are used for
(5) importation of fuels, goods, supplies by purposes other than those stated = VAT
international shipping or air transport
SALE OF GOODS
VAT-Exempt 0% VAT
Real Property Actual Export Sales (3)
(i) Not primarily held ICT/B
(ii) Low-cost or socialized housing Deemed Export Sales
(iii) Residential lot <= 1,919,500 (i) Internal or constructive export sales
(iv) House and/or other residential dwellings <= (a) Raw/Packaging materials to non-resident buyer
3,199,200 (5)
(v) Lease (12,800/unit/year or total (b) Raw/Packaging materials to export-oriented (3)
1,919,500/year) (c) Phil. Port FOB value of export products (2)27
(vi) Transmission to a trustee (d) Net selling price of export products (4)28
Except: if transmission is deemed sale (e) sales to bonded manufacturing warehouses (2)29
(vii) Transfer to corporation in exchange of SoS (f) sales to export processing zones30
(viii) Advance payments/Security Deposits in (g) sales to enterprises duly accredited by Subic Bay
lease Metropolitan Authority (2)
E: if applied to the rent (h) sales to registered export traders (3)
(i) sales to diplomatic missions etc. (2)
As regards ecozones and PEZA-registered entities (j) sale by VAT-supplier to manufacturer/producer
(i) Made by VAT-exempt supplier from customs whose products are 100% exported (3)
territory to any registered enterprise inside (ii) Sale of gold to BSP
ecozone (iii) Sale of goods/supplies/equipment/fuel to persons
engaged in int’l shipping/air transport (4)
(ii) Intra-ecozone enterprise sale of service, if (iv) Docking/Undocking services to foreign vessels
PEZA registered seller is subject to 5%
special tax regime Foreign currency denominated goods
(iii) Intra-ecozone sales of goods (i) To a NRC/NRA of goods (5)
(ii) To a NRC/NRA of goods locally manufactured for
household and personal use (2)
E: automobiles and non-essential goods
(1) Once registered as a VAT person, the taxpayer shall be liable to output tax and be entitled to input tax credit
beginning on the first day of the month following registration.
(2) The cancellation for registration will be effective from the first day of the following month the cancellation was
approved.
(3) What is the treatment for Withholding of VAT on Government Money Payments?
The government or any of its political subdivisions, instrumentalities or agencies, including government-
owned or controlled corporations (GOCCs) shall, before making payment on account of each purchase of
goods and/or services taxed at twelve percent (12%) VAT pursuant to Sections 106 and 108 of the Tax Code,
deduct and withhold a Final VAT due at the rate of five percent (5%) of the gross payment.
The five percent (5%) final VAT withholding rate shall represent the net VAT payable of the seller. The
remaining seven percent (7%) effectively accounts for the standard input VAT for sales of goods or services
to government or any of its political subdivisions, instrumentalities or agencies including GOCCs in lieu of the
actual input VAT directly attributable or ratably apportioned to such sales. Should actual input VAT
attributable to sales to government exceeds seven percent (7%) of gross payments, the excess may form part
of the sellers' expense or cost. On the other hand, if actual input VAT attributable to sale to government is
less than seven percent (7%) of gross payment, the difference must be closed to expense or cost.
The government or any of its political subdivisions, instrumentalities or agencies including GOCCs, as well as
private corporation, individuals, estates and trusts, whether large or non-large taxpayers, shall withhold
twelve percent (12%) VAT with respect to the following payments:
(i) Lease or use of properties or property rights owned by non-residents; and
(ii) Other services rendered in the Philippines by non-residents.
VAT- registered
cancelling their
registration (regardless of
w/in 2 years after close the source of input tax)
of the taxable quarter
when sales are made
Input Tax wrt Zero-rated and Application for w/in 2 years after
Effectively zero-rated Sales refund or TCC to close of the taxable
Direct Tax CIR + quarter when sales
Credit supporting docs are made
VAT-registered
Taxpayer Presumptive Input Tax
w/in 120 days
Transitional Input Tax w/in 120 days
Carry-over from
If VAT-exempt Actual Input Tax not related from submission
to zero-rated sales Tax Credit submission
changes his
status to VAT-
registered = GRANTED
transitional
input tax VAT-exempt Transactions DENIED INACTION
DENIED GRANTED
Formula
Increase in Net worth Tax Delinquency v. Tax Deficiency
Add: Non-deductible Item Tax Delinquency Tax Deficiency
PAGE 201 OF 275
UP COLLEGE OF LAW TAXATION 2 TAXATION LAW
which a tax is being assessed or collected, prescribed, there shall be assessed and
BUT if the taxpayer informs the CIR of any collected interest at the rate of 20% per
change in address, the running of the statute annum on the tax or deficiency tax or part
of limitations shall not be suspended thereof unpaid
(4) When the warrant of distraint or levy is duly (c) Compromise penalties
served upon the taxpayer, his authorized
representative, or a member of his household ADMINISTRATIVE REMEDIES
with sufficient discretion, and No Property is
located Assessment process [Sec. 228, NIRC; RR 12-99;
(5) When the taxpayer is out of the Philippines RR 18-13]
(a) Tax audit – In a tax audit, revenue officers
(iv) General provisions on additions to the tax examine the books of account and other
(a) Civil penalties (Sec. 248, NIRC) accounting records of taxpayers to determine the
1. 25% surcharge correct tax liability. This is through the issuance
a. Failure to file a return and pay tax due of a Letter of Authority.
thereon
b. Filing with unauthorized revenue Letter of Authority: An official document that
office empowers a Revenue Officer to examine and
c. Failure to pay deficiency tax within scrutinize a taxpayer’s books of accounts and
time prescribed in assessment notice other accounting records, in order to determine
d. Failure to pay full or part of the the taxpayer’s correct internal revenue tax
amount shown in ITR required to be liabilities.
filed or the full amount of tax due for
which no return is required to be filed Cases which need not be covered by a valid LA:
on or before the date prescribed for its Cases involving civil/criminal tax fraud which fall
payment under the jurisdiction of the tax fraud division of
2. 50% surcharge the Enforcement Services, and Policy cases under
a. Willful neglect to file the return within audit by the special teams in national offices
the period prescribed
b. False or fraudulent return is willfully (b) Notice of informal conference
made N.B. – RR 18-2013 amended RR 1812-99 and
(b) Interest (Sec. 249) deleted the service of notice of informal
1. General – there shall be assessed and conference.
collected any unpaid amount of tax,
interest at the rate of 20% per annum or (c) Issuance of preliminary assessment notice
such higher rate as may be prescribed (PAN) – The Assessment Division issues PAN if it
from the date prescribed for payment determines that there exists sufficient basis to
until fully paid assess the taxpayer for any deficiency tax. It shall
2. Deficiency interest – 20% p.a. on the tax show in detail the facts and the law on which the
due proposed assessment is based.
3. Delinquency interest – 20% p.a. on the
unpaid amount of (d) Exceptions to issuance of preliminary
a. Failure to pay the amount of tax due assessment notice (PAN)
on any return required to be filed
b. Failure to pay the amount of tax due The notice for informal conference and the PAN
for which no return is required shall not be required in any of the ff cases, in
c. Failure to pay a deficiency tax or which case, issuance of the Formal Assessment
surcharge or interest thereon on the Notice (FAN) shall be sufficient:
due date appearing on the notice 1. The finding for any deficiency tax is the
and demand of the CIR result of mathematical error in the
4. Interest on extended payments – if any computation of the tax as appearing on
person is qualified and elects to pay the face of the return; or
installments but fails to pay the tax or any 2. A discrepancy has been determined
installment on or before the date between the tax withheld and the
PAGE 203 OF 275
UP COLLEGE OF LAW TAXATION 2 TAXATION LAW
amount actually remitted by the (f) Issuance of formal letter of demand and
withholding agent; or assessment notice/final assessment notice
3. A taxpayer who opted to claim a refund or (FAN/FLD)
tax credit of excess creditable
withholding tax for a taxable period was A Final Assessment Notice (FAN) is a declaration
determined to have carried over and of deficiency taxes issued to a taxpayer who:
automatically applied the same amount fails to respond to a pre-assessment notice
claimed against the estimated tax within the prescribed period of time, or
liabilities for the taxable quarter or whose reply to the PAN was found to be
quarters of the succeeding taxable year; without merit.
or Sec 228: The taxpayer shall be informed in
4. The excise tax due on excisable articles writing of the law and the facts on which the
has not been paid; or assessment is made; otherwise the
5. An article locally purchased or imported assessment shall be void
by an exempt person, such as, but not An assessment contains not only a computation
limited to, vehicles, capital equipment, of tax liabilities, but also a demand for payment
machineries and spare parts, has been within a prescribed period.
sold, traded or transferred to a non-
exempt person. (g) Disputed assessment
(e) Reply to preliminary assessment notice (PAN) The taxpayer or his duly authorized
representative may protest administratively
Taxpayer is given 15 days from date of receipt of against the formal letter of demand and
PAN to respond assessment notice within thirty days (30) from
If he/she fails to respond: taxpayer is date of receipt. The taxpayer protesting an
considered in default; a formal letter of assessment may file a written request for
demand and assessment notice shall be reconsideration or reinvestigation
issued to the taxpayer RECONSIDERATION – refers to a plea of re-
N.B. – In Oakwood Management Services, Inc. evaluation of the assessment on the basis of
v. CIR (2013), the CTA held that the issuance existing records without need of additional
of the FAN before the lapse of the 15-day evidence. It may involve both question of fact
period to reply to PAN does not violate due or of law or both
process. A protest against the PAN, unlike the REINVESTIGATION – refers to a plea of re-
protest against the FAN, is not indispensable. evaluation of an assessment on the basis of
A PAN may or may not be protested by the newly-discovered evidence that a taxpayer
taxpayer, and the non-filing of such protest intends to present in the reinvestigation. It
does not render the PAN final and may also involve a question of fact or law or
unappealable. Therefore, the issuance of the both.
FAN before the lapse of the 15-day period for Failure to file a protest against FLD/FAN within
the taxpayer to file its protest to the PAN does 30 days, the assessment shall become final,
not inflict prejudice on the taxpayer, for as executory and demandable
long as the BIR properly served a FAN and
the taxpayer was able to intelligently contest (h) Administrative decision on a disputed
the FAN by filing a protest letter within the assessment (FDDA)
period provided by law.
(vi) Protesting the assessment
If he/she responds: a FAN/FLD shall be issued
within 15 days from filing/submission of the (a) Protest of assessment by taxpayer
taxpayer’s response, calling for payment of the (1) Protested assessment – After issuance of FAN,
taxpayer’s deficiency tax liability, inclusive of the taxpayer may protest the assessment either by a
applicable penalties. request for reconsideration or reinvestigation.
If the CIR denies the protest filed by the taxpayer, for review with the CTA en banc. (Sec. 18, RA
the latter may appeal to the CTA within 30 days 1125 as amended by RA 9282 [2004])
from receipt of the decision denying the protest.
A motion for reconsideration of the CIR’s denial Remedy of injunction; generally unavailable
of the protests shall not toll the 30 day period to No court may grant injunction to restrain the
appeal to the CTA. collection of any national internal revenue tax,
fee or charge. (Sec. 218, NIRC)
(b) In case of inaction by CIR within 180 days from Exception:
submission of documents When the all of the following conditions concur:
(1) It is an appeal to the CTA from a decision of
If the protest is not acted upon by the CIR’s duly the CIR, or Commissioner of Customs or the
authorized representative within 180 days from RTC, provincial, city or municipal treasurer or
filing of the protest or from submission of the Secretary of Finance, the case may be,
required documents, the taxpayer may either: AND
(a) Appeal to the CTA within 30 days after the (2) In the opinion of the Court of Tax Appeals, the
expiration of the 180 days, collection may jeopardize the interest of the
(b) Await the final decision of the CIR’s duly Government and/or the taxpayer. (Sec. 11,
authorized representative. R.A. 1125 as amended by R.A. 9282)
If the CIR did not act upon the petition within 180 Requisite before availing of injunction
days from the time the documents were (1) Taxpayer has to deposit the amount claimed;
submitted, the taxpayer may either: OR
(a) Appeal to the CTA within thirty days from the File an injunction bond with the Court for not
lapse of the 180-day period OR more double the amount (R.A. 1125)
(b) Wait until the CIR decides before he elevates
the case to the CTA. Petition for Review with the SC
Remedy if the taxpayer is not satisfied with the
These options are mutually exclusive, and resort decision of the CTA en banc:
to one bars the application of the other. [Rizal A party adversely affected by a decision or
Commercial Banking Corporation vs. CIR
ruling of the CTA en banc may file with the
(2007)] Supreme Court a verified petition for review
on certiorari pursuant to Rule 45 of the 1997
N.B. – if the protest is a request for Rules of Court. (Sec. 19, RA 1125 as amended
RECONSIDERATION, count the 180 days from by RA 9282 [2004])
the filing of the protest. The submission of
documents is only for a request for Modes of Service - The notices to the taxpayer
reinvestigation. required may be served by the CIR or his duly
authorized representative through the following
(c) Effect of failure to appeal – Assessment modes:
becomes final and demandable.
(1) PERSONAL SERVICE – the notice shall be
JUDICIAL REMEDIES served through personal service by delivering
personally a copy thereof to the party at his
Petition for Review at the CTA registered or known address or wherever he
Remedy if the taxpayer is not satisfied with the may be found. A known address shall mean a
CTA Division’s ruling: place other than the registered address
FIRST, he may file a motion for where business activities of the party are
reconsideration before the same Division of conducted or his place of residence.
the CTA within fifteen (15) days from notice
thereof. (Sec. 11, RA 1125 as amended by RA In case personal service is not practicable, the
9282 [2004]) notice shall be served by substituted service
THEN, a party adversely affected by a or by mail.
resolution of a Division of the CTA on a
motion for reconsideration may file a petition
PAGE 206 OF 275
UP COLLEGE OF LAW TAXATION 2 TAXATION LAW
(2) SUBSTITUTED SERVICE – substituted service (i) Grounds and requisites for refund
can be resorted to when the party is not 1. There is a tax collected erroneously or
present at the registered or known address illegally, or a penalty collected without
under the following circumstances: authority, or a sum excessively or wrongfully
May be left at the party’s registered collected (see Section 229, Tax Code)
address, with his clerk or with a person 2. There must be a written claim for refund filed
having charge thereof. by the taxpayer to the CIR (see Vda. De
May be left in place where business Aguinaldo v. CIR [February 26, 1965])
activities of the party are conducted with Exceptions
his clerk or person having charge thereof. a. When on the face of the return upon
May be left in the place of residence with which payment was made, such
a person of legal age residing therein. payment appears clearly to have been
If no person is found, the revenue officers erroneously paid, the CIR may refund
concerned shall bring a barangay official or credit the tax even without a written
and 2 disinterested witnesses to the claim (Section 229, Tax Code)
address so that they may personally b. A return filed showing an
observe and attest to such absence. The overpayment shall be considered as a
notice shall then be given to said written claim for credit or refund. (Sec.
barangay official. 204(C), Tax Code)
Should party be present but refuses to 3. The
claim must be a categorical claim for
receive the notice, the revenue officers reimbursement (see Bernejo v. CIR [July 25,
shall bring a barangay official and 2 1950])
disinterested witnesses in the presence of
4. The claim for refund must be filed within 2
the party so that they may personally
years from the date of the payment of the tax
observe and attest such act of refusal.
regardless of any supervening cause
The notice shall then be left with the
(Section 229, Tax Code)
barangay official.
