1|Page 2011 BAR COVERAGE FOR TAXATION I. General Principles of Taxation A.

Definition and Concept of Taxation Taxation Is the 1) necessary power of the 2) sovereign 3) to raise revenue through 4) enactment of laws that 5) impose charges 6) upon persons, property and activity, under its 7) jurisdiction in order to 8) defray - pay for the expenses of government Essential elements 1. based on necessity without taxes, state cannot maintain its very existence (lifeblood theory); courts may not enjoin collection of taxes; except: CTA feels it will jeopardize interest of government and taxpayers suspension (deposit or file surety bond not more than twice the amount); strictly construed against taxpayers and liberally construed against the government; Tax exemptions: deductions from gross income are measures that will decrease payments to government (exemptions); strictly construed Tax amnesty: a forgetting the collection of taxes; condoning taxes Exceptions: law granting awards for tax informers liberally construed Tax assessments are presumed correct burden of taxpayer to prove he is not liable and assessments are wrong and taxpayers position is correct Equitable recoupment not applicable in the Philippines; payment of money out of government without appropriation made by law Taxes are not subject to compensation and set-off; reason: payment of money out of government without appropriation made by law: exception: when obligation of govt. already subject of appropriation; Public funds are not subject to execution; this does not mean that the government is not obliged to pay; it simply means that payment must be worked out through the budget process, namely appropriation made by law. Govt cannot be estopped by the errors of admin officers; The errors of certain admin officers should not be allowed to jeopardize the governments financial position. Tax law cannot be interpreted in such a way that the tax would be payable only when it would please the taxpayer; if that were so, the tax would not be a compulsory burden. Mere retroactivity will not invalidate taxing statute; only when it is oppressive and harsh in its retroactive application 2. inherent in and an attribute of sovereignty it is the very nature of the sovereign the power to its subjects a sovereign state has the power of taxation even if there is no provision in the constitution explicating authorizing its exercise

2|Page refunds of taxes generally do not earn interest; exception: when the illegal collection is attended by arbitrariness and abuse of authority interest may be awarded the right to collect taxes is imprescriptible; when by its own law, it does consent to being subject prescription; the state, unlike a private person, does not sleep on its rights and thereby lose them; exception: when the state itself consents to being subjected to prescription. But then, the statute of limitations is strictly construed against the taxpayer. Is the power of taxation inherent also in local governments? NO. Taxation is a power inherent only in a sovereign government. LG, are mere instrumentalities of the sovereign; our consti directly vests LG with power to raise their own revenues subject to such as Congress may impose consistent with the policy of local autonomy 3. essentially legislative involves rule-making power; process: a) selecting persons who will be forced to pay taxes; b) objects to be subject to tax; c) amount to be collected; d) time for payment; e) procedure for collection May tax exemptions be granted by an executive officer? No, legislative power to tax includes the power to exempt; separation of powers unless authorized by law how does the sovereign exercise the power to tax? Resides in the people; there must collective agreement; with consent of the people body politic must consent to the imposition of tax; acting indirectly through their representatives in Congress; directly through initiative and referendum; May Congress delegate its power to tax? NO because a delegate is generally not allowed to further delegate; exceptions: a) consti itself authorizes it (as authority is given to Congress) ex: President to fix import duties and tariff rates; b) Congress creates local subdivisions carries with it the power to give them authority to raise its own revenues; c) when congress delegates to administrative bodies the details of enforcing a tax law no real delegation but only a deference to the executive branch to lay down the details of how to implement a taxing statute. How other govt branches participate in the power of taxation? President administers and collects the taxes, approve any revenue bill or veto it, fix tariff rates, pardon tax offenses Judiciary adjudicates and settles conflicts between the rights of the government and of its subjects Taxes are enforced charges independent of the will of individual subjects: existence of state will be extremely precarious if the inflow of revenues made to depend on the voluntary will and free consent of each individual subject. Taxes operate ad invitum means without consent; when applied to taxation refers to compulsory character of taxation; The power to tax is the power to destroy: since taxation is a power that can be exercised to any extent necessary to support the government; its exercise may sometimes impair or even destroy the right to engage in certain activities; however, not an absolute principle cannot be abused so as to destroy fundamental rights

3|Page Distinguish Taxes from License Fees

Source Purpose Amount Legality of objects Relation to impairment clause Taxes Taxing power Raise revenues Unlimited Impossible on legal and illegal acts Inferior to clause License Fees Police power Regulate acts Limited to reasonable cost Only in legal acts Superior to clause

Distinguish taxes from debts

Source Susceptibility to set-off Interest upon delinquency Imprisonment as penalty Prescription Taxes Taxing power Not subject None, unless Imposable but not poll tax Governed by tax law itself Debts contract subject Limited to reasonable cost Not imposable Governed by civil code

When are taxes treated as debts? a. As to enforcements: both can be enforced by judicial action upon default b. When secured by bond: statute of limitations on contracts is applicable to collection c. Deductibility of interest from gross income: both deductible from gross income, provided they are business related Distinguish taxes from special assessments?
Property tax Nature of liability Basis Regularity Taxes All kinds Personal to one assessed Need to raise revenues May be imposed repeatedly Special assessments Only on land Not personal On benefits received only Exceptional as to time and locality once only to a particular place and time

Taxes from penalties Taxes: raise revenue Penalties : punish and deter illegal act Taxes from tolls Tolls: compensate the owner for the use of property Taxes from customs duties Nature customs are taxes Purpose: customs duties imposts are levies on importation or exportation of goods Classification of Taxes As to Subject matter 1. Personal capitation or poll tax - individual 2. Property property owner; because of what he owns 3. Excise exercise an act; activities and professions and other acts state considers subject of its taxing power As to Purpose 1. General for the general purpose of govt.; ex: income tax

4|Page 2. Specific placed in a trust fund and government is imposed to use money collected only for the purpose that has been stated in that law Incidence 1. Direct fall on the person who is intended to pay the tax; income and estate 2. Indirect fall on one person but expected to pass on burden to the on intended to be taxed; VAT As to nature of the tax base 1. Ad valorem based on the value of the article 2. Specific based on specifications; such as weight and value capacity or any other physical unit of measurement As to the Structure of the tax rate 1. Progressive as rate increases as tax base increases; ex: income tax 2. Regressive rate decreases as base increases; ex: wholesale tax 3. Proportionate no rate change; fixed proportion to the tax base; ex: VAT How taxes are exacted (aspects of taxation) a. Levy the imposition, decided upon by congress and approved by the president of the obligation on subjects to pay for the expenses of govt; term levy also used in tax collection the collection of the tax on the property itself b. Assessment and collection the administrative implementation (assessmentdetermining amount to be paid) and enforcement of said obligation (collection), particularly in cases where those who were made liable refuse to pay the legislated imposition; in tax remedies computation and notification of taxpayers obligation Purpose for taxes collected Primary purpose raise revenue to defray expenses of government (Benefits protection theory: taxes are what we pay to live in a civilized society Secondary purpose a. To assist regulating certain activities; sin taxes (regulate smoking) b. Achieve certain social goals: luxury tax (equitable distribution of wealth) c. To attain particular economic objectives; encourage investments tax incentives are provided 4. intended to raise revenue 5. effected by imposition of forced charges (taxes) 6. persons, 7. purpose is to defray B. Nature of Taxation C. Characteristics of Taxation D. Power of Taxation Compared With Other Powers 1. Police Power 2. Power of Eminent Domain

5|Page E. Purpose of Taxation 1. Revenue-raising 2. Non-revenue/special or regulatory F. Principles of Sound Tax System 1. Fiscal Adequacy the sources of tax revenue should coincide with and approximate the needs of the government expenditures 2. Administrative Feasibility the tax system should be capable of being properly and efficiently administered by the government and enforced with the least inconvenience to the taxpayer 3. Theoretical Justice the tax system should be fair to the average taxpayer and based upon the ability to pay G. Theory and Basis of Taxation 1. Lifeblood Theory 2. Necessity Theory 3. Benefits-Protection Theory (Symbiotic Relationship) 4. Jurisdiction over subject and objects H. Doctrines in Taxation 1. Prospectivity of tax laws 2. Imprescriptibility 3. Double taxation a. Strict sense b. Broad sense c. Constitutionality of double taxation d. Modes of eliminating double taxation 4. Escape from taxation a. Shifting of tax burden 1) Ways of shifting the tax burden 2) Taxes that can be shifted 3) Meaning of impact and incidence of taxation b. Tax avoidance c. Tax evasion 5. Exemption from taxation a. Meaning of exemption from taxation b. Nature of tax exemption c. Kinds of tax exemption 1) Express 2) Implied 3) Contractual d. Rationale/grounds for exemption e. Revocation of tax exemption 6. Compensation and Set-off 7. Compromise 8. Tax amnesty a. Definition b. Distinguished from tax exemption 9. Construction and Interpretation of: a. Tax laws 1) General Rule 2) Exception b. Tax exemption and exclusion 1) General Rule