Service to the tax practitioner, who is 5. Taxpayer must show proof of the tax (Sec.
appointed by the taxpayer under 229)
circumstances prescribed in the pertinent
regulations on accreditation of tax (ii) Requirements for refund as laid down by cases
agents, shall be deemed service to the (1) Necessity of written claim for refund
taxpayer (RR 18-2013) (2) Claim containing a categorical demand for
reimbursement
(3) SERVICE BY MAIL – Service by mail is done by (3) Filing of administrative claim for refund and
sending a copy of the notice by registered the suit/proceeding before the CTA within 2
mail to the registered or known address of years from date of payment regardless of any
the party with instruction to the Postmaster supervening cause
to return the mail to the sender after 10 days The claim for refund must be filed within
if undelivered. A copy of the notice may also 2 years from the date of payment of the
be sent through reputable professional tax regardless of any supervening cause
courier service. If no registry or reputable (Section 229, Tax Code)
professional courier service is available,
service may be done by ordinary mail
Judicial remedy for refund – File with suit with the
CTA
1. Within 30 days from receipt of denial by
Refund
the CIR; and
Nature of a claim for refund: It partakes of the
nature of an exemption and is strictly construed 2. Before the expiration of the 2-year period
against the claimant. The burden of proof is on
the taxpayer claiming the refund that he is Simultaneous filing allowed
entitled to the same. (CIR v. Tokyo Shipping, If the 2 year period is about to lapse, the taxpayer
1995) may already appeal to the CTA even if the CIR has
not yet made any decision on the claim for refund.
PAGE 207 OF 275
UP COLLEGE OF LAW TAXATION 2 TAXATION LAW
In GIBBS V. COLLECTOR OF INTERNAL Taxes are erroneously paid when a taxpayer pays
REVENUE [FEBRUARY 29, 1960], the Supreme under a mistake of fact, such as, he is not aware
Court noted that if the CIR takes time in deciding of an existing exemption in his favor at the time
the claim and the period of two years is about to that payment is made. Taxes are illegally
end, the suit or proceeding must be started in the collected when payments are made under duress.
CTA before the end of the 2 year period without
awaiting the decision of the CIR. (e) Tax refund vis-à-vis tax credit
REFUND takes place when there is actual
N.B. – Compare with the rule on refunds of input reimbursement while TAX CREDIT takes place
VAT. The awaiting of the decision of CIR or the upon the issuance of a tax certificate or tax credit
lapse of the 180-day period is mandatory. memo, which can be applied against any sum
that may be due and collected from the taxpayer.
Legal basis of tax refunds – solutio indebitii and
the rules on quasi-contracts (prevention of unjust (f) Essential requisites for claim of refund
enrichment) (Comm. v. CA and Citytrust, cited in United
Airlines Inc. v. CIR, 2010): The grant of a refund is
Statutory basis for tax refund under the tax code founded on the assumption that the tax return is
(Sec. 204[c] and Sec. 229) valid, that is, the facts stated therein are true and
(a) Scope of claims for refund correct. The deficiency assessment, although not
The CIR may: yet final, created a doubt as to and constitutes a
Credit or refund taxes erroneously or illegally challenge against the truth and accuracy of the
received or penalties imposed without facts stated in said return which, by itself and
authority; without unquestionable evidence, cannot be the
Refund the value of internal revenue stamps basis for the grant of the refund. To grant the
when they are returned in good condition by refund without determination of the proper
the purchaser; and assessment and the tax due would inevitably
result in multiplicity of proceedings or suits. If the
In the CIR’s discretion, redeem or change deficiency assessment should subsequently be
unused stamps that have been rendered upheld, the Government will be forced to institute
unfit for use and refund their value upon anew a proceeding for the recovery of erroneously
proof of destruction refunded taxes which recourse must be filed
within the prescriptive period of ten years after
(b) Necessity of proof for claim or refund - discovery of the falsity, fraud or omission in the
No credit or refund of taxes or penalties shall be false or fraudulent return involved.
allowed unless the taxpayer files in writing with
the CIR a claim for credit or refund within two (2) Who may claim/apply for tax refund/tax credit
years after the payment of the tax or penalty. (Sec. Taxpayer/withholding agents of non-resident
204, NIRC) foreign corporation – the withholding agent is
A return filed showing an overpayment shall be directly and independently liable for the correct
considered as a written claim for credit or amount of tax that should be withheld and for
refund.(Sec. 204, NIRC) deficiency assessments, surcharges and
penalties.
(c) Burden of proof for claim of refund
Tax refunds, like tax exemptions, are construed General Rule: The taxpayer must file a written
strictly against the taxpayer and liberally in favor claim for refund stating a categorical demand for
of the taxing authority. (United Airlines, Inc. v. reimbursement before the CIR within two years
CIR, G.R. No. 178788, Sept. 29, 2010) from the date of payment. (Sec. 229, NIRC)
(d) Nature of erroneously-paid tax/illegally When it comes to recovery of unutilized input VAT,
assessed collected Section 112, and not Section 229 of the 1997 Tax
A claim for tax refund is in the nature of a claim Code, is the governing law. Second, prior to 8
for exemption and should be construed June 2007, the applicable rule is neither Atlas nor
strictissimi juris against the taxpayer. (see CIR V. Mirant, but Section 112(A). The Atlas doctrine,
TOKYO SHIPPING [MAY 26, 1995]) which held that claims for refund or credit of
input VAT must comply with the two-year decision and within two years from the date
prescriptive period under Section 229, should be of payment.
effective only from its promulgation on 8 June (b) CIR does not act on the claim and the 2-year
2007 until its abandonment on 12 September period is about to lapse - file a claim before
2008 in Mirant. (CIR v. San Roque) the CTA before the 2-year period lapses.
Otherwise, he may no longer file a claim
before the CTA in case the CIRrenders an
adverse decision beyond the 2-year period.
(Revised Rules of the CTA, as amended)
the taxpayer against the assessment and the (1) the taxpayer is retiring from any business
denial of such protest by the CIR. subject to tax; or
(2) the taxpayer is intending to leave the
(ii) Prescriptive periods Philippines; or
(3) the taxpayer is intending to remove his
Collections with assessments property from the Philippines or to hide or
FIVE YEARS after the assessment becomes final, conceal his property; or
executory, and demandable. (4) the taxpayer is planning to perform any act
tending to obstruct the proceedings for
Collections without assessments collecting the tax due or which may be due
In case of false or fraudulent return with from him (Sec. 206, NIRC)
intent to evade tax or of failure to file a return,
collection without assessment (or How constructive distraint is effected:
assessment) may be made within 10 years (1) Signing of receipt by the taxpayer
from discovery of falsity, fraud or omission. By requiring the taxpayer or any person
(Sec. 222(a), NIRC) having possession or control of such property
o An assessment may also be made to sign a receipt covering the property
which carries its own 5-year distrained and obligate himself to preserve
prescriptive period to collect. the same intact and unaltered and not to
Collections without assessment may be dispose of the same in any manner whatever,
made within the period for making an without the express authority of the CIR
assessment (3 years from the required date of (2) If the taxpayer refuses to sign the receipt:
filing or actual filing, whichever is later) (See signing of receipt by revenue officer in the
Sec. 203, NIRC) presence of two witnesses
In case the taxpayer or the person having the
Waiver of prescriptive period possession and control of the property
If tax was assessed within the different period refuses or fails to sign the receipt, the revenue
agreed upon by the CIR and the taxpayer, it may officer effecting the constructive distraint
be collected by distraint or levy or by a proceeding shall proceed to prepare a list of such
in court within the period agreed upon in writing property and, in the presence of two (2)
before the expiration of the 5-yr period.(Sec. witnesses, leave a copy thereof in the
222d, NIRC) premises where the property distrained is
located (Sec. 206, NIRC)
(iii) Distraint of Personal Property Note: In constructive distraint, the property is
not actually confiscated or seized by the
Distraint – remedy enforced on the goods, revenue officer.
chattels, or effects, and other personal property
of whatever character including stocks and other Actual distraint - placed on a person who owes
securities, debts, credits, bank accounts, and any delinquent tax or delinquent revenue (see
interest in and rights to personal property (Sec. Sec. 207, NIRC); involves actual seizure of the
205(a), NIRC) property
(2) Debts and credits: by leaving with the person The taxpayer may request that the warrant be
owing the debts or having in his possession or lifted. The CIR may, in his discretion, allow
under his control such credits, or with his the lifting of the order of distraint. He may ask
agent, a copy of the warrant of distraint. The for a bond as a condition for the cancellation
person owing the debts shall then pay the of the warrant. (Sec. 207(A), NIRC)
CIR instead of his creditor (taxpayer) on the
strength of such warrant. (5) Notice of Sale of Distrained Properties
(3) Bank accounts: by serving a warrant of The Revenue District Officer or his duly
garnishment upon the taxpayer AND upon authorized representative (not the officer
the president, manager, treasurer or other who served the warrant), shall cause a
responsible officer of the bank. The bank notification of the public sale to be
shall then turn over to the CIR so much of the posted in not less than two (2) public
bank accounts as may be sufficient to satisfy places in the municipality or city (one of
the claim of the Government. (NOTE: which is the Office of the Mayor) where
distraint of bank accounts is called the distraint was made.
GARNISHMENT) The notice shall specify the time and
place of the sale. The time of sale shall
Summary remedy of distraint of personal property not be less than twenty (20) days after
(1) Purchase by the government at sale upon notice to the owner and the publication or
distraint posting of such notice. (Sec. 209, NIRC)
(2) Report of sale to the Bureau of Internal
Revenue (BIR) (6) Sale at Public Auction
(3) Constructive distraint to protect the interest (a) At the time of the public sale, the revenue
of the government officer shall sell the goods, chattels, or
effects, or other personal property,
Procedure for Actual Distraint including stocks and other securities so
(1) Commencement of Distraint Proceedings distrained at a PUBLIC AUCTION, to the
Who issues the warrant of distraint: HIGHEST BIDDER for CASH or with the
(a) CIR or his duly authorized representative approval of the CIR, through a DULY
– where the amount involved is more LICENSED COMMODITY or STOCK
than P1M EXCHANGES.
(b) Revenue District Officer – where the (b) Any residue over and above what is
amount involved is P1M or less (Sec. required to pay the entire claim,
207(A), NIRC) including expenses of sale and distraint,
shall be RETURNED to the owner of the
(2) Service of Warrant of Distraint property sold. Expenses shall be limited
How actual distraint is effected: to actual expenses of SEIZURE and
The proper officer shall seize and distraint PRESERVATION of the property pending
any goods, chattels, or effects, and the the sale, no charge shall be imposed for
personal property, including stocks and other the services of the local internal revenue
securities, debts, credits, bank accounts and officer or his deputy. (Sec. 209, NIRC)
interests in and rights to personal property of (c) If the proceeds from the sale of the
the taxpayer in sufficient quantity to satisfy distrained properties are not sufficient to
the tax, expenses of distraint and the cost of satisfy the tax delinquency, the CIR or his
the subsequent sale. (Sec. 207(A), NIRC) duly authorized representative shall
within thirty (30) days after execution of
(3) Report on the Distraint the distraint, proceed with the levy on the
A report shall be submitted by the distraining taxpayer’s real property. (Sec. 207(B),
officer to the Revenue District Officer, and to NIRC)
the Revenue Regional Director.
(7) Release of the Properties from Distraint
(4) Power of the CIR or proper officer to lift the If at any time prior to the consummation of
order of distraint the sale all proper charges are paid to the
officer conducting the sale, the goods or
PAGE 211 OF 275
UP COLLEGE OF LAW TAXATION 2 TAXATION LAW
effects distrained shall be restored to the conducting the sale shall declare the
owner. (Sec. 210, NIRC) property FORFEITED to the GOVERNMENT
in satisfaction of the claim. (Sec. 215, NIRC)
(8) Purchase by the government at sale upon
distraint (5) Redemption of Property Sold
If the amount offered by the highest bidder is At any time before the day fixed for the
not equal to the amount of the tax or is very sale, the taxpayer may discontinue all
much less than the actual market value of the proceeding by paying the taxes, penalties
articles offered for sale, the CIR or his deputy and interest. (Sec. 213, NIRC)
may purchase the same in behalf of the Within one (1) year from the date of sale,
National Government for the amount of taxes, the taxpayer or anyone for him, may pay
penalties and costs due. The property so to the Revenue District Officer the total
purchased may be resold by the CIR or his amount of the following: public taxes +
deputy. (Sec. 212, NIRC) penalties + interest from the date of
delinquency to the date of sale + interest
(9) Report of sale to BIR on said purchase price at the rate of
Within two (2) days after the sale, the officer fifteen percent (15%) per annum from the
making the same shall make a report of his date of sale to the date of redemption.
proceedings in writing to the CIR and shall (Sec. 214, NIRC)
himself preserve a copy of such report as an
official record. (Sec. 211, NIRC) Note: If the property was forfeited in favor of the
government, the redemption price shall include
(iv) Summary remedy of levy on real property only the taxes, penalties and interest plus costs
of sale (no interest on purchase price since the
(1) Release of the Properties from Distraint Government did not “purchase” the property
If at any time prior to the consummation of anyway, it was forfeited)
the sale all proper charges are paid to the
officer conducting the sale, the goods or Note: The taxpayer-owner shall not be deprived
effects distrained shall be restored to the of possession of the said property and shall be
owner. (Sec. 210, NIRC) entitled to rents and other income until the
expiration of the period for redemption (Sec. 214,
(2) Purchase by the government at sale upon NIRC)
distraint
If the amount offered by the highest bidder is (6) Final Deed of Purchaser
not equal to the amount of the tax or is very After the period of redemption, a final deed of
much less than the actual market value of the sale is issued in favor of the purchaser.
articles offered for sale, the CIR or his deputy
may purchase the same in behalf of the (v) Forfeiture to government for want of bidder
National Government for the amount of taxes, Forfeiture implies a divestiture of property
penalties and costs due. The property so without compensation in consequence of a
purchased may be resold by the CIR or his default or offense. The effect of forfeiture is to
deputy. (Sec. 212, NIRC) transfer the title of the specific thing from the
owner to the government. (De Leon, NIRC
(3) Report of sale to BIR Annotated, p. 412)
Within two (2) days after the sale, the officer
making the same shall make a report of his Instances when forfeiture is appropriate
proceedings in writing to the CIR and shall (1) All chattels, machinery, and removable
himself preserve a copy of such report as an fixtures of any sort used in the unlicensed
official record. (Sec. 211, NIRC) production of articles (Sec. 268, NIRC)
(2) Dies and other equipment used for the
(4) Forfeiture in Favor of the Government printing or making of any internal revenue
If there is no bidder for the real property OR if stamp, label or tag which is in imitation of or
the highest bid is not sufficient to pay the purports to be a lawful stamp, label or tag.
taxes, penalties and costs, the IR Officer (Sec. 268, NIRC)
PAGE 212 OF 275
UP COLLEGE OF LAW TAXATION 2 TAXATION LAW
(3) Liquor or tobacco shipped under a false name (9) The winning bidder shall be responsible at his
or brand (Sec. 262, NIRC) own expense for the ejectment of squatters
and/or occupants, if any, of the auctioned
Remedy of enforcement of forfeitures property.
(1) Forfeiture of chattels and removable fixtures: (10) Negotiated or private sale shall be resorted to
enforced by the seizure, sale or destruction of as a consequence of failed public bidding for
the specific forfeited property. two consecutive times.
(2) Forfeiture of real property: enforced by a (11) Negotiated or private sale shall in all cases be
judgment of condemnation and sale in a approved by the Secretary of Finance.
legal action or proceeding civil or criminal as (12) Public auction sale shall be approved by the
the case may require (Sec. 224, NIRC) CIR or his authorized representative.
(13) The Government reserves the right to reject
Resale of real estate taken for taxes (RR No. 22- or cancel any or all bids.
2002)
(1) All acquired/forfeited properties transferred When property to be sold or destroyed
in the name of the Republic of the Philippines, (1) Forfeited chattels and removable fixtures:
having passed the one-year redemption sold in the same manner and under the
period, shall be converted into cash from the same conditions as the public notice and the
date of acquisition or forfeiture. time and manner of sale as are prescribed
(2) The sale of acquired/forfeited real properties for sales of personal property distrained for
shall be by sealed bids in a public auction to the non-payment of taxes
be witnessed by a representative of the COA. (2) Distilled spirits, liquors, cigars, cigarettes,
(3) The Notice of Sale of the acquired real other manufactured products of tobacco and
properties shall be published once a week for all apparatus used in or about the illicit
two (2) consecutive weeks in a newspaper of production of such articles: destroyed by the
general circulation in the Philippines which order of the CIR when the sale or use would
must be completed at least 20 days prior to be injurious to public health pr prejudicial to
the date of such public auction. the enforcement of the law
(4) Unless the CIR provides otherwise, the (3) All other articles subject to excise tax
Minimum Bid Price/Floor Price shall be the manufactured or removed in violation of the
latest fair market value as determined by the Code, dies for the printing or making of
CIR or the fair market value shown in the internal revenue stamps and labels: sold or
latest tax declaration issued by the provincial, destroyed in the discretion of the CIR
city or municipal assessor, whichever is (4) Forfeited property shall not be destroyed
higher, pursuant to Sec. 6(E) of the Tax Code. until at least 20 days after seizure. (Sec. 225,
(5) Anyone could bid except foreign nationals, NIRC)
corporate or otherwise, and those qualified
under existing laws, rules and regulations, Disposition of funds recovered in legal
including employees of the Bureau of Internal proceedings or obtained from forfeiture
Revenue. All judgments and monies recovered and
(6) Bidders shall be required to post a bond in received for taxes, costs, forfeitures, fines and
cash or manager’s check in an amount penalties shall be paid to the CIR or his
representing 10% of the minimum bid price at authorized deputies as the taxes themselves are
least one day before the scheduled public required to be paid, and except as specially
auction. provided, shall be accounted for and dealt within
(7) Unless the CIR allows extension of time to the same way. (Sec. 226, NIRC)
pay, in meritorious cases, the winning bidder
shall pay the full amount of his bid cash or (vi) Further distraint or levy
manager’s check within two days after receipt The remedy by distraint of personal property and
of notice of award. levy on realty may be repeated if necessary until
(8) All taxes and expenses relative to the the full amount due, including all expenses, is
issuance of title shall be borne by the winning collected. (Sec. 217, NIRC)
bidder.
(vii) Tax lien
50% of the tax or of the deficiency tax in the (b) Where the CIR has authorized an extension of
following cases: time within which to pay a tax or a deficiency
(1) Willful neglect to file the return within the tax or any part thereof (249(D), NIRC)
period prescribed; or
(2) A false or fraudulent return is willfully Penalties Imposed on Public Officers(Sec. 269,
made (Sec. 248(B), NIRC) NIRC)
The law imposes a fine of not less than P50,000
Prima facie evidence of a false or fraudulent nor more than P100,000 or imprisonment for not
return: Substantial underdeclaration of taxable less than 10 years nor more than fifteen years on
sales, receipts or income, or a substantial every official, agent or employee of the BIR or of
overstatement of deductions. Failure to report any agency or employee of the Government
sales, receipts or income in an amount exceeding charged with the enforcement of the Tax Code,
thirty percent (30%) of that declared per return, who shall: (CONED- FRAP)
and a claim ofdeductions in an amount exceeding (a) Extort or willfully oppress under color of law;
(30%) of actual deductions, shall render the (b) knowingly Demand other or greater sums
taxpayer liable for substantial underdeclaration than are authorized by law or receive any fee,
or for overstatement. (Sec. 248(B), NIRC) compensation or reward, except as by law
prescribed, for the performance of any duty;
(ii) Interest (c) willfully Neglect to give receipts, as by law
required, for any sums collected in the
In General performance of duty, or who willfully
20% per annum on the unpaid amount of tax,
interest at the rate of twenty percent (20%) per neglect to perform any of the duties enjoined
annum from the date prescribed for payment by law;
until the amount is fully paid. (Sec. 249(A), NIRC) (d) Conspire or collude with another or others to
defraud the revenues or otherwise violate the
Deficiency Interest law;
20% per annum on any deficiency in the tax due (e) willfully make Opportunity for any person to
from the date prescribed for its payment until the defraud the revenues, or who do or omit to do
full payment thereof. (Sec. 249(B), NIRC) any act with intent to enable any other person
to defraud the revenues;
Delinquency interest (f) negligently or by design Permit the violation
20% per annum on the unpaid amount in case of of the law by any other person;
failure to pay: (g) make or sign any False certificate or return in
(a) The amount of the tax due on any return any case where the law requires the making
required to be filed; or by them of such entry, certificate or return;
(b) The amount of the tax due for which no return (h) having knowledge or information of a
is required; or violation of any provision of the Code or of any
(c) A deficiency tax, or any surcharge or interest fraud committed on the revenues collectible
thereon on the due date appearing in the by the BIR, fail to Report such knowledge or
letter of demand and assessment notice (Sec. information to their superior officer, or to
249(C), NIRC) report as otherwise required by law; or
(i) without the authority of law, demand or
Interest on extended payment Accept or attempt to collect, directly or
20% per annum on the tax or deficiency tax or any indirectly, as payment or otherwise, any sum
part thereof unpaid from the date of notice and of money or other thing of value for the
demand until it is paid if any person required to compromise, adjustment or settlement of
pay the tax is: any charge or complaint for any violation or
(a) Qualified and elects to pay the tax on alleged violation of law.
installment but fails to pay the tax or any
installment or any part of such amount or Informer’s Reward[Sec. 282, NIRC]
installment or before the date prescribed for To whom given:
its payment; or
Cases which may be compromised: (Sec. 2, R.R. Compromise – an amount of money paid by the
30-2002) taxpayer to settle his civil liability for tax assessed
(1) Delinquent accounts by the government. The basis of the amount paid
(2) Cases under administrative protest after is the basic tax assessed. (Mamalateo, 2008)
issuance of the Final Assessment Notice to
the taxpayer which are still pending in the
Regional Offices, Revenue District Offices,
Legal Service, Large Taxpayer Service (LTS),
Collection Service, Enforcement Service and
other offices in the National Office
(3) Civil tax cases being disputed before the
courts
(4) Collection cases filed in courts
(5) Criminal violations, other than those already
filed in court or those involving criminal tax
fraud
Willful attempt to evade or defeat Any person who willfully attempts Fine: P30,000 - P100,000
tax. (Sec. 254) in any manner to evade or defeat AND
any tax or the payment thereof. Imprisonment: 2-4 years
Plus other penalties
Failure to File Return, Supply Any person required to pay any tax, Fine: P10,000 or more
Correct and Accurate Information, make a return, keep any record, or AND
Pay Tax, Withhold and Remit Tax supply correct and accurate Imprisonment:1-10 years
and Refund Excess Taxes Withheld information Plus other penalties
on Compensation (Sec. 255)
Any person who attempts to make it Fine - P10,000 - P20,000
appear for any reason that he or AND
another has in fact filed a return or Imprisonment: 1-3 years
statement, or actually files a return Plus other penalties
or statement and subsequently
withdraws the same return or
statement
Making false entries, records, or Any financial officer or Independent Fine - P50,000 - P100,000
reports, or using falsified or fake CPA engaged to examine and audit AND
accountable forms (Sec. 257) books of accounts of taxpayers Imprisonment: 2-6 years
under Sec.232 (A) and any person
under his direction.
Unlawful pursuit of business (Sec. Any person who carries on any Fine: P5,000 - P20,000
258) business for which in annual AND
registration fee is imposed without Imprisonment: 6 months-2
paying the tax as required by law. years
A person engaged in the business of Fine: P30,000 - P50,000
distilling, rectifying, repacking, AND
compounding or manufacturing any Imprisonment: 1-2 years
article subject to excise tax.
Illegal Collection of Foreign Any person who knowingly Fine: P20,000 - P50,000;
Payments (Sec. 259) undertakes the collection of foreign AND
payments under Sec. 67 without a Imprisonment: 1-2 years
license or without complying with
the implementing rules and
regulations.
Unlawful Possession of Cigarette Any person, manufacturer or Fine: P20,000 - P100,000;
Paper in Bobbins or Rolls, Etc. (Sec. importer of cigar or cigarettes AND
260) Imprisonment - 6 years 1 day
- 12 years
Unlawful Use of Denatured Alcohol Any person who for the purpose of Fine: P20,000 - P100,000;
(Sec. 261) manufacturing any beverage, uses AND
denatured alcohol or alcohol Imprisonment - 6 years 1 day
specially denatured to be used for - 12 years
motive power or withdrawn under
bond for industrial uses or alcohol
knowingly misrepresented to be
denatured to be unfit for oral intake
or who knowingly sells or offers for
sale such preparations containing
as an ingredient such alcohol.
Illegal Storage or Removal of Any person subject to excise tax Forfeiture of goods
Goods (Sec. 268) who fails to store the goods in
proper place, or removes goods
without payment of excise tax
START
Regional
Send Formal Letter Assessment
Is response w/n Taxpayer
of demand and Final NO to Division issues a
15 days? Is it responds w/in
Assessment Notice either Preliminary
meritorious? 15 days
(FAN) is issued Assessment Notice
(PAN)
Yes to ASSESSMENT
both ENDS
Assessment becomes
NO to
Final, Warrant of Distraint
either
& Levy Issued
Decision Commissioner
YES favorable to YES decides w/n
taxpayer? 180 days?
ASSESSMENT
ENDS NO NO
If MR is denied, appeal to
the CTA within remainder
of the 30 days
Assessment
CTA decides on Appeal made becomes Final,
YES NO
the appeal on time? Warrant of Distraint
& Levy Issued
W/in 5 days after sale, W/in 2 days after Excess of proceeds over the Officer sells the goods to the
distraining officer shall enter the sale, officer entire claim, shall be returned highest bidder for cash or
return of proceedings in the shall report to the to the owner. No charge shall with the Commissioner’s
records of RCO, RDO and Commissioner. be imposed for the services of approval, through commodity/
RRD (Sec. 213) (Sec. 211) the officer (Sec. 209) stock exchanges. (Sec. 209)
No, bid ok
W/n 1 year from sale, the W/n 5 days after the sale, Excess of proceeds
The Commissioner may, owner may redeem, by paying levying officer shall enter of the sale over claim
after 20 days notice, sell to the RDO the amount of the return of the proceedings and cost of sale shall
property at public auction taxes, penalties, and interest upon the records of the RCO, be turned over to the
or at private sale with thereon from the date of RDO and RRD (Sec. 213) owner (Sec. 213)
approval of the SoF. delinquency to the date of sale,
Proceeds shall be and 15% per annum interest on
deposited with the National purchase price from the date
Treasury (Sec. 216) Owner shall not be
of purchase to the date of Levy and distraint
deprived of the
redemption. (Sec. 214) may be repeated until
possession and shall
the full amount due,
be entitled to the
and all expenses are
fruits until 1 year
collected. (Sec. 217)
expires (Sec. 214)
exceed ten percent (10%) of the rates fixed by the must be posted in at least two (2) conspicuous
Code. (Sec. 191, LGC) and publicly accessible places. (Sec. 188, LGC)
f. Residual taxing power of local governments N.B. – Requisites for substantive validity of an
LGU may exercise the power to levy taxes or ordinance:
charges on ANY base or subject It must not contravene the Constitution
Required: or any statute
Not otherwise specifically enumerated in the It must not be unfair or oppressive
LGC or taxed under NIRC or other applicable It must not be partial or discriminatory
laws It must not prohibit but may regulate
Not unjust, excessive, oppressive, trade
confiscatory or contrary to declared national It must be general and consistent with
policy public policy
Pursuant to an ordinance enacted with It must not be unreasonable (Magtajas v.
public hearing conducted for the purpose. Pryce Properties [234 SCRA 225])
(Sec. 186, LGC)
4. Scope of Taxing Power
g. Authority to issue local tax ordinances
The power to impose a tax, fee, or charge, or to LGU Scope of Taxing Power
generate revenue under this Code shall be
exercised by the sanggunian of the local Provinces May levy only:
government unit concerned through an (Sec. 134, Transfer of Real Property
appropriate ordinance. (Sec. 132, LGC) LGC) Ownership
Business of Printing and
3. Local Taxing Authority Publication
Franchise Tax
Tax on Sand, Gravel and Other
a. Power to create revenues exercised thru LGUs Quarry Resources
Each LGU shall exercise its power to create its Professional Tax
power to create its own sources of revenue and to Amusement Tax
levy taxes, fees and charges. (Sec. 128, LGC) Annual Fixed Tax for every delivery
Exercised by the Sanggunian concerned through truck or van
an appropriate ordinance. (Sec. 132, LGC) Municipalities May levy taxes, fees and charges
not otherwise levied by provinces
Ordinances may be vetoed by local chief (Sec. 142, LGC)
executives of the LGUs, except the Punong Cities May levy taxes, fees and charges
Barangay, on the ground that it is ultra vires or which the province or municipality
may impose (Sec. 151, LGC)
prejudicial to public welfare. His reasons shall be
Barangays May levy only:
stated in writing. (Sec. 55 (a) and (b), LGC) Taxes on stores or retailers
Service fees or charges
b. Procedure for approval and effectivity of tax Barangay clearance
ordinances Other fees and charges (Sec. 152,
LGC)
A public hearing must be conducted prior to the
enactment of a tax ordinance. (Sec. 187, LGC) But all LGUs may also impose reasonable service
fees, rates for operation of public utilities, andtoll
Within ten (10) days after the approval of the fees and charges. (See letter e below) (Sec. 153-
ordinance, certified true copies of all tax 155, LGC)
ordinances or revenue measures shall be
published in full for three (3) consecutive days in
a newspaper of local circulation. 5. Specific taxing power of local government unit
(LGUs)
In provinces, cities and municipalities where
there are no newspapers of local circulation, it
Tax on Transfer of Real Not more than Total acquisition Sale, transfer, or Evidence of payment of tax
Property. Imposed on 50% of 1% price or fair other disposition of is to be required by
the sale, donation, market value, real property Register of Deeds as a
barter, or any other whichever is pursuant to R.A. requisite to registration;
mode of transfer of higher 6657 and by the provincial
ownership or title to real (Comprehensive assessor as a condition for
property (Sec 135m LGC) Agrarian Reform cancellation of old tax
Law) declaration.