6|Page 2) Exception c. Tax rules and regulations 1) General rule only d. Penal provisions of tax laws e. Non-retroactive application to taxpayers 1) Exceptions II. Scope and Limitation of Taxation Limitations classified 1. Inherent Limitations those that arise from the very nature of taxation itself 2. Constitutional those imposed by consti Inherent Limitations 1. Situs taxes may be imposed only on person, property or activity within the jurisdiction of the taxing authority; a state is limited to the area only on those within its jurisdiction If tax is: a. Personal, poll or capitation the residence tax residence of taxpayer or citizenship of taxpayer b. An excise tax: the state where the right is exercised or the activity is conducted c. A real property tax only the state where the real property is located d. Tax on tangible personal property same as real property e. A tax on intangible personal property they may be imposed by the state where the intangible personal property is exercised (business situs) Explain how public purpose is a limitation? Public purpose is an inherent limitation International comity? Courtesy the state is expected to show other states; ex: obligation to follow a treaty exempting nationals internal law cannot be passed in the phils that contradicts that international law Non-delegation? Taxation inherently legislative; non-delegation a limitation because it limits restricts the persons or entities that are authorize to exercise it Government exempt from taxes? General rule: Yes; however where the taxpayer is a LGU and taxing authority is national government vice-versa provided that the national government consents to the tax for budgetary reasons Double taxation prohibited? DT that a person is taxed twice by the same authority; also means two jurisdictions taxed the same person or activity; when prohibited: direct duplicate taxation taxing the same person twice for the same reason in violation of some provision in the consti usually the rule on equal protection; also prohibited is imposing a tax activity that is merely incidental to a business or activity which has already been taxed 2. Public purpose tax must be intended to raise revenue to defray public expenditure 3. International comity international courtesy

7|Page 4. Non-delegation 5. Exemption of government state cannot tax itself a. Public Purpose b. Inherently Legislative 1) General Rule 2) Exceptions a) Delegation to local governments b) Delegation to the President c) Delegation to administrative agencies c. Territorial 1) Situs of Taxation a) Meaning b) Situs of Income Tax 1) From sources within the Philippines 2) From sources without the Philippines 3) Income partly within and partly without the Philippines c) Situs of Property Taxes (1) Taxes on Real Property (2) Taxes on Personal Property d) Situs of Excise Tax (1) Estate Tax (2) Donors Tax e) Situs of Business Tax (1) Sale of Real Property (2) Sale of Personal Property (3) VAT d. International Comity e. Exemption of Government Entities, Agencies, and Instrumentalities Constitutional Limitations a. Provisions Directly Affecting Taxation 1. Prohibition against imprisonment for non-payment of poll tax 2. Uniformity and equality of taxation applied uniformly to subjects of taxation similarly situated; fair (equitable) when its burden falls on those who are able to pay it (those who have more in life should shoulder more expenses under the law) 3. Grant by Congress of authority to the President to impose tariff rates authority to Congress to delegate to President the fixing of customs and tariff duties; not a blanket authority; only by law; only within specified limits; limitations within the framework of national development; customs/tariff dues dealing with countries in foreign relations and political sense; 4. Prohibition against taxation of religious, charitable entities, and educational entities exemptions of charitable institutions favored because of their nature; performing

8|Page functions which the government itself should perform; only on their properties actually, directly and exclusively used for religious, charitable and educational purposes; 5. Prohibition against taxation of non-stock, non-profit institutions schools; favoring schools goes beyond property revenues all kinds of taxes and duties (books imported or donations from abroad); cessation properties shall be disposed in the manner provided by law Exempts donations made to school on the donor; Budgetary priority to education 6. Majority vote of Congress for grant of tax exemption vote requirement for tax exemptions; majority of all the members of Congress 7. Prohibition on use of tax levied for special purpose - Rule on Taxes for special purposes all money collected on any tax levied for a special purpose shall be treated as a special fund and paid out for such purpose only; balance or remainder transferred to the general funds of government 8. Presidents veto power on appropriation, revenue, tariff bills but the veto shall not affect the item or items to which he does not object; encroach a bit on law-making; 9. Non-impairment of jurisdiction of the Supreme Court power of judicial review; review, revise, reverse, modify or affirm on appeal or certiorari, final judgments or order in cases involving the legality of any tax, impost, assessment, or toll, or any penalty imposed in relation thereto. 10. Grant of power to the local government units to create its own sources of revenue subject to such guidelines and limitations as the Congress may provide, consistent with the policy of local autonomy; accrue exclusively to the LGU (fees, taxes and charges) Share of LGs in national taxes just share as determined by law, in the national taxes which shall be automatically released to them. Taxing power of Autonomous Regions within its territorial jurisdiction 11. Flexible tariff clause 12. Exemption from real property taxes - charitable institutions 13. No appropriation or use of public money for religious purposes Excessive fines shall not be imposed no reasonable proportion as to the amount being collected and offense committed Requirement on progressive system the Congress shall evolve a progressive system of taxation; progressive when the effective rate of taxation goes up depending upon the resources of the person affected. The tax rate goes up as the tax base increases; If regressive not a standard that invalidates a law; only a moral incentive and not a morally enforceable rights Requirement for an appropriation no money shall be paid out of the treasury except in pursuance of an appropriation made by law

9|Page

Tax bills to originate in the HOR all appropriation, revenue or tariff bills authorizing increase of public debt shall originate exclusively in the HOR, but Senate may propose or concur with amendments; more sensitive to the local needs of constituents; may undergo extensive stages or be entirely different from what came from the house; Duty of the President to submit budget within 30 days from the opening of every regular session, as basis of the general appropriations bill, a budget of expenditures and sources of financing, including receipts from existing and proposed revenue measures. Presidential pardoning power b. Provisions Indirectly Affecting Taxation 1. Due process restricts the deprivation of property without due process of law Procedure required; what is required in order to pass a valid law: what is prohibited by due process clause arbitrary and discriminatory; ex: when taxation amounts to confiscation of property; tax is confiscatory the fact of a tax being confiscatory is established by competent evidence 2. Equal protection it does not demand that everyone pay the same amount of tax where there are differences in the amount, the differences should be based on reasonable grounds; clause does not preclude classification; what is reasonable for purposes of taxation? A)be based on substantial distinctions; b) be germane or materially related to the purpose of the law; 3) classification must be applicable to present and future conditions until law is repealed; d) applicable to all members of the class (uniformity of taxation) 3. Religious freedom not subjected to hindrances and unreasonable restrictions; 4. Non-impairment of obligations of contracts - prohibits the passing of a law that impairs the obligation of contracts; when tax exemption has been granted for a valid consideration for a valid consideration, the contract clause prohibits the state from passing a law impairing that exemption Construction of Tax rules 1. general rule: must be interpreted fairly 2. doubtful tax laws strictly against the government; liberally in favor of the taxpayers; if there is clear intention of the law that there should be taxing burden of proof shifts on taxpayer Tax exemptions construed liberally a) law expressly provides (ex: retirement or incentive taxes); b)the exemption is in favor of religious and charitable institutions; c) where the exemption is in favor of government, pol subdv or instrumentality; d) retirement (ex: terminal leave not subject to withholding tax; preferential tax rate and exemption) Tax amnesty general pardon; how interpreted strictly against the taxpayer; Partial refund? Not granted unless granted in the most explicit and categorical language J. Stages of Taxation 1. Levy 2. Assessment and Collection

10 | P a g e 3. Payment 4. Refund K. Definition, Nature, and Characteristics of Taxes L. Requisites of a valid tax M.Tax as distinguished from other forms of exactions 1. Tariff 2. Toll 3. License fee 4. Special assessment 5. Debt N. Kinds of Taxes 1. As to object a. Personal, capitation, or poll tax b. Property tax c. Privilege tax 2. As to burden or incidence a. Direct b. Indirect 3. As to tax rates a. Specific b. Ad valorem c. Mixed 4. As to purposes a. General or fiscal b. Special, regulatory, or sumptuary 5. As to scope or authority to impose a. National internal revenue taxes b. Local real property tax, municipal tax 6. As to graduation a. Progressive b. Regressive c. Proportionate II. National Internal Revenue Code of 1997 as amended (NIRC) A. Income Taxation What is income all wealth which flows into the taxpayer other than as a mere return of capital (gains and profits; gains derived from gains and disposition of capital assets) Capital is a fund; income is flow of that fund; C is wealth, I is the source of wealth Property is a tree, tree is the fruit; labor is a tree, income is fruit of labor, capital is tree, income is fruit When is income subject to tax (Realization Principle)? Only when it has become realized; only when it has become real or having an identity that is separate and distinct from its source; mere increase in the market value of ones property is not yet income; but when the property is

11 | P a g e sold at a price higher than its cost, the amount received above the cost is income that is subject to tax, and part of the price that corresponds to the cost is not subject to income tax because it is mere return of capital Tests that are applied to determine if income is realized or not a. severance test: when income can be separated from the capital b. control test: when the recipient can use the income for his own benefit c. proprietary interest test: when recipients rights over the income are substantially those of its owner d. actual receipt test: when a cash basis taxpayer takes actual or constructive possession of the income e. equivalent of cash doctrine: when what is received, though not cash, can be exchanged or is like cash (cancellation of debt increase in his net worth) f. claim of right doctrine: when recipient makes a claim, rightfully or not, of complete ownership over the income; ex: a thiefs claim over the stolen property; sequestration g. test of involuntary conversion when property is involuntarily converted, there is no realization of income if proceeds are used to acquire property of a like kind Are all realized income recognized as taxable income? NO; In order to be recognized as taxable, realized income must have three requisites: a. there must be a closed and completed transaction b. gain or profit is derived therefrom c. no law excludes the income from taxation ex: sale of mutual fund law excludes it from taxation although first two are present How is income Tax structured? a. Subject individuals (trusts and estates); corporations (including partnerships) b. Object income c. Tax base - taxable income d. Tax rate variable progressive tax rate depending on the nature of the subject and on the nature of income e. Length of accounting period generally: 12 months; exceptions 1) change of accounting period- with the permission of the BIR; 2) final return of a decedent; 3) first return of an estate; 4) newly organize corporations; 5) dissolving corporations f. Kinds of taxable years 1) calendar jan 1 end of dec; 2) fiscal; (individuals, estates and trusts are required to follow the calendar year) g. Methods of accounting 1) cash receipts and disbursement method report when you earn the cash and pay when you disburse (claiming deductions); 2) accrual method the income or liability is recognized even if the cash is not received; 3) installment method reports income at the time the installments are paid; 4) percentage of completion method like installment method but adopted by construction companies in accordance with the percentage of work accomplished; 5) crop year basis used in agricultural; tax during harvest; h. Manner of determining tax liability self-assessment (the person liable files a tax return that shows tax due) Is income tax collected by the government taxed at the same time that the income flows to the taxpayer? No, the tax income is imposed only on the net result of the taxpayers transactions within a certain period called accounting period; exceptions:1) final taxes are either

12 | P a g e withheld by the payor or remits it to the government when the transaction occurs, 2) some taxes that are paid by the taxpayer gradually in advance of the regular income tax (ex: tax on gains on the share of unlisted stocks). Pay as you go rule a. When interest is paid on bank deposits b. When cash property dividends are declared by corporations and paid to stockholders c. When real property that is a capital asset paid within 30 days after the sale d. When royalties, other than tax free royalties for books, literary works, and musical compositions, are received e. When winnings other than tax free lotto and sweepstakes prices are received When is the income tax for the taxable year paid? When the return is filed after the end of the taxable year pay as you file; on or before 15th day of april of each year; Exceptions: 1) final tax on sale of stocks not traded through the local exchange within 30 days after each sale and consolidated on april 15 the following year; 2) final tax on sale of real property that is a capital asset is paid within 30 days from date of sale Tax Retrun a document filed by the taxpayer that sets out, in addition to basic data about himself, the amount of tax that he calculates is what he should pay based on his own declaration of what goes into his tax base and his application thereto of the tax rate. It is usually filed at the time the tax is to be paid. 2. Income Tax Systems a. Global (or unitary) Tax System all types of income derived from whatever and wherever sources are treated in exactly the same way b. Schedular Tax System income is divided into different groups (schedules) and each schedule is given a separate treatment, usually in terms of the tax rate c. Semi-schedular or semi-global tax system Philippines; since only some and not all types were segregated; ex: interest from bank deposits, capital gains from sale of real property were segregated and subjected to preferential rates. Those not segregated were subjected to the regular rates 3. Features of the Philippine Income Tax Law a. Direct tax imposed on the income earner who is expected to bear the economic burden b. General tax applicable to the majority if not all of the population c. Progressive progressive; the rate increases as the base enlarges d. Comprehensive e. Semi-schedular or semi-global tax system some types of income are categorized for different treatments; the rest uniformity f. Criteria in Imposing Philippine Income Tax: What Situs justifies a states subjecting a person to income tax? A state may impose an income tax by reason of: a. Citizenship Principle b. Residence Principle c. Source Principle d. Location of the property that produces the income e. Place where the business that produces the income is conducted

4. Types of Philippine Income Tax

13 | P a g e 5. Taxable Period a. Calendar Period b. Fiscal Period c. Short Period 6. Kinds of Taxpayers
Citizens Resident global and schedular Non-resident (including overseas contract workers) Aliens Resident or non-resident Tax Base All income derived from sources within and without (or outside) the Philippines Only income derived from sources within the Philippines Tax Base Only income derived from sources within the Philippines

What are income considered to be derived from sources within the Philippines? 1. Interests when they are derived from sources within the Philippines and when they are paid on indebtedness of residents 2. Dividends a) when paid by domestic corporations; b) when paid by foreign corporations 50% or more of whose gross income for the last 3 years come from the Philippines 3. Fee on services when services rendered in Philippines 4. Rentals and royalties when the property rented or the right for which royalties are paid in the Philippines 5. Gains on sale of real property when located in the Philippines Income taxes on citizens and resident aliens 1. on passive income, namely interests, royalties, prizes and other winnings, cash and property dividends from domestic sources final tax (no need to declare on any other returns) of different tax rates 2. on capital gains, from sale of shares of stock not traded in the PSE final tax of 5% on first 100K and 10% on excess (30 days from the date of sale) 3. on capital gains, from sale of real property in the Phils final tax of 6% based on gross selling price 4. on all other income progressive tax rate from 5% to 32% What are the income taxes on passive income received by a Philippine resident from domestic sources? 1. On interest from banks generally 20% 2. Except: a. From EFCDUs (expanded foreign currency deposit units) 7.5% b. From long term (5 yrs) deposits or investments tax free, but if pre-terminated, taxed at diminishing rate based on holding period from 20% if remaining term is 3 or more years to only 5% if remainder is 1 year or less 3. Royalties generally 20% except for books and other literary works at 10% 4. Prizes 20%, except from the sweepstakes and lotto which are tax free, and those less than 10K which shall be part of other income 5. Cash and property dividends from domestic corp (including share in distributable net income after tax of partnerships, other than general professional partnership) 10%

14 | P a g e How are gains from sale by a resident of domestic shares of stock (capital assets) taxed? 1. gains from the sale of shares listed and traded in the local stock exchange is not subject to the income tax. Instead, the sale is subject to a transaction tax of of 1% of gross selling price 2. gains from sales, during the taxable year, of shares of stock not so listed is taxed at 5% on the first 100K of net capital gain and 10% on excess Gains on real property (capital asset) 6% on gross selling price or current fair market value (zonal value) whichever is higher, is imposed on the presumed capital gains from the sale; Exceptions: 1. sales to the government may be taxed at final tax of 6% or as part of other income of the seller, at his option 2. if the sale is of a principal residence, and proceeds are reinvested in a new principal residence (within 18 months), no tax imposed if not done more than every ten years How is the rest of the individuals income subject to tax? put in one category and subjected to the progressive tax rate that starts at 5% for income not higher than 10K peaks at 32% for any income above 500K How is the taxable income of individuals, other than those subject to the final taxes computed? All pertinent items of gross income, less all deductions permitted by law for such types of income, and less also personal and additional exemptions, constitute a resident individuals taxable income Gross income 1. Compensation for services (salaries, commissions 2. Income derived from the conduct of trade or business or exercise of a profession 3. Gains derived from dealings in property, other than those subject to final tax 4. Interests 5. Rents 6. Royalties not subject to final tax 7. Dividends not subject to final tax 8. Annuities 9. Prizes and winning not exempt 10. Pensions not exempt 11. Partners distributive share from the net income of the general professional partnership Exclusions 1. Return of premiums on life insurance policies paid to the insured, which are really a return on capital 2. Income exempt under treaty (public policy reason) Exclusions not part of Gross income 1. Proceeds of life insurance paid to the heirs or beneficiaries upon the death of the insured (return of capital); 2. Amount received by the insured as a return of premium paid by him under life insurance, endowment or annuity contracts 3. Gifts (donors tax), bequests, devises, inheritance (inheritance tax). But, if the donated or inherited property earns interest, the interest is part of gross income (have already to transfers taxes).