Professional Tax. Such amount Such reasonable Professionals To be paid to the province
Provinces may levy as the classification by exclusively employed where the profession is
annual professional tax Sangguniang the Sangguniang by the government practiced, or where a
on each person engaged Panlalawigan Panlalawigan principal office is
in the exercise of a may maintained.
profession requiring determine, in
government no case to A person who pays for
examination (Sec 139, exceed professional tax may
LGC) P300.00 practice his profession
anywhere in the country
without being subjected to
similar taxes.
Payable annually, on or
before Jan 31.
Amusement Tax. Not more than Gross receipts Holding of operas, In case of theaters or
Collected from 10% (amended from admission concerts, dramas,cinemas, tax shall first be
proprietors, lessees, or by RA 9640, fees recitals, painting, and
deducted and withheld by
operators of theaters, 2009) art exhibitions, flower
their proprietors, lessees
cinemas, concert halls, shows, musicaland operators
circuses, boxing stadia, programs, literary
and other places of and oratorical Proceeds to be shared
amusement (Sec 140, presentations equally by the province
LGC) and municipality where
Exception to amusement places are
Note: The case of Alta exemption: Pop, rock, located.
Vista Golf and Country or similar concerts
Club v. City of Cebu (20
Jan. 2016) states that
golf courses are not
subject to amusement
tax because “people do
not enter a golf course to
see or view a show or
performance.”
Annual Fixed Tax For Amount not Every truck, van, Manufacturers, producers,
Every Delivery Truck or exceeding vehicle wholesalers, dealers and
Van of Manufacturers or P500 retailers referred to in
Producers, Wholesalers column 1 shall be exempt
of, Dealers, or Retailers from tax on peddlers
in, Certain Products.
Imposed on vehicles
used for the delivery of
distilled spirits,
fermented liquors, soft
drinks, cigars and
cigarettes, and other
products as may be
determined by the
sanggunian, to sales
outlets, or consumers in
the province, whether
PAGE 232 OF 275
UP COLLEGE OF LAW TAXATION 2 TAXATION LAW
Rates on levy made by the city may exceed the maximum rates allowed for the province or municipality by
not more than 50%
RULE 2: Where there is NO branch or sales (1) sales made in Muntinlupa, Bacolod and
outlet in the city/municipality where the sale Cebu will go to the said cities
is made, sale shall be recorded in the principal (2) sales in all other places which do not have
office and the tax shall be paid to such a sales branch shall be distributed as
city/municipality. follows: 30% to Valenzuela and 70% to
Bulacan
RULE 3: In the case of manufacturers,
contractors, producers, and exporters having Excise Tax: Allied Thread Co., Inc. v. City Mayor
factories, project offices, plants, and of Manila [1984] Tax is imposed on the
plantations, proceeds shall be allocated as performance of an act or occupation,
follows: enjoyment of a privilege. The power to levy
(1) 30% of sales recorded in the principal such tax depends on the place in which the act
office shall be made taxable by the is performed or the occupation is engaged in;
city/municipality where the principal not upon the location of the office.
office is located
(2) 70% shall be taxable by the Sales Tax: Shell Co., Inc. v. Municipality of
city/municipality where the factory, Sipocot, Camarines Sur [1959]
project office, plant, or plantation is It is the place of the consummation of the sale,
located associated with the delivery of the things
Illustration of Rules 1 to 3: which are the subject matter of the contract
A company has a principal office in that determines the situs of the contract for
Mandaluyong, while its sales office and purposes of taxation, and not merely the place
factory are in Sta Rosa: of the perfection of the contract.
(1) sales made in Sta Rosa, will be recorded in
Sta Rosa D. TAXING POWERS OF BARANGAYS
(2) sales made in Los Baños, Calamba or The following shall exclusively accrue to the
Cabuyao [i.e., delivered to customers barangays:
located in those places], will be recorded (1) Taxes on Stores or Retailers with Fixed
in Mandaluyong Business Establishments.
(3) aside from sales made in Sta Rosa, Sta (a) Rate: not greater than one percent
Rosa also gets 70% of sales recorded in (1%)
Mandaluyong, pursuant to Rule 3 (b) Base:
(i) Cities: gross sales or receipts of
RULE 4: In case the plantation is located in a the preceding calendar year of
place other than the place where the factory is P50,000.00 or less
located, the 70% in Rule 3 will be divided as (ii) Municipalities: gross sales or
follows: receipts of P30,000.00 or less
60% to the city/municipality where the factory (2) Service Fees or Charges. For services
is located rendered in connection with the
40% to the city/municipality where the regulations or the use of barangay-owned
plantation is located properties or facilities such as palay, copra,
or tobacco dryers.
RULE 5: In case of 2 or more factories, (3) Barangay Clearance. A city or municipality
plantations, etc. in different localities, the cannot issue a permit for business without
70% shall be prorated among the localities a clearance from the barangay concerned.
where the factories, plantations, etc. are The sangguniang barangay may impose a
located in proportion to their respective reasonable fee on the clearance.
volume of production. (4) Other Charges Allowed.
(a) charges on commercial breeding of
Illustration: fighting cocks, cockfights and
A company has a principal office in Valenzuela cockpits;
and has its factory in Bulacan. It also has (b) charges on places of recreation which
branches selling merchandise in Muntinlupa, charge admission fees; and
Bacolod, Cebu.
F. COMMUNITY TAX
Who may levy [Sec. Cities or municipalities
156, LGC]
(1) Individuals who are:
(a) Inhabitants of the Philippines
(b) Eighteen years of age or over
(c) Either:
(i) Regularly employed on a wage or salary basis for at least 30 consecutive
working days during any calendar year
(ii) Engaged in business or occupation
(iii) Owns real property with an aggregate assessed value of P1,000 or more
(iv) Is required by law to file an income tax return
Persons Liable [Sec. (2) Juridical Persons
157 &158, LGC] (a) Every corporation no matter how created or organized,
(b) Whether domestic or resident foreign,
(c) Engaged in or doing business in the Philippines
(1) Individuals
(a) Annual community tax of P5.00 PLUS annual additional tax of P1.00 per
P1,000.00 of income regardless whether from business, exercise of profession or
property
(b) Never to exceed P5000
(c) Husband and wife shall pay a basic tax of P5.00 each PLUS additional tax based
on total property owned by them and the total gross receipts or earnings derived
therefrom
(2) Juridical Persons
(a) Annual community tax of P500.00 PLUS annual additional tax of not more than
P10,000.00 according to the ff. schedule:
(i) P2.00 for every P5,000 worth of real property in the Philippines owned during
the preceding year based
Rates [Sec. 157 (ii) P2.00 for every P5,000.00 of gross receipts derived from business in the
&158, LGC] Philippines during the preceding year.
(b) Dividends received by a corporation from another corporation shall be deemed
part of the gross receipts or earnings for purposes of computing additional tax.
Persons Exempt (1) Diplomatic and consular representatives
[Sec. 159, LGC] (2) Transient visitors who stay in the Philippines for not more than 3 months
Place of Payment Where individual resides, or where the principal office of the juridical entity is located.
[Sec. 160, LGC]
Time of Payment Accrues on the 1st day of January of each year to be paid not later than the last day of
[Sec 161, LGC] February of each year
Penalty If unpaid within the prescribed period, an interest of 24% shall be added per annum from
the due date until payment. [Sec. 161, LGC]
G. TAXPAYER’S REMEDIES
PAGE 240 OF 275
UP COLLEGE OF LAW TAXATION 2 TAXATION LAW
The lien may only be extinguished upon full may select and necessarily used by him in
payment of the delinquent local taxes, fees, his ordinary occupation
and charges including related surcharges and (3) his necessary Clothing, and that of all his
interests. [Sec. 173, LGC] family
(4) household furniture and Utensils
H.2. CIVIL REMEDIES, IN GENERAL necessary for housekeeping and used for
(1) Administrative action that purpose by the delinquent taxpayer,
(2) Judicial action such as he may select, of a value not
exceeding P10,000
Procedure for administrative action (5) Provisions, including crops, actually
Distraint of personal property provided for individual or family use
Personal properties subject to distraint: goods, sufficient for 4 months
chattels or effects and other personal property (6) the professional Libraries of doctors,
of whatever character, including stocks and engineers, one fishing boat and net, not
other securities, debts, credits, bank accounts, exceeding the total value of P10,000 by
and interest in and rights to personal property the lawful use of which a fisherman earns
his livelihood
Procedure: [Sec. 175, LGC] (7) any material or Article forming part of a
(1) Seizure of personal property house or improvement of any real property
(2) Accounting of distrained goods
(3) Publication of time and place of sale and Appeal before the Secretary of Justice;
the articles distrained Procedure
(4) Release of distrained property upon Appeal to the Secretary of Justice
payment prior to sale within 30 days from effectivity
(5) Procedure of sale The Secretary of Justice has 60 days to
(6) Disposition of proceeds decide but an appeal does not
suspend the effectivity of the
Levy of real property ordinance
Levy upon real property and interest in or rights Within 30 days from the Secretary of
to real property Justice’s decision or after 60 days
inaction, an appeal may be filed with
Procedure [Sec. 176, LGC] the RTC. (See Sec. 187, RA 7160)
(1) Preparation of a duly authenticated
certificate by the LGU Treasurer effecting Penalty on local treasurer for failure to issue
the levy on the real property and execute warrant of distraint or levy
(2) Service of written notice of levy to the Automatically dismissed from the service after
assessor and Register of Deeds due notice and hearing [Sec. 177, LGC]
(3) Annotation of the levy on the tax
declaration and the certificate of title Procedure for judicial action
(4) Advertisement and Sale [Sec. 178, LGC] The local government may institute an
ordinary civil action with regular courts of
Further distraint or levy proper jurisdiction for the collection of
The remedies by distraint or levy may be delinquent taxes, fees, charges or other
repeated if necessary until the full amount due, revenues.
including all expenses, is collected [Sec. 184, The civil action shall be filed by the local
LGC] treasurer. [Sec. 183, LGC]
Exemption of personal property from distraint Valley Trading Co. vs. CFI of Isabela, (1989);
or levy (ToB-CUPLA) Angeles City v. Angeles City Electric
(1) Tools and implements necessarily used by Corporation, (2010): LGC does not contain a
the taxpayer in his trade or employment provision prohibiting courts from enjoining the
(2) One horse, cow, carabao, or other Beast of collection of local taxes. Such lapse may have
burden, such as the delinquent taxpayer allowed preliminary injunction under Rule 58,
ROC where local taxes are involved.
PAGE 241 OF 275
UP COLLEGE OF LAW TAXATION 2 TAXATION LAW
Property leased to private entities is not I.6. LISTING OF REAL PROPERTY IN THE
exempt from RPT, as it is not actually, directly ASSESSMENT ROLLS
and exclusively used for charitable purposes. The local assessor must maintain an
Portions of the land occupied by the hospital assessment roll wherein all real property,
and portions used for its patients, whether whether taxable or exempt, located within the
paying or non-paying, are exempt from real territorial jurisdiction of the LGU, is listed.
property taxes.
Real property in general—
I.4. APPRAISAL AND ASSESSMENT OF
REAL PROPERTY TAX
Shall be listed, valued and assessed in the (3) Commercial – Is land devoted principally
name of the owner or administrator, or anyone for the object of profit and is not classified
having legal interest in the property. as agricultural, industrial, mineral, timber
or residential land
For undivided real property— (4) Industrial – Is land devoted principally to
May be in the name of the estate or of the heirs industrial activity as capital investment
and devisees, or in the name of one or more and is not classified as agricultural,
co-owners commercial, timber, mineral or residential
land
Real property of a corporation, partnership or (5) Mineral – Are lands in which minerals
association— exist in sufficient quantity or grade to
Same manner as an individual justify the necessary expenditures to
extract and utilize such minerals
Real property owned by the Republic of the (6) Timberland
Philippines, its instrumentalities, political (7) Special – all lands, buildings and other
subdivision, the beneficial use has been improvements actually, directly and
granted to a taxable person— exclusively used for hospitals, cultural, or
scientific purposes, and those owned and
In the name of the possessor, grantee or of the used by local water districts, and GOCCs
public entity if such property has been rendering essential public services in the
acquired or held for resale or lease. [Sec. 205, supply and distribution of water and/or
LGC] generation and transmission of electric
power [Sec. 216, LGC]
I.7. APPRAISAL AND VALUATION OF REAL
PROPERTY Machinery
Land Brand New The FMV is the acquisition
The assessor of the province, city or cost
municipality or his deputy may summon the If the machinery is imported,
owners or persons having legal interest the acquisition cost includes
freight, insurance, bank and
therein and witnesses, administer oaths, and
other charges, brokerage,
take deposition concerning the property, its arrastre and handling, duties
ownership, amount nature, and value. [Sec. and taxes, plus cost of inland
213, LGC] transportation, handling, and
installation charges at the
Before any general revision of property present site. [Sec. 224, LGC]
assessment is made, there shall be prepared a All other FMV is determined by
schedule of FMV by the provincial, city or Cases dividing the remaining
municipal assessors; which shall be published economic life of the
in a newspaper of general circulation or in the machinery by its estimated
absence thereof, shall be posted in the economic life and multiplied
by the
provincial capital, city or municipal hall and in replacement/reproduction
two other conspicuous public places therein. cost. [Sec. 224, LGC]
[Sec. 212, LGC] Depreciation Rate—not exceeding five
CLASSES OF REAL PROPERTY Allowance percent (5%) of its original
(1) Residential – Is land principally devoted to cost or replacement cost, for
habitation each year of use
(2) Agricultural – Is land devoted principally The remaining value shall be
to the planting of trees, raising of crops, fixed at not less than twenty
livestock and poultry, dairying, salt percent (20%) of such
making, inland fishing and similar original, replacement or
reproduction cost for so long
aquaculture activities and other
as the machinery is useful
agricultural activities and is not classified and in operation. [Sec. 225,
as mineral, timber, residential, LGC]
commercial or industrial land
I.8. ASSESSMENT OF REAL PROPERTY the punong barangay to the last known
i. Assessment levels address of the person to be served. [Sec. 223,
Assessment level – is the percentage applied LGC]
to the fair market value to determine the
taxable value of the property [Sec. 199(g), I.9. COLLECTION OF REAL PROPERTY TAX
LGC] Real property tax for any year
Assessment levels shall be fixed by Date of shall accrue on the first day
ordinances of the sanggunian at rates not Accrual (5.1) of January. [Sec. 246, LGC]
exceeding those prescribed in Sec. 218 On or before the 31st of
January or on any date
prescribed, the local
ii. General revisions of assessments and treasurer shall post the
property classification notice of the dates when the
The local assessor shall undertake a general Notice for tax may be paid without
revision of real property assessments every 3 Collection interest at a conspicuous and
years. [Sec. 219, LGC] (5.2) publicly accessible place at
the city or municipal hall.
iii. Date of effectivity of assessment or
reassessment The notice shall also be
General rule: All assessments or published in a newspaper of
reassessments made after the first day of general circulation in the
locality once a week for two
January of any year shall take effect on the first consecutive weeks. [Sec.
day of January of any year 249, LGC]
Within five years from the
Exceptions: reassessments due to date they become due
(1) partial or total destruction Prescriptive
(2) major change in actual use; Periods for Within ten years from
(3) great and sudden inflation or deflation of Collection discovery of fraud, in case
real property values; (5.3) there is fraud or intent to
(4) gross illegality of the assessment when evade
made; or Local treasurer is legally
prevented to collect tax.