15 | P a g e 4. Amounts received through accident or health insurance or under workmens compensation act, as compensation for personal injury or sickness, plus damages paid therefor 5. Income of any kind to the extent required by any treaty obligation binding upon the government of the Philippines 6. Retirement benefits pursuant to the retirement law 7. Retirement benefits under a qualified private retirement plan 8. Any amount received by an official or employee or by his heirs from the employer as a consequence of separation from the service because of death, sickness or other physical disability or for cause beyond the control of said official or employee 9. SS benefits, retirement gratuities, pensions and other similar benefits (resident or nonresident or aliens) 10. Payments to residents by the USVA 11. Benefits received from the SSS, GSIS 12. Miscellaneous items a. Income derived from foreign government b. Income derived by the govt and its political subdivisions c. Prizes and awards in recognition of religious, charitable, scientific, educ, artistic or literary or civic achievement d. Prizes and awards in sports competitions e. 13th month pay and other benefits not exceeding 30K f. GSIS, SSS, medicare contributions g. Gains from sale of bonds, debentures and other certificates of indebtedness h. Gains from the redemption of shares in mutual funds Fringe benefits Tax? A final tax of 32% on the grossed-up monetary value furnished or granted to the employee (except rank and file), unless the fringe benefit is required by the nature of or necessary to the trade (ex: keeper/guard of a hacienda), business or profession of the employer or when the fringe benefit is for the convenience or advantage of the employer; 32% is paid by the corporation ; liable are the managerial or supervisory What items are part of the base of the fringe benefits? 1. Housing 2. Expense account 3. Vehicle of any kind 4. Household personnel 5. Interest on loans to the extent less than market rates 6. Membership fees and dues in social and athletic clubs or similar organizations 7. Expenses for foreign travel 8. Holiday and vacation expenses 9. Educational assistance to the employee or hid dependents 10. Life on health insurance and other non-life insurance premiums or similar amounts in excess of what the law allows, such as contributions to the SSS, GSIS, group insurance, similar contributions What are the fringe benefits are not subject to FBT? 1. Exempted by the code 2. Contributions of employer to retirement, insurance or hospitalization benefit plans 3. Benefits to rank and file 4. De minimis benefits (ex: 1 sack of rice, meal allowance) 5. When necessary for the business of employer 6. When for the convenience of the employer

16 | P a g e

Deductions items allowed to deduct to arrive at taxable income; reasons: 1) akin to capital; 2) public policy ex: charitable contributions Exclusions not part of tax base Deductions only income is compensation for services 1. Premiums not exceeding 2400 per family for health or hospitalization insurance taken by the taxpayer; gross income of more than 250K; married only spouse claiming dependents entitled to deductions Individual taxpayer other than compensation in addition to premium payments on health/hospitalization insurance 1. Optional standard deduction of 40% of gross income 2. Itemized deductions that he can prove he is entitled to a. Ordinary and necessary to trade, business or professional expenses b. Interest on indebtedness incurred in connection with business and, if used to purchase assets, not treated as part of the cost 3. Taxes in connection with business, except the Phil income tax, provided foreign income tax are not claimed as a tax credit, estate and donors taxes, and taxes assessed against local benefits (special assessments) 4. Losses not compensated for by insurance or otherwise, such as those 1) incurred in connection with business; 2) casualty losses; 3) NOLCO (net operating loss carry over) which is carried over for more than 3 years; 4) short term capital loss; 5) securities becoming worthless; 6) wash sales; 7) wagering losses; 8) abandonment losses 5. Bad debts ascertained to be worthless and charged off during the year 6. Depreciation allowance for ordinary wear and tear, including obsolescence, computed through a) straight line method; b) declining balance method; c) sum of the years digits methods; d) any other method approved by the Sec. of Finance 7. Depletion of oil, gas wells and mines 8. Charitable institutions a. 100% if donations are to: a) government or its subdivisions for priority activities in education, health, youth and sports development; b) foreign governments made fully deductible by agreements or treaties; c) accredited NGOs b. 10% in case of individuals and 5% of corporations of taxable income from business as computed without benefit of the deduction 9. Research and development expenses treated as deferred expenses 10. Contributions to qualified pension trusts up to 100% if in payment for liability accruing during the year or 10% annually , for the next 10 years, if in excess of such current liability What items are not deductible from gross income? 1. Personal, living and family expenses 2. Amounts paid out for new building or for permanent improvements, or betterments made to increase the value of any property or estate 3. Amount expended in restoring property or in making good the exhaustion thereof for which an allowance is or has been made 4. Premiums paid for a life insurance policy covering the life of an officer or employee or any person interested in the business of the taxpayer, when the taxpayer is directly or indirectly the beneficiary under such policy 5. Losses from sales or exchanges of property among certain related persons

17 | P a g e What expenses are considered ordinary and necessary 1. Compensation for services, including gross-up value of fringe benefits 2. Travel expenses (in pursuit of trade or business and profession) 3. Business rentals 4. Entertainment, amusement and recreation expenses Kickbacks or bribes NO, by expressed provision of the tax code; reasons of public policy What are the requisites in order to be able to deduct interest on indebtedness from gross income? 1. There must be an indebtedness 2. The interest is paid or incurred during the taxable year on that indebtedness 3. The indebtedness of that of the taxpayer 4. The indebtedness is connected with taxpayers business 5. The interest must be legally due Tax arbitrage rule means a transaction that is entered into for the purpose of taking advantage resulting from different tax treatments of two legs of the transaction; the law reduces the amount that is to be deducted from interest paid by 33%; example: a taxpayer purports to get a loan (in order to deduct the entire interest from his ordinary income that is tax on net at 30% and then depositing proceeds with a bank in a time deposit certificate whose interest is taxed only at 20%. By so doing he seeks to gain 10% How does the law favor those who invest property used in business? Borrower is given the option of either claiming the entire capital as an expense (thereby reducing the tax on his net income when he has taxable income) or treating the interest as part of the cost of the property acquired, called capitalizing, if he cannot benefit from the deduction because he does not have enough taxable income to reduce Are all taxes paid in connection with business deductible from gross income? Generally yes: except: 1. Philippine income taxes 2. Foreign income taxes that are not claimed as tax credit 3. Estate and donors taxes 4. Taxes assessed against local benefits of a kind tending to increase the value of property assessed special assessments Tax Benefit Rule reporting of tax refund as income only if the tax refund previously benefitted a tax payer What losses are deductible from gross income? 1. Loss must be actual 2. Sustained in a closed and completed transaction 3. Must not be compensated for by insurance or otherwise 4. Loss must be liquidated and fully charged off during the taxable year 5. Not claimed as deduction from gross estate (estate tax return) 6. If due to casualty, must be reported to BIR within 45 days from discovery of loss

18 | P a g e What losses are not deductible from gross income by reason of relationship of the parties? The following losses from the sale or exchange of property may not be deducted when: 1. Between members of a family, spouse, brothers and sisters, ancestors and lineal descendants 2. Between an individual and a corporation more than 50% of which capital is owned by the taxpayer, except in case of distribution in liquidation 3. Between 2 corporations more than 50% of whose capital is owned by the same individual, if either one is personal holding company; exception: liquidation 4. Between grantor and fiduciary of a trust 5. Between the fiduciaries of two trusts, if the grantor of the two trusts is the same 6. Between a fiduciary of a trust and a beneficiary of such trust What are losses that are not deductible from gross income by reason of public policy? 1. Losses sustained in illegal transactions 2. Casualty losses only when they are not compensated for by insurance 3. Wagering(gambler) losses are deductible only from wagering gains (report wagering gains) 4. Losses on the wash sale of securities cost of purchase price that caused the disallowance; property when acquired; loss incurred; property re-acquired 5. Capital losses are deductible only from capital gains 6. Losses in sale or exchange by a taxpayer other than a corporation of a long term capital asset are deductible only to the extent of 50% of said loss What are capital assets? Any asset or property whether or not connected with business, but is property that is not 1. Stock in trade or property in inventory 2. Property held primarily for sale in the ordinary course of business 3. Property used in business and subject to depreciation allowance 4. Real property used in the business of taxpayer Why are capital assets given special treatment? CA are held by taxpayer for long periods of time; their value are values that accrue from year to year; they contribute to the wealth of taxpayer as capital; special treatment given by the law is in recognition to the contribution of assets held as capital make towards the stability and growth of the economy as a whole. Are all gains from sale or exchange of property subject to the regular income tax? No, some gains by way of exception, are not subject to income tax; examples: 1. The presumed gains from sale of real property that is a capital asset is subject to the final tax of 6% on the gross selling price; 2. The gain from trading stocks listed in the stock exchange is exempt from income tax Transactions tax 3. Gains realized from the sale of bonds, debentures, or other certificates of indebtedness with a maturity of more than 5 years are exclusions from gross income 4. Gains realized by the investor upon redemption of shares of stock in a mutual fund company are exclusions from gross income. Are exchanges of property where no gain or loss recognized? No gain or loss is recognized when: 1. Pursuant to a merger or consolidation, the parties exchange their stock or security for new corporation under certain conditions

19 | P a g e 2. Property is transferred to a corporation by a person in exchange for stock in such corp of which as a result such person, alone or together with not more than 4 persons gains control of the corp Names instances where there are gains recognized but not losses? 1. Gains from illegal transactions are recognized but not the losses 2. Gains from related taxpayers are recognized but not the loss 3. Gains from exchanges of property for stock in a corp in pursuance of a merger or consolidation where taxpayer receives, in addition, money or property also are recognized to the extent of the cash or fair market value of the property but not the loss When are bad debts deductible from gross income?; also applies to tax benefit rule 1. Debt must be valid and subsisting 2. Connected with taxpayers business 3. Must be ascertained to be worthless 4. Must be fully charged off during the year Depreciation allowance deduction to enable the taxpayer to recover the cost of the gradual diminution in the value of his business asset resulting from its ordinary wear and tear; ex: buildings but not land, intangible rights with limited duration Methods used to compute possible depreciation 1. Straight line method get life time of property deduct in equal parts 2. Declining balance method 3. Sum of the years digits 4. Any other method prescribed the Sec of finance upon recommendation of BIR Commissioner What is the purpose of permitting the deduction of a depletion allowance to recover the capital he had in invested in wasting assets (happens suddenly), like mines and oil and gas wells, depleted over time on account of their being extracted from the earth. When are charitable contributions deductible from gross income? 1. Contribution of gift must be actually paid 2. Donee is a charitable organization must be of the kind specified in tax code 3. No part of net income of the done charitable org inures to the benefit of any private stockholder or individual How much must be deducted? All of what is given (or in full) is given to (100% ): 1. The government to be used exclusively in undertaking priority activities in education, health, youth and sports development, human settlement, science and culture and economic development 2. Foreign institutions/international orgs in compliance with treaties and other intl agreements or commitments 3. NGOs that are accredited (donation is used not later than the 15th day of the 3rd month following the close of the donees taxable year); donees administrative expenses should not exceed 30% of total expenses; assets must be distributed to another non-profit domestic corp or to the state 4. The assets of the done must be distributed to another non-profit domestic corporation or to the state;

20 | P a g e In part if given to other donees to the extent of only 10% of net income of individuals; 5% of the net income of the corporate donor from business, without benefit of the deduction of the donations allowed in full and of those subject to this limitation. What are options of the taxpayer in order to recover expenditures for research and development? A taxpayer may treat amount spent for R&D either: 1. Treat them as ordinary and necessary expenses and deduct them in full from gross income 2. As deferred expenses an deduct them ratably over a period of not less than sixty months What are the requisites for treating amounts spent for R&D as deferred expenses? 1. Amount must be paid or incurred in connection with taxpayers business 2. Amount must not have been treated as ordinary and necessary expense 3. Amount is chargeable to a capital account but not of a character which is subject to depreciation or depletion. What R & D expenditures may not be amortized by the taxpapyer? 1. Expenditures for the acquisition or improvement of land o property subject to depreciation or depletion 2. Expenditures for the purpose of ascertaining the existence location, quality of ore or other mineral, including oil and gas (exploration expenses) How are contributions to employee benefit trusts to be deducted by the employer? 1. Contributions covering pension liability accruing during the taxable year are deductible in full 2. Any contribution in excess of that may be deducted over a period of 10 years to the extent of 1/10th of the amount per year Taxpayer must be able to show that the withholding tax required by law to be deducted by the payor was in fact withheld and remitted to the BIR. Reducing the net taxable income for individuals: After deducting the optional or itemized deductions, further deductions: Personal exemptions 50K plus 25K for each dependent not exceeding 4 to be claimed by only one of the spouses Personal Exemptions amounts which state permits a resident individual to further deduct from the regular income tax base, to answer for the individuals and his familys necessary expenses How do married individuals compute their income tax liability? 1. H and W shall file one return but shall compute their respective income tax liabilities separately. This avoids the marriage tax 2. Only one of the spouses may claim the dependents. If spouses are legally separated, only one who has custody of the dependent may claim that amount. SUMMARIZE FORMULA FOR TAXABLE INCOME OF RESIDENT INDIVIDUALS Everything received other than mere return of capital (all income) Less: exclusions GROSS INCOME Less: allowable deductions NET INCOME

21 | P a g e Less Personal Exemptions NET TAXABLE INCOME

a. Individual Taxpayers 1) Citizens a) Resident citizens b) Non-resident citizens 2) Aliens a) Resident aliens b) Non-resident aliens (1) Engaged in trade or business shall come to the Philippines and stay therein for an aggregate period more than 180 days during any calendar; taxed in the same manner as a resident alien; 20% on all income deducted by the payor (2) Not engaged in trade or business 25% on gross income Non-resident aliens who enjoy preferential tax treatment 1. those employed by regional or area headquarters or multinational companies 15% 2. those employed by offshore banking units 15% 3. those employed by foreign service contractors or subcontractors engaged in petroleum operations in the Philippines 15% Entities taxed in the same way as individuals? a. estates of deceased persons which are under judicial settlement b. trusts which are irrevocable What rules specifically apply to estates? 1. Under judicial settlement 2. Estates can also claim a personal exemption of 20K 3. Additional deduction for income currently distributed to heirs who must report what they received as part of their respective gross income in the form of support (itemized deductions also) What kind of trusts are taxed like individuals? only irrevocable trust; depending of how income is distributed, they are: a) accumulation trusts; b) current distribution trusts; c) discretionary trusts; they can claim as deductions current distributions of income beneficiaries who must report them in their own returns; personal exemption of 20K. Trusts not treated like individuals? - Revocable trusts and grantor trusts (grantor is also a beneficiary); incomes are included in the gross incomes of the trustors When individuals and trusts and estates file income tax returns: General rule: annually on or before 15th day of april of each year covering income for the preceding taxable years; Exceptions:

22 | P a g e 1. Sale of unlisted shares 30 days from each transaction and a consolidated return on or before 15th day of april 2. Sale of real property that is a capital asset within 30 days from ach sale or disposition Individuals Need not file tax returns: 1. Gross income is not from business or profession and does not exceed his total personal and additional exemptions 2. Income is compensation from only one employer, correctly withheld by employer and does not exceed 60K 3. Sole income has been subjected to final withholding tax 4. Exempt from income tax pursuant to tax code and other special laws

3) Special Class of Individual Employees a) Minimum wage earner c. Corporations Purposive test (business motive test; engage in business or intended to generate profits corporation within the meaning of the Income Tax Law Co-ownership parties find themselves together in no intention to pursue a common venture (inherit from a common ancestor), or contribute property to share the income amongst themselves 1) Domestic corporations tax base: net income derived from sources within and without (or outside) the Phils How are domestic corporations taxed? Passive income of DC are taxed like the passive income of individuals, except: a. No preferential tax rate for interests from LTCDs b. Tax in interest from EFCDUs is 10% c. No tax on domestic intra-corporate dividends Gains from sale of shares of stock are taxed like individuals Gains from sale of real property are taxed like individuals The rest is all taxable income (computed as gross income less allowable deductions) and the tax is the higher of 2% MCIT or 30% on Net Taxable Income (Normal Income Tax) If MCIT is bigger than the NIT excess is creditable v NIT for the next 3 years Personal Exemptions in Corporations NO. Deductions allowed to I but not to Corporations premiums for health/hospitalization insurance Minimum Corprate Income Tax 2% on the gross income starting from the 4th year following the commencement of the operations of the company; discourage of corp of recording very low net income and remaining to be in existence; corp incurring net losses required to pay MCIT, may carry forward and credit against the normal IT due for the next 3 years following the excess of the MCIT over the normal IT