(5) any other abnormal cause shall be made
The owner or property
within ninety (90) days from the date of Instances for requests for reinvestigation
any cause and shall take effect at the Suspension of and writes a waiver before
beginning of the quarter next following Prescriptive expiration of period to
the reassessment. [Sec. 221, LGC] Period collect.
The owner of property is out
iv. Assessment of property subject to back of the country or cannot be
taxes located [Sec. 270, LGC]
Property declared for the first time: assessed The local treasurer.
for taxes for the period during which it would Collecting He may deputize the
have been liable but in no case for more than Authority barangay treasurer to collect
all taxes upon filing of a
ten [10] years prior to the date of initial bond. [Sec. 247, LGC]
assessment [Sec. 222, LGC]
I.10. SPECIAL RULES ON PAYMENT
v. Notification of new or revised assessment
When real property is assessed for the first i. Payment of real property tax in installments
time or when an existing assessment is Payment of real property tax and the
increased or decreased, the local assessor additional tax for the Special Education Fund,
shall within thirty [30] days give written notice without interest, may be made in four [4]
of the new or revised assessment to the person equal instalments:
in whose name the property is being declared. 1st : March 31st
2nd : June 30th
Notice may be given personally or by 3rd : September 30th
registered mail or through the assistance of 4th : December 31st
PAGE 246 OF 275
UP COLLEGE OF LAW TAXATION 2 TAXATION LAW
The LBAA shall decide the appeal within 120 protest the tax assessed and without
days from the date of receipt of such appeal exhausting available administrative remedies.
The LBAA shall have the power to summon
witnesses, administer oaths, conduct ocular The local treasurer shall decide the protest
inspection, take depositions, and issue within 60 days from receipt.
subpoena duces tecum and/or subpoena Appeal to the CTA En Banc
Appeal must be filed through a petition for
The LBAA must furnish the appellant a copy of review within 30 days from the receipt of the
the decision of the board. [Sec. 229, LGC] decision of CBAA [Sec. 11, R.A. 1125 as
amended]
Fels Energy v. Province of Batangas [G.R. No.
168557, Feb. 16, 2007]: Under Section 226 of Appeal to the SC
R.A. No 7160, the last action of the local Appeal must be filed within 15 days from
assessor on a particular assessment shall be receipt of decision of the CTA [Rule 45, Rules
the notice of assessment; it is this last action of Court]
which gives the owner of the property the right
to appeal to the LBAA. The procedure likewise J.2. JUDICIAL
does not permit the property owner the Question on the legality of a tax ordinance
remedy of filing a motion for reconsideration Any question on the constitutionality or
before the local assessor. legality of a tax ordinance may be raised on
appeal within 30 days from effectivity to the
Victorias Milling v. CTA [G.R. No. L-24213, Mar. Secretary of Justice who shall render a
13, 1968]: The failure to appeal within the decision within 60 days from the date of
statutory period renders the assessment final receipt of the appeal.
and unappealable.
The appeal shall not have the effect of
Appeal to the Central Board of Assessment suspending the effectivity of the tax ordinance
Appeals (CBAA) and the accrual and payment of the tax.
Appeal must be filed within 30 days from the
receipt of the decision of LBAA [Sec. 229, LGC] Within 30 days after receipt of the decision or
the lapse of the sixty-day period without the
Effect of payment of tax Secretary of Justice acting upon the appeal,
Appeal on assessments of real property shall the aggrieved party may file appropriate
not suspend the collection of the proceedings with a court of competent
corresponding realty taxes on the property jurisdiction. [Sec. 187, LGC]
involved as assessed by the provincial or city
assessor without prejudice to the subsequent Assailing the validity of a tax sale
readjustment depending upon the final No court shall entertain any action assailing
outcome of the appeal. [Sec. 231, LGC] the validity of any sale at public auction until
the taxpayer shall have deposited with the
Payment of real property under protest court the amount for which the real property
Protest must be filed with the local treasurer. was sold, together with interest of two percent
No protest shall be entertained unless the tax per month from the date of sale to the time of
is first paid. The protest must be in writing and the institution of the action. [Sec. 267, LGC]
filed within 30 days from payment of the tax to
the local treasurer.
Flowchart V: Procedure for Assessment of Land Value for Real Property Tax
Purposes-Local Gov’t Code
For purposes of this flowchart owner means owner or administrator of real property or any person having legal interest thereto
Assessor prepares
Owner declares real Assessor declares
assessment rolls
property once every 3 real property if owner/
START wherein real property
years (sec. 202) w/n administrator fails to
shall be listed, valued
Jan 1 to June 30 do so (sec. 204)
and assessed (sec. 205)
Submit documents
Owner may claim
supporting exemption w/ Is real property
for tax exemption Yes
in 30 days from tax exempt?
Required (sec. 206)
declaration (sec. 206)
Documents
submitted w/in
30 days? Property shall be
Property dropped from
Yes proven as tax Yes
assessment roll
No exempt? (sec. 206)
Property shall be
listed as taxable in
No
the assessment
roll (sec. 206) END
Amount of tax
LT must decide w/
protested shall be
LT grants LT decides w/in in 60 days from
refunded or Yes Yes
protest? 60 days? receipt of protest
applied as tax
(sec. 252)
credit (Sec. 252)
No
For purposes of this flowchart owner means owner or administrator of real property or any
START person having legal interest thereto
LT returns to the
Sanggunian concerned
purchaser/bidder the
may, by ordinance sell
price paid + interest
and dispose of the real
of 2% per month
LT shall deliver to property acquired under
(sec. 261)
purchaser certificate the preceding section at
of sale public auction. (sec. 264)
If property is not
redeemed, the local Levy may be repeated
Proceeds of sale in treasurer shall until the full amount due,
excess of delinquent execute a deed of including all expenses, is
tax, interest & conveyance to the collected. (sec. 265)
expenses of sale purchaser (sec. 262)
remitted to the owner
(sec. 260)
END
Note: Export duties imposed upon all export Articles – goods, wares, merchandise and in
products under Sec. 514, TCC had been general anything that may be made subject of
abolished, except the export duty upon logs importation or exportation [Sec. 3514, TCC]
[Sec. 1, EO 26 issued on 1 July 1986].
U.S. Dollars, having ceased to be legal tender
Import tariff – All articles, when imported from in the Philippines, fall within the meaning of
any foreign country into the Philippines, shall the term merchandise [Bastida v.
be subject to duty upon each importation, Commissioner of Customs (1970)]
even though previously exported from the
Philippines, except as otherwise specifically C. PURPOSE FOR IMPOSITION
provided for in this Code or in other laws [Sec. For the protection of consumers and
101, TCC] manufacturers, as well as Philippine products
from undue competition posed by foreign-
CMTA, Sec. 104: “All goods, when imported made products.
into the Philippines, shall be subject to duty
upon importation, including goods previously D. FLEXIBLE TARIFF CLAUSE
exported from the Philippines, except as Constitutional Basis: Sec. 28[2], Art. VI,
otherwise specifically provided under CMTA or 1987 Constitution. The Congress may, by
other laws.” law, authorize the President to fix with
specified limits, and subject to such
limitations and restrictions, as it may
PAGE 252 OF 275
UP COLLEGE OF LAW TAXATION 2 TAXATION LAW
impose, tariff rates, import and export Note: The payment of the duties, taxes, fees
quotas, tonnage and wharfage duties, and and other charges must be in full. [Papa v.
other duties or imposts within the Mago (1968)]
framework of the national development
program of the Government. Imported articles shall be deemed "entered"
in the Philippines for consumption when the
The flexible clause refers to the authority given specified entry form is properly filed and
to the President, upon the recommendation of accepted, together with any related
NEDA, to adjust the tariff rates in the interest documents required by the TCC and/or
of national economy, general welfare and/or regulations to be filed with such form at the
national security [Sec. 401, TCC]. time of entry, at the port or station by the
customs official designated to receive such
CMTA, Sec. 1608: “In the interest of the entry papers and any duties, taxes, fees
general welfare and national security,” the and/or other lawful charges required to be
President is empowered to adjust the tariff paid at the time of making such entry have
rates, upon recommendation of NEDA. been paid or secured to be paid with the
customs official designated to receive such
The President is empowered to increase (by not monies, provided that the article has
more than 5x) or reduce (by not more than previously arrived within the limits of the port
50%) the rates of import duty expressly fixed of entry. [Sec. 206, TCC]
by statute. This includes the authority to
modify the form of duty. [Sec. 401, TCC] CMTA, Sec. 115: “Imported goods shall be
deemed “entered” in the Philippines for
CMTA, Sec. 1608: The President is empowered consumption when the goods declaration is
to: electronically lodged, together with any
(1) Increase, reduce or remove existing rates required supporting documents, with the
[increase in the rate cannot exceed 100% pertinent customs office.”
ad valorem], including authority to modify
the form of duty E.2. OBLIGATIONS OF IMPORTER
(2) Establish import quotas or ban imports of i. Cargo manifest
any commodity [Sec. 1005, TCC; the same under CMTA, Sec.
(3) Impose an additional duty not exceeding 1204]
10% ad valorem
Every vessel from a foreign port must have on
E. REQUIREMENTS OF IMPORTATION board a complete manifest of all her cargo.
E.1. BEGINNING AND ENDING OF
IMPORTATION All the cargo intended to be landed at a port
Importation begins when the carrying vessel in the Philippines must be described in
or aircraft enters the jurisdiction of the separate manifests for each port of call.
Philippines with intention to unload therein
[Sec. 1202, TCC; the same under CMTA, Sec. The manifest shall include:
103] (1) Port of departure
(2) Port of delivery
Importation is deemed terminated upon (3) Marks, numbers, quantity and description
payment of duties, taxes and other charges of the packages
due upon the articles, or secured to be paid, at (4) Names of the consignees
a port of entry AND the legal permit for
withdrawal shall have been granted, or in case General rule: It cannot be changed or altered
said articles are free of duties, taxes and other after entry of vessel.
charges, until they have legally left the
jurisdiction of the customs. [Sec. 1202, TCC; Exception:
the same under CMTA, Sec. 103] Amendment by the master, consignee or
agent attached to the original manifest
CANNOT amend the manifest after the invoice responsible officer of the company to sign the
and/or entry covering the importation have goods declaration as declarant on its behalf.]
been received and recorded in the office of the
appraiser CMTA, Sec. 102(y): “Goods Declaration - a
statement made in the manner prescribed by
EXCEPT: (a) Obvious clerical error or any other the Bureau and other appropriate agencies, by
discrepancy is committed in the preparation; which the persons concerned indicate the
(b) Without fraudulent intent; (c) Discovery procedure to be observed in the application for
would not have been made until after the entry or admission of imported goods and
examination of the importation is completed. the particulars of which the customs
administration shall require.”
The cargo manifest and each copy thereof
shall be accompanied by a translation into the All imported articles, except importation
official language of the Philippines, if originally admitted free of duty, shall be subject to a
written in another language. [Sec. 1006, TCC; formal or informal entry. [Sec. 1302, TCC]
different under CMTA, Sec. 1205—the
translation shall be in English] CMTA, Sec. 401: “Unless otherwise provided
for in this Act, all imported goods shall be
Master shall deliver and mail the cargo subject to the lodgement of a goods
manifest to (endorsed by boarding officer): declaration. A goods declaration may be for
(1) Auditor General consumption, for customs bonded
(2) Collector (Present original) [Sec. 1007, warehousing, for admission, for conditional
TCC; different under CMTA, Sec. 1206— importation, or for customs transit.”
the Bureau of Customs shall provide
electronic copies to the COA Chairperson; Kinds of Import Entry [Sec. 1302, TCC]
the master shall present to the District (1) Formal Entry
Collector the original properly endorsed (2) Informal Entry
by the boarding officer]
CMTA, Sec. 401—Kinds of Goods Declaration
ii. Import entry (1) For Consumption
- Now called “Goods Declaration” under the (2) For Customs Bonded Warehousing
CMTA (3) For admission
(4) For conditional importation
Imported articles must be entered in the (5) For customs transit
customhouse at the port of entry within fifteen
days from date of discharge of the last Content and Form of Import Entry
package from the vessel either Content [Sec. 1304, TCC]
(1) by the importer, being holder of the bill of (1) That the entry delivered to the Collector
lading contains a full account of the value or price
(2) by any other holder of the bill of lading in articles, including subject of the entry;
due course, (2) That the invoice and entry contain a just
(3) by a customs broker acting under authority and faithful account of the value or price
from a holder of the bill, or of said articles including and specifying
(4) by a person duly empowered to act as the value of all containers or coverings,
agent or attorney-in-fact for such holder. and that nothing has been omitted,
therefrom or concealed whereby the
The Collector may grant an extension of not government of the Republic of the
more than fifteen days. [Sec. 1301, TCC; the Philippines be defrauded of any part of the
same under CMTA, Sec. 106 and 407, except duties lawfully due on the articles;
that for declarants, #2 is changed to—the (3) That, to the best of the declarant's
exporter, being the owner of the goods to be information and belief, all the invoice and
shipped out. And, in case the consignee or the bills of lading to the articles are the only
person who has the right to dispose of the ones in existence relating to the
goods is a juridical person, it may authorize a importation in question and that they are
in the state in which they were actually (2) Under irrevocable domestic letter of
received by him; credit, bank guarantee or bond for:
(4) That, to the best of the declarant's (a) Placing the article in customs bonded
information and belief, the entries, warehouse;
invoices and bill of and the declaration (b) Constructive warehousing and
thereon under penalties of falsification of immediate transportation to other
perjury are in all respects genuine and true, ports of the Philippines upon proper
and were made by the person by whom the examination and appraisal; or
same purpose to have been made. [The (c) Constructive warehousing and
same under CMTA, Sec. 412, except that immediate exportation.
#1 is omitted]
CMTA, Sec. 402: “All goods declaration for
Form consumption shall be cleared through a
(1) signed by the importer, consignee or formal entry process.”
holder of the bill, by or for whom the entry
is effected [Sec. 1305, TCC; CMTA, Sec. Note: All importations entered under formal
107—signed by the declarant]; entry shall be covered by a letter of credit or
(2) in the required number of copies in such any other verifiable document evidencing
form as prescribed by regulations [Sec. payment. [R.A. 9135 (2001); slightly modified
1306, TCC]; and under CMTA, Sec. 402—“a letter of credit or
(3) shall contain the names of the importing any verifiable commercial document
vessel or aircraft, port of departure and evidencing payment or in cases where there is
date of arrival, the number and mark of no sale for export, by any commercial
packages, or the quantity, if in bulk, the document indicating the commercial value of
nature and correct commodity description the goods.”]
of the articles contained therein, and its
value as set forth in a proper invoice to be iii. Declaration of correct weight or value
presented in duplicate the entry [Sec. 1306, [Sec. 1313, TCC]
TCC; the same under CMTA, Sec. 411, Classification
except that the latter provides for the When article is not specifically classified in the
inclusion of the names of the consignees Code, the interested party, importer or foreign
and port of destination] exporter may submit a sample with full
description of component materials in a
Articles to be cleared on informal entry written request.
[Sec. 1302, TCC]
(1) Articles of a commercial nature intended Value
for sale, barter or hire, the dutiable value Upon written application, Collector shall
of which is P2000 or less; [Value changed furnish importer within 30 days the latest
to P50,000 under CMTA, Sec. 402] information as to the value of the articles to be
(2) Personal and household effects or articles, imported.
regardless of value, imported in
passenger's baggage, mail, or otherwise, Importer must present all pertinent papers
for personal use. and documents, act in good faith and unable
to obtain information due to unusual
The Collector may, upon instruction of the conditions
Secretary of Finance, when he deems it
necessary for the protection of the revenue, Information given is not an appraisal nor is it
require a formal entry regardless of value. binding upon the Collector’s right of appraisal.
punishable discrepancy between the declared When made: Upon approval by the Collector of
weight and actual weight of the cargo exists, the returns of the appraiser and reports of the
the inevitable conclusion is that he is weights, gauge or quantity [Sec. 1601, TCC]
negligent or careless. Similarly, if in the
exercise or performance of this duty, he is How: the liquidation shall be made on the face
negligent or careless resulting in the of the entry showing the particulars thereof,
commission of excessive discrepancy in the initiated by the liquidating clerk, approved by
weight of the ship's cargo penalized under the the chief liquidator, and recorded in the record
law, carelessness or incompetency is, of liquidations. [Sec. 1601, TCC]
nonetheless, imputable to him.
Additional Process: A daily record of all entries
PROVISIONAL GOODS DECLARATION (PGD) liquidated shall be posted in the public
UNDER CMTA, SEC. 403: Where the declarant corridor of the customhouse, stating the name
does not have all the information or of the vessel or aircraft, the port from which
supporting documents required to complete she arrived, the date of her arrival, the name of
the goods declaration, the lodging of a the importer, and the serial number and date
provisional goods declaration may be of the entry. A daily record must also be kept
allowed: Provided, That it substantially by the Collector of all additional duties, taxes
contains the necessary information required and other charges found upon liquidation, and
by the Bureau and the declarant undertakes to notice shall promptly be sent to the interested
complete the information or submit the parties. [Sec. 1601, TCC]
supporting documents within 45 days from
the filing of the PGD, extentible for another 45 Tentative and Final Liquidation
days for valid reasons. Tentative Liquidation
[Sec. 1602, TCC]
If the Bureau accepts a PGD, the duty When liquidation shall be deemed to be
treatment of the goods shall not be different tentative: If to determine the exact amount
from that of goods with complete declaration. due under the law in whole or in part some
future action is required [only as to item/s
Goods under a PGD may be released upon affected]
posting of any required security equivalent to
the amount ascertained to be the applicable Effect: shall to that extent be subject to future
duties and taxes. and final readjustment and settlement; entry
in such case shall be stamped "Tentative
iv. Liability for payment of duties liquidation"
[Sec. 1204, TCC; the same under CMTA, Sec.
405] Final Liquidation
General rule: the liability for duties, taxes, fees [Sec. 1603, TCC as amended by RA 9135]
and other charges attaching on importation When liquidation is final and conclusive upon
constitutes a personal debt due from the all the parties: when articles have been
importer to the government; it constitutes a entered and passed free of duty or final
lien upon the articles imported which may be adjustment of duties made, after the
enforced while such articles are in custody or expiration of 3 years from the date of the final
subject to the control of the government. payment of duties.
defendant shall explain the possession to the conveyance by land, sea or air, or any
satisfaction of the court. [Sec. 3601, TCC] compartment thereof [Sec. 3606, TCC]
(3) Removal, Breakage, Alteration of Marks:
Note: The penalties for unlawful importation Any person who alters, defaces or
are very different in the CMTA, under Sec. obliterates any distinctive mark placed by
1401; the penalties are dependent on the a customs official on any package of
appraised value of the goods unlawfully warehoused articles [Sec. 3607, TCC]
imported. (4) Removing Goods from Customs Custody:
Any importer or owner of warehoused
F.2. OTHER FRAUDULENT PRACTICES articles, or person in his employ, who by
(1) Various Practices against Customs contrivance, fraudulently opens the
Revenue: Any person who warehouse, or gains access to the articles,
(1) makes or attempts to make any entry except in the presence of the proper
of imported or exported article by official of the customs acting in the
means of any false or fraudulent execution of his duty [Sec. 3608, TCC]
invoice, declaration, affidavit, letter, (5) Failure to Keep Importation Records and
paper, or Give Full Access to Customs Officers: Any
(2) by means of any false statement, person who shall fraudulently remove
written or verbal, or by means of any warehoused articles from any public or
false or fraudulent practice private warehouse or shall fraudulently
whatsoever, or conceal such articles in any such
(3) shall be guilty of any willful act or warehouse, or shall aid or abet any such
omission by means of whereof the removal or concealment [Sec. 3609, TCC]
Government might be deprived of the
lawful duties, taxes and other charges, G. CLASSIFICATION OF GOODS
or any portion thereof, accruing from G.1. TAXABLE IMPORTATION
the article or any portion thereof, All articles, when imported from any foreign
embraced or referred to in such country into the Philippines, shall be subject
invoice, declaration, affidavit, letter, to duty upon each importation, even though
paper, or statement, or affected by previously exported from the Philippines,
such act or omission [Sec. 3602, TCC] except as otherwise specifically provided for in
(2) Failure to Report Fraud: Any master, pilot this Code or in other laws. [Sec. 100, TCC]
in command or other officer, owner or
agent of any vessel or aircraft trading with G.2. PROHIBITED IMPORTATION
or within the Philippines and any [Sec. 101, TCC] (POPP-LAW-DING)
employee of the Bureau of Customs, who, (1) Dynamite, gunpowder, ammunitions and
having cognizance of any fraud upon the other explosives, firearm and weapons of
customs revenue, shall fail to report all war, and detached parts thereof, except
information relative thereto to the when authorized by law.
Collector, as required by law [Sec. 3603, (2) Written or printed article in any form
TCC] containing:
(1) Concealment or Destruction of Evidence of (a) any matter advocating or inciting
Fraud: Any person who willfully conceals treason, rebellion, insurrection or
or destroys, any invoice, book or paper sedition against the Government of
relating to any article liable to duty, after the Philippines
an inspection thereof has been demanded (b) forcible resistance to any law of the
by the Collector of any Collection district, Philippines
or at any time conceals or destroys any (c) containing any threat to take the life of
such invoice, book or paper for the or inflict bodily harm upon any person
purpose of suppressing any evidence of in the Philippines.
fraud therein contained [Sec. 3605, TCC] (3) Written or printed articles, photographs,
(2) Affixing Seals: Any person who shall engravings, lithographs, objects,
willfully break or destroy any seal placed paintings, drawings or other
by a customs official upon any car, or other
equal to one and one-half times the luxury items] in excess of two thousand
ascertained duties, taxes and other pesos: And provided, finally, That the
charges thereon, conditioned for the personal and household effects [except
exportation thereof or payment of the luxury items] of a returning resident who
corresponding duties, taxes and other has not stayed abroad for six months shall
charges within six [6] months from the be subject to fifty per cent ad valorem duty
date of acceptance of the import entry; across the board, the total dutiable value
(5) Medals, badges, cups and other small of which does not exceed two thousand
articles bestowed as trophies or prizes, or pesos; any excess shall be subject to the
those received or accepted as honorary corresponding duty provided in this Code;
distinction; (7) Wearing apparel, articles of personal
(6) Personal and household effects belonging adornment, toilet articles, portable tools
to residents of the Philippines returning and instruments, theatrical costumes and
from abroad including jewelry, precious similar effects accompanying travelers, or
stones and other articles of luxury which tourists. or arriving within a reasonable
were formally declared and listed before time before and after their arrival in the
departure and identified under oath Philippines, which are necessary and
before the Collector of Customs when appropriate for the wear and use of such
exported from the Philippines by such persons according to the nature of the
returning residents upon their departure journey, their comfort and convenience:
therefrom and during their stay abroad; Provided, That this exemption shall not
personal and household effects including apply to articles intended for other
wearing apparel, articles of personal persons or for barter, sale or hire: Provided,
adornment [except luxury items], toilet further, That the Collector of Customs may,
articles, portable appliances and in his discretion, require either a written
instruments and similar personal effects, commitment or a bond in an amount
excluding vehicles, watercrafts, aircrafts, equal to one and one-half times the
and animals purchased in foreign ascertained duties, taxes and other
countries by residents of the Philippines charges conditioned for the exportation
which were necessary, appropriate and thereof or payment of the corresponding
normally used for the comfort and duties, taxes and other charges within
convenience in their journey and during three [3] months from the date of
their stay abroad upon proof satisfactory acceptance of the import entry: And
to the Collector of Customs that same Provided finally, That the Collector of
have been in their use abroad for more Customs may extend the time for
than six [6] months and accompanying exportation or payment of duties, taxes
them on their return, or arriving within a and other charges for a term not
reasonable time which, barring exceeding three months from the
unforeseen circumstances, in no case expiration of the original period;
shall exceed ninety days before or after the (8) Personal and household effects and
owners' return: Provided, That the vehicles belonging to foreign consultants
personal and household effects shall and experts hired by, and/or rendering
neither be in commercial quantities nor service to, the government, and their staff
intended for barter, sale or hire and that or personnel and families, accompanying
the total dutiable value of which shall not them or arriving within a reasonable time
exceed two thousand pesos [P2,000.00]: before or after their arrival in the
Provided further, That the returning Philippines, in quantities and of the kind
residents have not previously received the necessary and suitable to the profession,
benefit under this section within one year rank or position of the person importing
from and after the last exemption granted: them, for their own use and not for barter,
Provided furthermore, That a fifty [50] per sale or hire provided that, the Collector of
cent ad valorem duty across the board Customs may in his discretion require
shall be levied and collected on the either a written commitment or a bond in
personal and household effects [except an amount equal to one and one-half
times the ascertained duties, taxes and and the giving of a bond in an amount
other charges upon the articles classified equal to one and one-half times the
under this subsection; conditioned for the ascertained duties, taxes and other
exportation thereof or payment of the charges thereon, conditioned for
corresponding duties, taxes and other exportation thereof or payment of the
charges within six [6] months after the corresponding duties, taxes and other
expiration of their term or contract; And charges within six [6] months from the
Provided, finally, That the Collector of date of acceptance of the import entry;
Customs may extend the time for Provided, That the Collector of Customs
exportation or payment of duties, taxes may extend the time for exportation or
and other charges for term not exceeding payment of duties, taxes and other
six [6] months from the expiration of the charges for a term not exceeding six [6]
original period; months from the expiration of the original
(9) Professional instruments and implements, period; and technical and scientific films
tools of trade, occupation or employment, when imported by technical, cultural and
wearing apparel, domestic animals, and scientific institutions, and not to be
personal and household effects belonging exhibited for profit: Provided, further, That
to persons coming to settle in the if any of the said films is exhibited for profit,
Philippines or Filipinos and/or their the proceeds therefrom shall be subject to
families and descendants who are now confiscation, in addition to the penalty
residents or citizens of other countries, provided under Section Thirty-six hundred
such parties hereinafter referred to as and ten as amended, of this Code;
Overseas Filipinos, in quantities and of the (11) Articles brought by foreign film producers
class suitable to the profession, rank or directly and exclusively used for making or
position of the persons importing them, recording motion picture films on location
for their own use and not for barter or sale, in the Philippines, upon their identification,
accompanying such persons, or arriving examination and appraisal and the giving
within a reasonable time, in the discretion of a bond in an amount equal to one and
of the Collector of Customs, before or after one-half times the ascertained duties,
the arrival of their owners, which shall not taxes and other charges thereon,
be later than February 28, 1979 upon the conditioned for exportation thereof or
production of evidence satisfactory to the payment of the corresponding duties,
Collector of Customs that such persons taxes and other charges within six [6]
are actually coming to settle in the months from the date of acceptance of the
Philippines, that change of residence was import entry, unless extended by the
bona fide and that the privilege of free Collector of Customs for another six [6]
entry was never granted to them before or months; photographic and
that such person qualifies under the cinematographic films, undeveloped,
provisions of Letters of Instructions 105, exposed outside the Philippines by
163 and 210, and that the articles are resident Filipino citizens or by producing
brought from their former place of abode, companies of Philippine registry where the
shall be exempt from the payment of principal actors and artists employed for
customs duties and taxes: Provided, That the production are Filipinos, upon affidavit
vehicles, vessels, aircrafts, machineries by the importer and identification that
and other similar articles for use in such exposed films are the same films
manufacture, shall not be classified previously exported from the Philippines.