23 | P a g e

When and whom may suspend MCIT? Sec of Finance 1. Prolonged labor dispute 2. Force majeure 3. Legitimate business reverses Improperly Accumulated Earnings Tax (IAET) 10% intended to punish corp which do not declare dividends for the purpose of avoiding the tax on its shareholders Corporations/ associations not subject to IAET? 1. Publicly held corp 2. Banks and other non-bank financial intermediaries 3. Insurance companies 4. Taxable partnerships 5. General professional partnerships earnings whether distributed or not are taxed on individual members 6. Non-taxable joint ventures 7. PEZA, CDA and SBMA set-up on invitation by government to invite capital When corp file their ITR? Except foreign corp., on a quarterly basis within 60 days following the end of the first three quarters and a final adjustment return covering the entire year on the 15th day of the 4th month following the close of the taxable year. Resident Corp subjected to flat rate 30% - distribute the fruits of their work to stockholders subjected to tax again to individuals Branch Profits remittance Tax tax of 15% imposed on total profits applied or earmarked by a foreign company doing business in the Phils through a branch or remittance to its head office; 2) Foreign corporations (W/N engaged in trade or business) sourced within the Philippines (1) Resident foreign corporations (2)Non-resident foreign corporations c. Partnerships 4. General Professional Partnerships incomes are computed like corporations but partners each report in their own returns their respective shares in the net income, whether distributed or not, as part of their business income Other partnerships for business or trade are taxed exactly like corporations; their distributions of net income are taxed like dividends.

e. Estates and Trusts f. Co-ownerships 7. Income Taxation a. Definition

24 | P a g e b. Nature c. General principles 8. Income a. Definition b. Nature 6 c. When income is taxable 1) Existence of income 2) Realization of income a) Tests of Realization b) Actual vis--vis Constructive receipt 3) Recognition of income 4) Methods of accounting a) Cash method vis--vis Accrual method b) Installment payment vis--vis Deferred payment vis-vis Percentage completion (in long term contracts) d. Tests in determining whether income is earned for tax purposes 1) Realization test 2) Claim of right doctrine or Doctrine of ownership, command, or control 3) Economic benefit test, Doctrine of proprietary interest 4) Severance test 9. Gross Income a. Definition b. Concept of income from whatever source derived c. Gross Income vis--vis Net Income vis--vis Taxable Income d. Classification of Income as to Source 1) Gross income and taxable income from sources within the Philippines 2) Gross income and taxable income from sources without thePhilippines 3) Income partly within or partly without the Philippines d. Sources of income subject to tax 1) Compensation Income 2) Fringe Benefits a) Special treatment of fringe benefits b) Definition c) Taxable and non-taxable fringe benefits 3) Professional Income 4) Income from Business 5) Income from Dealings in Property a) Types of Properties (1) Ordinary assets (2) Capital assets b) Types of Gains from dealings in property (1) Ordinary income vis--vis Capital gain (2) Actual gain vis--vis Presumed gain (3) Long term capital gain vis--vis Short term capital gain 7 (4) Net capital gain, Net capital loss (5) Computation of the amount of gain or loss (a) Cost or basis of the property sold (b) Cost or basis of the property exchanged in corporate readjustment

25 | P a g e [1] Merger [2] Consolidation [3] Transfer to a controlled corporation (tax-free exchanges) (c) Recognition of gain or loss in exchange of property [1] General rule [a] Where no gain or loss shall be recognized [2] Exceptions [a] Meaning of merger, consolidation, control securities [b] Transfer of a controlled corporation (6) Income tax treatment of capital loss (a) Capital loss limitation rule (applicable to both corporations and individuals) (b) Net loss carry-over rule (applicable only to individuals) (7) Dealings in real property situated in the Philippines (8) Dealings in shares of stock of Philippine corporations (a) Shares listed and traded in the stock exchange (b) Shares not listed and traded in the stock exchange (9) Sale of principal residence 6) Passive Investment Income a) Interest Income b) Dividend Income (1) Cash dividend (2) Stock dividend (3) Property dividend (4) Liquidating dividend c) Royalty Income d) Rental Income (1) Lease of personal property (2) Lease of real property (3) Tax treatment of (a) Leasehold improvements by lessee (b) VAT added to rental/paid by the lessee (c) Advance rental/long term lease 7) Annuities, Proceeds from life insurance or other types of insurance 8 8) Prizes and awards 9) Pensions, retirement benefit, or separation pay 10) Income from any source whatever a) Forgiveness of indebtedness b) Recovery of accounts previously written off c) Receipt of tax refunds or credit d) Income from any source whatever e. Source rules in determining income from within and without 1) Interests 2) Dividends

26 | P a g e 3) Services 4) Rentals 5) Royalties 6) Sale of real property 7) Sale of personal property 8) Shares of stock of domestic corporation f. Situs of Income Taxation (See page 2 under Inherent Limitations, Territorial) g. Exclusions from Gross Income 1) Rationale for the exclusions 2) Taxpayers who may avail of the exclusions 3) Exclusions distinguished from deductions and tax credit 4) Under the Constitution a) Income derived by the government or its political subdivisions from the exercise of any essential governmental function 5) Under the Tax Code a) Proceeds of life insurance policies b) Return of premium paid c) Amounts received under life insurance, endowment or annuity contracts d) Value of property acquired by gift, bequest, devise or descent e) Amount received through accident or health insurance f) Income exempt under tax treaty g) Retirement benefits, pensions, gratuities, etc. h) Winnings, prizes, and awards, including those in sports competition 6) Under a Tax Treaty 7) Under Special Laws h. Deductions from Gross Income 1) General rules a) Deductions must be paid or incurred in connection with the taxpayers trade, business or profession b) Deductions must be supported by adequate receipts or invoices (except standard deduction) 2) Return of capital (cost of sales or services) a) Sale of inventory of goods by manufacturers and dealers of properties b) Sale of stock in trade by a real estate dealer and dealer in securities c) Sale of services 3) Itemized deductions a) Expenses (1) Requisites for deductibility (a) Nature: Ordinary and necessary (b) Paid and incurred during taxable year (2) Salaries, wages and other forms of compensation for personal services actually rendered, including the grossed-up monetary value of the fringe benefit subjected to fringe benefit tax which tax should havebeen paid (3) Traveling/Transportation expenses (4) Cost of materials (5) Rentals and/or other payments for use or possession of property

27 | P a g e (6) Repairs and maintenance (7) Expenses under lease agreements (8) Expenses for professionals (9) Entertainment expenses (10) Political campaign expenses (11) Training expenses b) Interest (1) Requisites for deductibility (2) Non-deductible interest expense (3) Interest subject to special rules (a) Interest paid in advance (b) Interest periodically amortized (c) Interest expense incurred to acquire property for use in trade/business/profession c) Taxes (1) Requisites for deductibility (2) Non-deductible taxes (3) Treatments of surcharges/interests/fines for delinquency (4) Treatment of special assessment (5) Tax credit vis--vis deduction d) Losses (1) Requisites for deductibility 10 (2) Other types of losses (a) Capital losses (b) Securities becoming worthless (c) Losses on wash sales of stocks or securities (d) Wagering losses (e) NOLCO e) Bad debts (1) Requisites for deductibility f) Depreciation (1) Requisites for deductibility (2) Methods of computing depreciation allowance (a) Straight-line method (b) Declining-balance method (c) Sum-of-the-years-digit method g) Charitable and other contributions (1) Requisites for deductibility (2) Amount that may be deducted h) Contributions to pension trusts (1) Requisites for deductibility 4) Optional standard deduction a) Individuals, except non-resident aliens b) Corporations, except non-resident foreign corporations 5) Personal and additional exemption (Republic Act 9504 Minimum Wage Earner Law) a) Basic personal exemptions b) Additional exemptions for taxpayer with dependents c) Status-at-the-end-of-the-year rule 6) Items not deductible

28 | P a g e a) General rules b) Personal, living or family expenses c) Amount paid for new buildings or for permanent improvements (capital expenditures) d) Amount expended in restoring property (major repairs) e) Premiums paid on life insurance policy covering life or any other officer or employee financially interested f) Interest expense, bad debts, and losses from sales of property between related parties g) Losses from sales or exchange or property h) Non-deductible interest i) Non deductible taxes j) Non-deductible losses k) Losses from wash sales of stock or securities i.Exempt Corporations 11 10. Taxation of Resident Citizens, Non-resident Citizens, and Resident Aliens a. General rule: Resident citizens Taxable on income from all sources within and without the Philippines b. Taxation on Compensation Income 1) Inclusions a) Monetary compensation (1) Regular salary/wage (2) Separation pay/retirement benefit not otherwise exempt (3) Bonuses, 13th month pay, and other benefits not exempt (4) Directors fees b) Non-monetary compensation (1) Fringe benefit not subject tax 2) Exclusions a) Fringe benefit subject to tax b) De minimis benefits c) 13th month pay and other benefits and payments specifically excluded from taxable compensation income 3) Deductions a) Personal exemptions and additional exemptions b) Health and hospitalization insurance c) Taxation of compensation income of a minimum wage earner (1) Definition of Statutory Minimum Wage (2) Definition of Minimum Wage Earner (3) Income also subject to tax exemption: holiday pay, overtime pay, night shift differential, and hazard pay c. Taxation of Business Income/Income from Practice of Profession d. Taxation of Passive Income 1) Passive income subject to final tax a) Interest income b) Royalties