hereunder; As used in this paragraph, the terms
(10) Articles used exclusively for public "actors" and "artists" include the persons
entertainment, and for display in public operating the photographic cameras or
expositions, or for exhibition or other photographic and sound recording
competition for prizes, and devices for apparatus by which the film is made;
projecting pictures and parts and (12) Importations for the official use of foreign
appurtenances thereof, upon embassies, legations, and other agencies
identification, examination, and appraisal of foreign governments: Provided, That
those foreign countries accord like stores or air store supplies: Provided, That
privileges to corresponding agencies of any surplus or excess of such vessel or
the Philippines; aircraft supplies arriving from foreign
(13) Articles imported for the personal or ports or airports shall be dutiable;
family use of the members and attaches of (17) Articles and salvage from vessels
foreign embassies, legations, consular recovered after a period of two years from
officers and other representatives of the date of filing the marine protest or the
foreign governments: Provided, That such time when the vessel was wrecked or
privilege shall be accorded under special abandoned, or parts of a foreign vessel or
agreements between the Philippines and her equipment, wrecked, abandoned in
the countries which they represent: And Philippine waters or elsewhere: Provided,
Provided, further, That the privilege may That articles and salvage recovered within
be granted only upon specific instructions the said period of two years shall be
of the Secretary of Finance in each dutiable;
instance which will be issued only upon (18) Coffins or urns containing human remains,
request of the Department of Foreign bones or ashes, used personal and
Affairs; household effects [not merchandise] of
(14) Imported articles donated to, or for the the deceased person, except vehicles, the
account of, any duly registered relief value of which does not exceed ten
organization, not operated for profit, for thousand pesos, upon identification as
free distribution among the needy, upon such;
certification by the Department of Social (19) Samples of the kind, in such quantity and
Services and Development or the of such dimension or construction as to
Department of Education, Culture and render them unsalable or of no
Sports, as the case may be; appreciable commercial value; models
(15) Containers, holders and other similar not adapted for practical use; and
receptacles of any material including kraft samples of medicines, properly marked
paper bags for locally manufactured "sample-sale punishable by law," for the
cement for export, including corrugated purpose of introducing a new article in the
boxes for bananas, mangoes, pineapples Philippine market and imported only once
and other fresh fruits for export, except in a quantity sufficient for such purpose by
other containers made of paper, a person duly registered and identified to
paperboard and textile fabrics, which are be engaged in that trade: Provided, That
of such character as to be readily importations under this subsection shall
identifiable and/or reusable for shipment be previously authorized by the Secretary
or transportation of goods shall be of Finance: Provided, however, That
delivered to the importer thereof upon importation of sample medicine shall be
identification, examination and appraisal previously authorized by the Secretary of
and the giving of a bond in an amount Health that such samples are new
equal to one and one-half times the medicines not available in the Philippines:
ascertained duties, taxes and other Provided, finally, That samples not
charges within six months from the date of previously authorized and/or properly
acceptance of the import entry; marked in accordance with this section
(16) Supplies which are necessary for the shall be levied the corresponding tariff
reasonable requirements of the vessel or duty.
aircraft in her voyage or flight outside the (20) Commercial samples, except those
Philippines, including articles transferred that are not readily and easily identifiable
from a bonded warehouse in any [e.g., precious and semi-precious stones,
collection district to any vessel or aircraft cut or uncut, and jewelry set with precious
engaged in foreign trade, for use or stones], the value of any single
consumption of the passengers or its crew importation of which does not exceed ten
on board such vessel or aircrafts as sea or thousand pesos [P10,000.00] upon the
air stores; or articles purchased abroad for giving of a bond in an amount equal to
sale on board a vessel or aircraft as saloon twice the ascertained duties, taxes and
other charges thereon, conditioned for the imported books and/or publications are
exportation of said samples within six [6] for economic, technical, vocational,
months from the date of the acceptance of scientific, philosophical, historical or
the import entry or in default thereof, the cultural purposes or that the same are
payment of the corresponding duties, educational, scientific or cultural
taxes and other charges. If the value of any materials covered by the International
single consignment of such commercial Agreement on Importation of Educational
samples exceeds ten thousand pesos Scientific and Cultural Materials signed by
[P10,000.00],the importer thereof may the President of the Philippines on August
select any portion of same not exceeding 2, 1952, or other agreements binding upon
in value of ten thousand pesos the Philippines.
[P10,000.00] for entry under the provision (23)Educational, scientific and cultural
of this subsection, and the excess of the materials covered by international
consignment may be entered in bond, or agreements or commitments binding
for consumption, as the importer may upon the Philippine Government so
elect; certified by the Department of Education,
(21) Animals (except race horses), and plants Culture and Sports.
for scientific, experimental, propagation, (24) Bibles, missals, prayer books, Koran,
botanical, breeding, zoological and Ahadith and other religious books of
national defense purposes: Provided, That similar nature and extracts therefrom,
no live trees, shoots, plants, moss, and hymnal and hymns for religious uses;
bulbs, tubers and seeds for propagation (25) Philippine articles previously exported
purposes may be imported under this from the Philippines and returned without
section, except by order of the having been advanced in value or
Government or other duly authorized improved in condition by any process of
institutions: Provided, further, That the manufacture or other means, and upon
free entry of animals for breeding which no drawback or bounty has been
purposes shall be restricted to animals of allowed, including instruments and
recognized breed, duly registered in the implements, tools of trade, machinery and
book of record established for that breed, equipment, used abroad by Filipino
certified as such by the Bureau of Animal citizens in the pursuit of their business,
Industry: Provided, furthermore, That occupation or profession; and foreign
certificate of such record, and pedigree of articles previously imported when
such animal duly authenticated by the returned after having been exported and
proper custodian of such book of record, loaned for use temporarily abroad solely
shall be produced and submitted to the for exhibition, testing and
Collector of Customs, together with experimentation, for scientific or
affidavit of the owner or importer, that educational purposes; and foreign
such animal is the animal described in containers previously imported which
said certificate of record and pedigree: have been used in packing exported
And Provided, finally, That the animals Philippine articles and returned empty if
and plants are certified by the National imported by or for the account of the
Economic and Development Authority as person or institution who exported them
necessary for economic development; from the Philippines and not for sale,
(22) Economic, technical, vocational, barter or hire subject to identification:
scientific, philosophical, historical, and Provided, That any Philippine article
cultural books and/or publications: falling under this subsection upon which
Provided, That those which may have drawback or bounty has been allowed
already been imported but pending shall, upon re-importation thereof, be
release by the Bureau of Customs at the subject to a duty under this subsection
effectivity of this Decree may still enjoy the equal to the amount of such drawback or
privilege herein provided upon bounty.
certification by the Department of (26) Aircraft, equipment and machinery,
Education, Culture and Sports that such spare parts commissary and catering
supplies, aviation gas, fuel and oil, posting a bond in an amount equal to one
whether crude or refined, and such other and one-half times the ascertained duties,
articles or supplies imported by and for taxes and other charges due thereon to
the use of scheduled airlines operating cover a period of one year from the date of
under Congressional franchise: Provided, acceptance of the entry, which period for
That such articles or supplies are not meritorious reasons may be extended by
locally available in reasonable quantity, the Commissioner of Customs from year to
quality and price and are necessary or year, subject to the following conditions:
incidental for the proper operation of the (a) That they shall be properly identified
scheduled airline importing the same; and registered with the Land
(27) Machineries, equipment, tools for Transportation Commission;
production, plants to convert mineral ores (b) That they shall be subject to customs
into saleable form, spare parts, supplies, supervision fee to be fixed by the
materials, accessories, explosives, Collector of Customs and subject to
chemicals, and transportation and the approval of the Commissioner of
communication facilities imported by and Customs;
for the use of new mines and old mines (c) That they shall be deposited in the
which resume operations, when certified Customs zone when not in use; and
to as such by the Secretary of Agriculture (d) That upon the expiration of the period
and Natural Resources upon the prescribed above, duties and taxes
recommendation of the Director of Mines, shall be paid, unless otherwise re-
for a period ending five [5] years from the exported
first date of actual commercial production
of saleable mineral products: Provided, H. CLASSIFICATION OF DUTIES
That such articles are not locally available H.1. ORDINARY/REGULAR DUTIES
in reasonable quantity, quality and price Ordinary or regular duties refer to those that,
and are necessary or incidental in the as a matter of course, are imposed on dutiable
proper operation of the mine; and aircrafts articles [Sec. 104, TCC]
imported by agro-industrial companies to
be used by them in their agriculture and i. Ad valorem; Methods of valuation
industrial operations or activities, spare The tax rates are based on
parts and accessories thereof; (1) The cost (FMV) or price of the imported
(28) Spare parts of vessels or aircraft of articles, in wholesale quantities in the
foreign registry engaged in foreign trade principal market of the exporting country
when brought into the Philippine or the country of origin, including
exclusively as replacements or for the expenses connected with the importation,
emergency repair thereof, upon proof such as insurance, freight, packaging,
satisfactory to the Collector of Customs loading and unloading charges, but
that such spare parts shall be utilized to excluding internal excise taxes to be
secure the safety, seaworthiness or remitted or rebated; or
airworthiness of the vessel or aircraft, to (2) In case such value is not ascertainable, the
enable it to continue its voyage or flight; reports of the Revenue or commercial
(29) Articles of easy identification exported attaches; or
from the Philippines for repair and (3) If still not ascertainable, the domestic
subsequently reimported upon proof wholesale market price in the ordinary
satisfactory to the Collector of Customs course of trade less import duty and not
that such articles are not capable of being more than 25% for expenses and profits.
repaired locally: Provided, That the cost of [Sec. 201, TCC]
the repairs made to any such article shall
pay a rate of duty of thirty per cent ad Basis for all Methods of Valuation
valorem; [Sec. 201, TCC and CAO 4-2004]
(30) Trailer chassis when imported by Methods for determining dutiable value –
shipping companies for their exclusive use (1) Transaction value – an ad valorem rate of
in handling containerized cargo, upon duty equivalent to the price actually paid
PAGE 264 OF 275
UP COLLEGE OF LAW TAXATION 2 TAXATION LAW
or payable for the goods when sold for real difficulties in determining the dutiable
export to the Philippines, as adjusted; value using Method 5
(2) Transaction value of identical goods – the
transaction value of identical goods sold Dutiable Value (DV) must not include:
for export to the Philippines and exported (1) Charges for construction, erection,
at or about the same time as the goods assembly maintenance or technical
being valued; “identical goods” shall assistance undertaken after importation
mean goods which are the same in all (2) Cost of transport after importation
respects, including physical (3) Duties and taxes of Phil
characteristics, quality and reputation, (4) Other permissible deduction under WTO
discounting minor differences in Valuation Agreement
appearances;
(3) Transaction value of similar goods – the ALL the following conditions must be satisfied
transaction value of similar goods sold for so the Transaction Value (TV) shall be the DV
export to the Philippines and exported at (CREPD):
or about the same time as the goods being (1) Sale for export to Phil
valued; “similar goods” shall mean goods (2) No restrictions as to the disposition or use
which, although not alike in all respects, of goods by buyer except:
have like characteristics and like (3) Those imposed by law or Phil authorities
component materials which enable them (4) Limit the geographical area where goods
to perform the same functions and to be may be resold
commercially interchangeable; (5) Do not substantially affect the value of the
(4) Deductive value – an amount based on the goods
unit price at which the imported gods or (6) Not be subject to some condition or
identical or similar imported goods are consideration for which value cannot be
sold in the Philippines, in the same determined
condition as when imported, in the (7) No part of the proceeds of any subsequent
greatest aggregate quantity, at or about disposal shall accrue to the seller
the time of importation of the goods being (8) Buyer and seller are not related or if they
valued, to persons not related to the are, relationship did not affect the price
persons from whom they buy such goods,
as adjusted Deemed related if:
(5) Computed value – the aggregate value of (1) They are officers or directors of one
the cost or value of materials and another’s business;
fabrication or other processing employed (2) They are legally recognized partners in
in producing the imported goods, amount business;
for profit and general expenses, freight, (3) There exists in an employer-employee
insurance fees and other transportation relationship between them;
expenses for the importation of the goods, (4) Any person directly or indirectly owns,
among others; and controls or holds 5% or more of the
(6) Fallback value – an amount determined by outstanding voting stock or shares of
using other reasonable means and on the bother seller and buyer;
basis of data available in the Philippines. (5) One of them directly or indirectly controls
the other;
General rule: The foregoing methods are (6) Both of them are directly or indirectly
sequentially applied controlled by a 3rd person;
(7) Together they directly or indirectly control
Exception: [CAO 4-2004] Methods 4 and 5 a 3rd person; or
may be reversed at the request of the importer, (8) Related by affinity or consanguinity up to
subject to the approval of the Commissioner. 4th civil degree.
(1) sold in the Phil in the same condition as Gross Weight – weight of same, together with
imported the weight of all containers, packages, holders
(2) sales taken place at or about the same and packings, of any kind, in which said
time of importation of good being valued articles are contained, held or packed at the
time of importation
If no sale took place at or about the time of Legal Weight – weight at the time of their sale
importation, use sales at the earliest date after to the public in usual retail quantities
importation (of the similar or identical Net Weight – only the actual weight at the
good])but before expiration of 90 days time of importation excluding the weight of
the immediate and all other containers
If no sale meet the above conditions, importer
may choose the use of sales of goods being H.2. SPECIAL DUTIES
valued after further processing These are additional import duties imposed on
specific kinds of imported articles [See Table
“At or about the same time” of Special Duties]
45 days prior to and 45 days following the
importation I. REMEDIES
Computed value I.1. GOVERNMENT
DV is determined on the basis of cost of i. Administrative/Extrajudicial
production + profit + general expenses Search, seizure, forfeiture, arrest
reflected in sales from exporting country to the Enforcement of Tax Lien
Phil of goods of same class or kind Tax Lien – attaches upon the articles imported
which may be enforced while such are in
DV is calculated by: custody or subject to the control of the
Determining aggregate of relevant costs, government [Sec. 1204]
charges and expenses or value of
(1) materials and Sec. 1508.
(2) production or processing costs When an importer has an outstanding and
Costs* containers, packing, assists, demandable account with the Bureau of
engineering, artwork, plans and sketches Customs,
undertaken in Phil and charged to producer Collector shall hold the delivery of the
profits and general expenses article.
cost of transport, insurance and charges to the Upon notice, he may sell such importation
port or place of importation or a portion of it to satisfy the obligation.
Importer may settle his obligation anytime
*Note: these additional costs are added only if before the sale.
not included in the determination of the
aggregate of relevant costs, charges and Seizure and Forfeiture
expenses or value of materials and production. [Sec. 2205]
Who may effect:
Fallback value (1) Customs official;
If DV cannot be determined using any of the (2) Fisheries Commissions;
above methods, use other reasonable means (3) Philippine Coast Guard
consistent with principles and general
provisions of General Agreements on Tariffs Note: Person who is exercising such an
and Trade [GATT] authority has the duty to make known his
official character, upon being questioned at
ii. Specific the time of the exercise. If his authority came
[Sec. 202, TCC] from a special authorization, he has the duty
Rates are based on units of weight number or to exhibit the written authority upon demand.
measurement
What is seized:
Kinds of weight: To make seizure of any vessel, aircraft, cargo,
animal or any movable property when the
PAGE 267 OF 275
UP COLLEGE OF LAW TAXATION 2 TAXATION LAW
same is subject to forfeiture or liable for any (1) posting for 15 days in the public corridor of
fine under the tariff and customs law customhouse
(2) publication in newspaper
Where authority may be exercised: (3) other means Collector considers desirable
At any place within the jurisdiction of the
Bureau of Customs Collector shall make a list and particular
description and classification of the seized
Other Rights/Authority of the Official effecting property, appraisal based on local wholesale
the search and seizure values by
(1) Authority to require assistance of any (1) at least 2 appraising officials
police officer if necessary [Sec. 2207] (2) absent such, 2 competent disinterested
(2) At any time, right to enter, pass through or citizens
search any inclosure or warehouse, or
other building, not being a dwelling house If within 15 days from notification, no owner or
[Sec. 2208] agent is found or appears before Collector,
(3) Right to enter and search a dwelling then the property would be forfeited to
house, upon warrant issued by the Judge Government and sold at auction
of the Court, or any responsible officer as
may be authorized [Sec. 2209] Settlement
(4) Right to Search Vessels or Aircrafts and [Sec. 2307]
Persons or Articles Conveyed [Sec. 2210] While case is pending, Collector may accept
(5) Right to Search Vehicles, Beasts and settlement of any seizure case
Persons when he has reasonable cause to (1) Upon approval of Commissioner
suspect the presence therein of dutiable or (2) Payment of fine (25% to 80% of the
prohibited article introduced into the landed cost of the article)
Philippines contrary to law [Sec. 2211]
(6) Search of Persons Arriving From Foreign In case of forfeiture, should pay the domestic
Countries [Sec. 2212] market value of the seized article
How claimed
(1) Claim made in writing
(2) Collector shall verify with the records in his
office
(3) Certify claim to Commissioner with his
recommendation and necessary papers
(4) Commissioner shall then cause the claim
to be paid if found correct
START
Collector’s Amount
decision favorable Automatic review* by Customs
Yes involved less Yes
to taxpayer/ Commisioner (Sec. 2313)
than 5M?
adverse to gov’t?
Is
Does
No Commissioner’s
commissioner
Yes decision favorable
decide w/in 30
Taxpayer appeals to taxpayer/
days?
to Customs adverse to gov’t?
Commissioner 15
days from receipt No
of notice
Inaction construed as affirmation
of Collector’s decision
Does
Commissioner
Yes No, amount is at least
decide w/n 30
Is 5M
days?
Commissioner’s Yes
Automatic Review* by
decision
the Secretary of
favorable to Yes
Finance (SOF) (Sec.
taxpayer/
2313, CMO 3-2002)
adverse to
gov’t?
Is SOF’s
decision Does SOF
No favorable to Yes decide within
No No taxpayer/adverse 30 days?
to gov’t?
No
Yes
Inaction construed as
affirmation of
Decision becomes
commissioner’s decision No
END final &
(or of collector’s decision Appeal
unappealable
in case of inaction by to CTA
commissioner)
Appeal to the
Inaction construed
Court of Tax
as affirmation of
Appeals within 30
Collector’s
days from notice
decision
of decision
Appeal to CTA en
MR within 15 days
banc 15 days from Appeal to the
from receipt of END
receipt of decision Supreme Court
decision
denying MR
*Automatic review is intended to protect the interest of the Government. W/o auto review, the Commissioner and SoF would not know
about the decision laid down by the Collector favoring the taxpayer. Automatic review is necessary because nobody is expected to appeal
the decision of the Collector which is favorable to the taxpayer & adverse to the Government. (Yaokasin v. Commissioner 180 SCTA 591
Anti-Dumping Equivalent to the 5% ad valorem of Not exceeding tariff increase, For a]:
Duty = Normal subsidy the articles 100% ad valorem either ad
Value - Export upon the articles valorem or appropriately set
Price specific, or to a level not
both, to be paid exceeding one-
through a cash third of the
bond set at a applicable out-
level sufficient quota customs
to redress or duty on the
prevent injury to agricultural
the domestic product under
industry [Sec. 8, consideration in
RA 8800] the year when it
is imposed
Notes:
Exceptions to the Marking of Articles (in the following
situations, the containers shall be the one subject to
marking):
(1) Article is incapable of being marked
(2) Article cannot be marked prior to shipment to the
Philippines without injury
(3) Article cannot be marked prior to shipment to the
Philippines, except at an expense economically
prohibitive of its importation
(4) Marking of a container of such article will
reasonably indicate the origin of such article
(5) Article is a crude substance
(6) Article is imported for use by the importer and not
intended for sale in its imported or any other form
(7) Article is to be processed in the Philippines by the
importer or for his account otherwise than for the
purpose of concealing the origin of such article
and in such manner that any mark contemplated
by this section would necessarily be obliterated,
destroyed or permanently concealed
All criminal offenses arising from violations of the exclusive appellate jurisdiction of the tax court. It,
National Internal Revenue Code or Tariff and thus, follows that the CTA, by constitutional
Customs Code and other laws administered by mandate, is vested with jurisdiction to issue writs
the Bureau of Internal Revenue or the Bureau of of certiorari in these cases. [City of Manila v.
Customs. Principal amount of taxes and fees, Grecia-Cuerdo, (2014)]
exclusive of charges and penalties, claimed is
more than or equal to one million pesos. CTA En Banc
(1) Decisions, resolutions or orders on motions
The filing of the criminal action being deemed to for reconsideration or new trial of the Court in
necessarily carry with it the filing of the civil Division in the exercise of its exclusive
action, and no right to reserve the filling of such original jurisdiction over cases involving
civil action separately from the criminal action criminal offenses arising from violations of
will be recognized. the National Internal Revenue Code or the
Tariff and Customs Code and other laws
ii. Exclusive appellate jurisdiction in criminal cases administered by the Bureau of Internal
Revenue or Bureau of Customs;
CTA Division (2) Decisions, resolutions or orders on motions
(1) Over appeals from the judgments, for reconsideration or new trial of the Court in
resolutions or orders of the Regional Trial Division in the exercise of its exclusive
Courts in tax cases originally decided by them, appellate jurisdiction over criminal offenses
in their respected territorial jurisdiction. mentioned in the preceding subparagraph;
(2) Over petitions for review of the judgments, and
resolutions or orders of the Regional Trial (3) Decisions, resolutions or orders of the
Courts in the exercise of their appellate Regional trial Courts in the exercise of their
jurisdiction over tax cases originally decided appellate jurisdiction over criminal offenses
by the Metropolitan Trial Courts, Municipal mentioned in subparagraph [f].
Trial Courts and Municipal Circuit Trial Courts
in their respective jurisdiction. B. JUDICIAL PROCEDURES
B.1. JUDICIAL ACTION FOR COLLECTION OF
Does the CTA have jurisdiction over a special civil TAXES
action for certiorari assailing an interlocutory i. Internal revenue taxes
order issued by the RTC in a local tax case? YES. The remedies for the collection of internal
revenue taxes, fees or charges, and any
While there is no express grant of such power, increment thereto resulting from delinquency
with respect to the CTA, Section 1, Article VIII of can be through the institution of a civil or criminal
the 1987 Constitution provides, nonetheless, that action. [Sec. 205, NIRC]
judicial power shall be vested in one Supreme
Court and in such lower courts as may be Note: Please refer to Taxpayer’s Remedies (B.
established by law and that judicial power Collection)
includes the duty of the courts of justice to settle
actual controversies involving rights which are When this remedy is resorted to:
legally demandable and enforceable, and to The tax assessment becomes final and executory
determine whether or not there has been a grave because of the failure to appeal.
abuse of discretion amounting to lack or excess Even pending decision of the administrative
of jurisdiction on the part of any branch or protest [CIR v. Union Shipping, 1990]
instrumentality of the Government.
ii. Local taxes
On the strength of the above constitutional The LGU concerned may enforce the collection of
provisions, it can be fairly interpreted that the delinquent taxes, fees, charges or other revenues
power of the CTA includes that of determining by civil action in any court of competent
whether or not there has been grave abuse of jurisdiction. The civil action shall be filed by the
discretion amounting to lack or excess of local treasurer. [Sec. 183, LGC]
jurisdiction on the part of the RTC in issuing an
interlocutory order in cases falling within the
when the determination of an issue of fact from the time it is deemed submitted for
requires the examination of a long account. The resolution.
hearing before such justice shall proceed in all
respects as though the same had been made How: The motion shall be in writing stating its
before the Court. grounds, a written notice of which shall be served
by the movant on the adverse party.
Upon the completion of such hearing, the justice
concerned shall promptly submit to the Court a A motion for new trial shall be proved in the
written report thereon, stating therein his manner provided for proof of motions. A motion
findings and conclusions. Thereafter, the Court for the cause mentioned in subparagraph [a] of
shall render its decision on the case, adopting, the preceding section shall be supported by
modifying, or rejecting the report in whole or in affidavits of merits which may be rebutted by
part, or, the Court may, in its discretion, recommit counter-affidavits. A motion for the cause
it to the justice with instructions, or receive mentioned in subparagraph (b) of the preceding
further evidence. [Sec. 12, RA No. 1125, as section shall be supported by affidavits of the
amended; also Sec. 3, Rule 12, A.M. No. 05-11-07] witnesses by whom such evidence is expected to
be given, or by duly authenticated documents
Court Official – which are proposed to be introduced in evidence.
In default or ex parte hearings, or in any case
where the parties agree in writing, the Court may A motion for reconsideration or new trial that
delegate the reception of evidence to the Clerk of does not comply with the foregoing provisions
Court, the Division Clerks of Court, their shall be deemed pro forma, which shall not toll
assistants who are members of the Philippine bar, the reglementary period for appeal.
or any Court attorney. The reception of
documentary evidence by a Court official shall be Effect: The filing of a motion for reconsideration
for the sole purpose of marking, comparison with or new trial shall suspend the running of the
the original, and identification by witnesses of period within which an appeal may be perfected.
such documentary evidence. The Court official
shall have no power to rule on objections to any Grounds: A motion for new trial may be based on
question or to the admission of exhibits, which one or more of the following causes materially
objections shall be resolved by the Court upon affecting the substantial rights of the movant:
submission of his report and the transcripts (1) Fraud, accident, mistake or excusable
within ten days from termination of the hearing. negligence which ordinary prudence could
[Sec. 4, Rule 12, A.M. No. 05-11-07] not have guarded against and by reason of
which such aggrieved party has probably
Motion for reconsideration or new trial been impaired in his rights; or
[Rule 15, A.M. No. 05-11-07] (2) Newly discovered evidence, which he could
Who: Any aggrieved party may seek a not, with reasonable diligence, have
reconsideration or new trial of any decision, discovered and produced at the trial and,
resolution or order of the Court. which, if presented, would probably alter the
result.
May be opposed by: The adverse party may file an
opposition to the motion for reconsideration or A motion for new trial shall include all grounds
new trial within ten days after his receipt of a copy then available and those not included shall be
of the motion for reconsideration or new trial of a deemed waived.
decision, resolution or order of the Court.
Restrictions: No party shall be allowed to file a
When: He shall file a motion for reconsideration second motion for reconsideration of a decision,
or new trial within fifteen days from the date he final resolution or order; or for new trial.
received notice of the decision, resolution or order
of the Court in question. ii. Appeal to the CTA, en banc
No civil proceeding involving matter arising
The Court shall resolve the motion for under the National Internal Revenue Code, the
reconsideration or new trial within three months Tariff and Customs Code or the Local
Government Code shall be maintained, except as and Customs Code and other laws enforced by the
herein provided, until and unless an appeal has Bureau of Customs - The prosecution may be
been previously filed with the CTA and disposed conducted by their respective duly deputized
of in accordance with the provisions of this Act. legal officers.
Bureau of Customs, to appear in behalf of the action. At the other end, there is the public policy
officials of said agencies sued in their official precluding excessive judicial interference in
capacity: Provided, however, such duly deputized official acts, which may unnecessarily hinder the
legal officers shall remain at all times under the delivery of basic public services.
direct control and supervision of the Solicitor
General. The Court has adopted the "direct injury test" to
determine locus standi in public suits. In People
iii. Petition for review on certiorari to the Supreme v. Vera, it was held that a person who impugns
Court the validity of a statute must have "a personal
A party adversely affected by a decision or ruling and substantial interest in the case such that he
of the CTA en banc may file with the Supreme has sustained, or will sustain direct injury as a
Court a verified petition for review on certiorari result." The "direct injury test" in public suits is
pursuant to Rule 45 of the 1997 Rules of Civil similar to the "real party in interest" rule for
Procedure. [Sec. 19, R.A. No. 1125 as amended] private suits under Section 2, Rule 3 of the 1997
Rules of Civil Procedure. [Planter’s Products, Inc.
C. TAXPAYER’S SUIT IMPUGNING THE v. Fertiphil Corporation, G.R. No. 166006, March
VALIDITY OF TAX MEASURES OR ACTS OF 14, 2008]
TAXING AUTHORITIES
As applied to taxation:
C.1. TAXPAYER’S SUIT, DEFINED It is well-stated that the validity of a statute may
Taxpayer’s suit – refers to a case where the act be contested only by one who will sustain a direct
complained of directly involves the illegal injury in consequence of its enforcement. Yet,
disbursement of public funds derived from there are many decisions nullifying, at the
taxation. [Kilosbayan v. Guingona, Jr. (1994)] instance of taxpayers, laws providing for the
disbursement of public funds, upon the theory
C.2. DISTINGUISHED FROM CITIZEN’S SUIT that "the expenditure of public funds by an officer
The plaintiff in a taxpayer's suit is in a different of the State for the purpose of administering an
category from the plaintiff in a citizen's suit. In the unconstitutional act constitutes a misapplication
former, the plaintiff is affected by the expenditure of such funds," which may be enjoined at the
of public funds, while in the latter, he is but the request of a taxpayer. [Pascual v. Secretary of
mere instrument of the public concern. [De Public Works (1960)]
Castro v. Judicial and Bar Council (2010)]
A taxpayer is allowed to sue where there is a
C.3. REQUISITES FOR CHALLENGING THE claim that public funds are illegally disbursed, or
CONSTITUTIONALITY OF A TAX MEASURE OR that the public money is being deflected to any
ACT OF TAXING AUTHORITY improper purpose, or that there is wastage of
public funds through the enforcement of an
i. Concept of locus standi as applied in taxation invalid or unconstitutional law. A person suing as
The doctrine of locus standi is the right of a taxpayer, however, must show that the act
appearance in a court of justice. The doctrine complained of directly involves the illegal
requires a litigant to have a material interest in disbursement of public funds derived from
the outcome of a case. In private suits, locus taxation. He must also prove that he has
standi requires a litigant to be a "real party in sufficient interest in preventing the illegal
interest," which is defined as "the party who expenditure of money raised by taxation and that
stands to be benefited or injured by the judgment he will sustain a direct injury because of the
in the suit or the party entitled to the avails of the enforcement of the questioned statute or
suit." contract. In other words, for a taxpayer’s suit to
In public suits, this Court recognizes the difficulty prosper, two requisites must be met:
of applying the doctrine especially when plaintiff (1) public funds derived from taxation are
asserts a public right on behalf of the general disbursed by a political subdivision or
public because of conflicting public policy issues. instrumentality and in doing so, a law is violated
On one end, there is the right of the ordinary or some irregularity is committed and
citizen to petition the courts to be freed from
unlawful government intrusion and illegal official
PAGE 280 OF 275
UP COLLEGE OF LAW TAXATION 2 TAXATION LAW
(2) the petitioner is directly affected by the The decision of the Collector can be reviewed by
alleged act. [Mamba v. Lara, G.R. No. 165109, the Commissioner of Customs who can approve,
Dec. 14, 2009] modify or reverse the decision or action of the
Collector. If the party is not satisfied with the
ii. Doctrine of transcendental importance ruling of the Commissioner, he may file the
Recognizing that a strict application of the "direct necessary appeal to the Court of Tax Appeals.
injury" test may hamper public interest, this Afterwards, the decision of the Court of Tax
Court relaxed the requirement in cases of Appeals can be appealed to this Court.
"transcendental importance" or with "far
reaching implications." Being a mere procedural
technicality, it has also been held that locus
standi may be waived in the public interest. [Ibid]