29 | P a g e c) Dividends from domestic corporation d) Prizes and other winnings 2) Passive income not subject to final tax e. Taxation of capital gains 1) Income from sale of shares of stock of a Philippine corporation a) Shares traded and listed in the stock exchange b) Shares not listed and traded in the stock exchange 2) Income from the sale of real property situated in the Philippines 12 3) Income from the sale, exchange, or other disposition of other capital assets 11. Taxation of Non-resident Aliens Engaged in Trade or Business a. General rules b. Cash and/or property dividends c. Capital gains 12. Exclude Non-resident Aliens Not Engaged in Trade or Business 13. Individual Taxpayers Exempt from Income Tax a. Senior citizens b. Exemptions granted under international agreements 14. Taxation of Domestic Corporations a. Tax payable 1) Regular tax 2) Minimum corporate income tax (MCIT) a) Imposition of MCIT b) Carry forward of excess minimum tax c) Relief from the MCIT under certain conditions d) Corporations exempt from the MCIT e) Applicability of the MCIT where a corporation is governed both under the regular tax system and a special income tax system b. Allowable deductions 1) Itemized deductions 2) Optional standard deduction c. Taxation of Passive Income 1) Passive income subject to tax a) Interest from deposits and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements and royalties b) Capital gains from the sale of shares of stock not traded in the stock exchange c) Income derived under the expanded foreign currency deposit system d) Intercorporate dividends e) Capital gains realized from the sale, exchange, or disposition of lands and/or buildings 2) Passive income not subject to tax d. Taxation of Capital Gains 1) Income from sale of shares of stock 2) Income from the sale of real property situated in the

30 | P a g e Philippine 13 3) Income from the sale, exchange, or other disposition of other capital assets e. Tax on proprietary educational institutions and hospitals f. Tax on government-owned or controlled corporations, agencies or instrumentalities 15. Taxation of Resident Foreign Corporations a. General rule b. With respect to their income from sources within the Philippines c. Minimum corporate income tax d. Tax on certain income (1) Interest from deposits and yield or any other monetary benefit from deposit substitutes, trust funds and similar arrangements and royalties (2)Income derived under the expanded foreign currency deposit system (3) Capital gain from sale of shares of stock not traded in the stock exchange (4) Intercorporate dividends e. Exclude: (1) International carrier (2) Offshore banking units (3) Branch profits remittances (4) Regional or area headquarters and Regional operating headquarters of multinational companies 16. Taxation of Non-resident Foreign Corporations a. General rule b. Tax on certain income (1) Interest on foreign loans (2) Intercorporate dividends (3) Capital gains from sale of shares of stock not traded in the stock exchange c. Exclude: (1)Non-resident cinematographic film owner, lessor or distributor (2)Non-resident owner or lessor of vessels chartered by Philippine nationals (3)Non-resident owner or lessor of aircraft machineries and other equipment 17.Improperly Accumulated Earnings of Corporations 18. Exemption from tax on corporations 19. Taxation of Partnerships 14 20. Taxation of General Professional Partnerships 21. Taxation on Estates and Trusts a) Application b) Exception c) Determination of tax 1) Consolidation of income of two or more trusts

31 | P a g e 2) Taxable income 3) Revocable trusts 4) Income for benefit of grantor 5) Meaning of in the discretion of the grantor 22. Withholding tax a. Concept b. Kinds 1) Withholding of final tax o certain incomes 2) Withholding of creditable tax at source c. Withholding on wages 1) Requirement for withholding 2) Tax paid by recipient 3) Refunds or credits 4) Year-end adjustment 5) Liability for tax d. Withholding of VAT e. Filing of return and payment of taxes withheld 1) Return and payment in case of government employees 2) Statements and returns f.Final withholding tax at source g. Creditable withholding tax 1) Expanded withholding tax 2) Withholding tax on compensation h. Fringe benefit tax B. Estate Tax 1. Basic principles 2. Definition 3. Nature 4. Purpose or object 5. Time and transfer of properties 6. Classification of decedent 7. Gross estate vis--vis Net estate 8. Determination of gross estate and net estate 9. Composition of gross estate 10.Items to be included in gross estate 11.Deductions from estate 12.Exclusions from estate 15 13.Tax credit for estate taxes paid in a foreign country 14.Exemption of certain acquisitions and transmissions 15.Filing of notice of death 16.Estate tax return C. Donors Tax 1. Basic principles 2. Definition 3. Nature 4. Purpose or object 5. Requisites of valid donation 6. Transfers which may be constituted as donation a. Sale/exchange/transfer of property for insufficient

32 | P a g e consideration b. Condonation/remission of debt 7. Transfer for less than adequate and full consideration 8. Classification of donor 9. Determination of gross gift 10.Composition of gross gift 11.Valuation of gifts made in property 12.Tax credit for donors taxes paid in a foreign country 13. Exemptions of gifts from donors tax 14. Person liable 15. Tax basis D. Value-Added Tax (VAT) 1. Concept 2. Characteristics 3. Impact of tax 4. Incidence of tax 5. Tax credit method 6. Destination principle 7. Persons liable 8. VAT on sale of goods or properties a. Requisites of taxability of sale of goods or properties 9. Zero-rated sales of goods or properties, and effectively zerorated sales of goods or properties 10.Transactions deemed sale a. Transfer, use or consumption not in the course of business of goods/properties originally intended for sale or use in the course of business b. Distribution or transfer to shareholders, investors or creditors c. Consignment of goods if actual sale not made within 60 days from date of consignment 16 d. Retirement from or cessation of business with respect to inventories on hand 11.Change or cessation of status as VAT-registered person a. Subject to VAT 1) Change of business activity from VAT taxable status to VAT-exempt status 2) Approval of request for cancellation of a registration due to reversion to exempt status 3) Approval of request for cancellation of registration due to desire to revert to exempt status after lapse of 3 consecutive years b. Not subject to VAT 1) Change of control of a corporation 2) Change in the trade or corporate name 3) Merger or consolidation of corporations 12.VAT on importation of goods a. Transfer of goods by tax exempt persons 13.VAT on sale of service and use or lease of properties a. Requisites for taxability

33 | P a g e 14.Zero-rated sale of services 15.VAT exempt transactions a. VAT exempt transactions, in general b. Exempt transaction, enumerated 16.Input tax and output tax, defined 17.Sources of input tax a. Purchase or importation of goods b. Purchase of real properties for which a VAT has actually been paid c. Purchase of services in which VAT has actually been paid d. Transactions deemed sale e. Transitional input tax f. Presumptive input tax g. Transitional input tax credits allowed under the transitory and other provisions of the regulations 18.Persons who can avail of input tax credit 19.Determination of output/input tax; VAT payable; Excess input tax credits a. Determination of output tax b. Determination of input tax creditable c. Allocation of input tax on mixed transactions d. Determination of the output tax and VAT payable and computation of VAT payable or excess tax credits 20.Substantiation of input tax credits 21.Refund or tax credit of excess input tax 17 a. Who may claim for refund/apply for issuance of tax credit certificate (TCC) b. Period to file claim/apply for issuance of TCC c. Manner of giving refund d. Destination principle or Cross-border doctrine 22.Invoicing requirements a. Invoicing requirements in general b. Invoicing and recording deemed sale transactions c. Consequences of issuing erroneous VAT invoice or VAT official receipt 23.Filing of return and payment 24.Withholding of final VAT on sales to government E. Compliance Requirements (Internal Revenue Taxes) 1. Administrative requirements a. Registration requirements 1) Annual registration fee 2) Registration of each type of internal revenue tax 3) Transfer of registration 4) Other updates 5) Cancellation of registration 6) Power of the Commissioner to suspend the business operations of any person who fails to register b. Persons required to register for VAT 1) Optional registration for VAT of exempt person

34 | P a g e 2) Cancellation of VAT registration 3) Changes in or cessation of status of a VAT-registered person c. Supplying taxpayer identification number (TIN) d. Issuance of receipts or sales or commercial invoices 1) Printing of receipts or sales or commercial invoices 2) Invoicing requirements for VAT a) Information contained in the VAT invoice or VAT official receipt b) Consequences of issuing erroneous VAT invoice or official receipts e. Exhibition of certificate of payment at place of business f.Continuation of business of deceased person g. Removal of business to other location 2. Tax returns a. Income Tax Returns 1) Individual Tax Returns a) Filing of individual tax returns (1) Who are required to file (a) Return of husband and wife 18 (b) Return of parent to include income of children (c) Return of persons under disability (2)Who are not required to file b) Where to file c) When to file 2) Corporate Returns a) Requirement for filing returns (1) Declaration of quarterly corporate income tax (a) Place of filing (b)Time of fling (2) Final adjustment return (a) Place of filing (b)Time of filing (3) Taxable year of corporations (4)Extension of time to file return b) Return of corporation contemplating dissolution or reorganization c) Return on capital gains realized from sale of shares of stock not traded in the local stock exchange 3) Returns of receivers, trustees in bankruptcy or assignees 4) Returns of general partnerships 5) Fiduciary returns b. Estate Tax Returns 1) Notice of death to be filed 2) Estate tax returns a) Requirements b) Time of filing and extension of time c) Place of filing 3) Discharge of executor or administrator from personal liability

35 | P a g e a) Definition of deficiency c. Donors Tax Returns 1) Requirements 2) Time and place of filing d. VAT Returns 1) In general 2) Where to file the return e. Withholding Tax Returns 1) Quarterly returns and payments of taxes withheld 2) Annual information return 3. Tax payments a. Income Taxes 1) Payment, in general; time of payment 2) Installment payment 3) Payment of capital gains tax 19 b. Estate Taxes 1) Time of payment a) Extension of time 2) Liability for payment a) Discharge of executor or administrator from personal liability b) Definition of deficiency 3) Payment before delivery by executor or administrator a) Payment of tax antecedent to the transfer of shares, bonds or rights 4) Duties of certain officers and debtors 5) Restitution of tax upon satisfaction of outstanding obligations c. Donors Taxes 1) Time and place of payment d. VAT 1) Payment of VAT 2) Where to pay the VAT F. Tax Remedies under the NIRC 1. Taxpayers Remedies a. Assessment 1) Concept of assessment a) Requisites for valid assessment b) Constructive methods of income determination c) Inventory method for income determination d) Jeopardy assessment e) Tax delinquency and tax deficiency 2) Power of the Commissioner to make assessments and prescribe additional requirements for tax administration and enforcement a) Power of the Commissioner to obtain information, and to summon/examine, and take testimony of persons 3) When assessment is made a) Prescriptive period for assessment

36 | P a g e (1) False, fraudulent, and non-filing of returns b) Suspension of running of statute of limitations 4) General provisions on additions to the tax a) Civil penalties b) Interest 5) Assessment process a) Tax audit b) Notice of informal conference c) Issuance of preliminary assessment notice (PAN) d) Notice of informal conference 20 e) Issuance of preliminary assessment notice (PAN) f) Exceptions to Issuance of PAN g) Reply to PAN h) Issuance of formal letter of demand and assessment notice/final assessment notice i) Disputed assessment j) Administrative decision on a disputed assessment 6) Protesting assessment a) Protest of assessment by taxpayer (1) Protested assessment (2) When to file a protest (3) Forms of protest b) Submission of documents within 60 days from filing of protest c) Effect of failure to protest 7) Rendition of decision by Commissioner a) Denial of protest (1) CIRs actions equivalent to denial of protest (a) Filing of criminal action against taxpayer (b) Issuing a warrant of distraint and levy (2)Inaction by Commissioner 8) Remedies of taxpayer to action by Commissioner a) In case of denial of protest b) In case of inaction by Commissioner within 180 days from submission of documents c) Effect of failure to appeal b. Collection 1) Requisites 2) Prescriptive periods 3) Distraint of personal property including garnishment a) Summary remedy of distraint of personal property (1) Procedure for distraint and garnishment (2) Sale of property distrained and disposition of proceeds (a) Release of distrained property upon payment prior to sale (3)Purchase by the government at sale upon distraint (4) Report of sale to BIR (5) Constructive distraint to protect the interest of the government

37 | P a g e 4) Summary remedy of levy on real property a) Advertisement and sale b) Redemption of property sold c) Final deed of purchaser 5) Forfeiture to government for want of bidder a) Remedy of enforcement of forfeitures (1)Action to contest forfeiture of chattel b) Resale of real estate taken for taxes c) When property to be sold or destroyed d) Disposition of funds recovered in legal proceedings or obtained from forfeiture 6) Further distraint or levy 7) Tax lien 8) Compromise a) Authority of the Commissioner to compromise and abate taxes 9) Civil and criminal actions a) Suit to recover tax based on false or fraudulent returns c. Refund 1) Grounds and requisites for refund 2) Requirements for refund as laid down by cases a) Necessity of written claim for refund b) Claim containing a categorical demand for reimbursement c) Filing of administrative claim for refund and the suit/proceeding before the CTA within 2 years from date of payment regardless of any supervening cause 3) Legal basis of tax refunds 4) Statutory basis for tax refund under the Tax Code a) Scope of claims for refund b) Necessity of proof for claim or refund c) Burden of proof for claim of refund d) Nature of erroneously paid tax/illegally assessed collected e) Tax refund vis--vis tax credit f) Essential requisites for claim of refund 5) Who may claim/apply for tax refund/tax credit a) Taxpayer/withholding agents of non-resident foreign corporation 6) Prescriptive period for recovery of tax erroneously or illegally collected 7) Other consideration affecting tax refunds 2. Government Remedies a. Administrative remedies 1) Tax lien 2) Levy and sale of real property 3) Forfeiture of real property to the government for want of bidder 4) Further distraint and levy 5) Suspension of business operation 6) Non-availability of injunction to restrain collection of tax b. Judicial remedies The CIR may pursue, either one or simultaneously, administrative and/or civil or criminal action. There is no need to first distraint personal property and levy on real property before filing a civil action for collection in court or filing a criminal complaint before the DOJ.

38 | P a g e If the basic tax to be collected is less than 1M, the civil case must be filed in the RTC. From RTC, appeal is to CTA. If the basic tax to be collected 1M or more, case must be filed with the CTA invoking its original jurisdiction. Judgment in a criminal case must include, along with the imposition of the criminal penalty, an order to pay the taxes and penalties due (to avoid duplicity of suits).

3. Statutory Offenses and Penalties a. Civil penalties 1) Surcharge 2) Interest a) In General b) Deficiency interest c) Delinquency interest d) Interest on extended payment 4. Compromise and Abatement of taxes a. Compromise b. Abatement G. Organization and Function of the Bureau of Internal Revenue 1. Rule-making authority of the Secretary of Finance a. Authority of secretary of finance to promulgate rules and regulations b. Specific provisions to be contained in rules and regulations c. Non-retroactivity of rulings 2. Power of the Commissioner to suspend the business operation of a taxpayer III. Local Government Code of 1991, as amended A. Local Government Taxation 1. Fundamental principles 2. Nature and source of taxing power a. Grant of local taxing power under the Local Government Code b. Authority to prescribe penalties for tax violations c. Authority to grant local tax exemptions d. Withdrawal of exemptions e. Authority to adjust local tax rates f. Residual taxing power of local governments g. Authority to issue local tax ordinances 3. Local taxing authority a. Power to create revenues exercised thru LGUs b. Procedure for approval and effectivity of tax ordinances 4. Scope of taxing power 5. Specific taxing power of local government unit (LGUs) a. Taxing powers of provinces 1) Tax on transfer of real property ownership 2) Tax on business of printing and publication

39 | P a g e 3) Franchise tax 4) Tax on sand, gravel and other quarry services 5) Professional tax 6) Amusement tax 7) Tax on delivery truck/van b. Taxing powers of cities c. Taxing powers of municipalities 1) Tax on various types of businesses 2) Ceiling on business tax impossible on municipalities within Metro Manila 3) Tax on retirement on business 4) Rules on payment of business tax 5) Fees and charges for regulation & licensing 6) Situs of tax collected d. Taxing powers of barangays e. Common revenue raising powers 1) Service fees and charges 2) Public utility charges 3) Toll fess or charges f. Community tax 6. Common limitations on the taxing powers of LGUs 7. Collection of business tax a. Tax period and manner of payment b. Accrual of tax c. Time of payment d. Penalties on unpaid taxes, fees or charges e. Authority of treasurer in collection and inspection of books

8. Taxpayers remedies Remedies under the Local Government Code (Administrative Level Business Taxes) 1. When the local treasurer finds that the correct taxes have not been paid, he issues a notice of assessment stating nature of the tax, and amount of deficiency, interest and penalties 2. The taxpayer has 60 days from receipt to file a written protest, otherwise the assessment becomes final 3. The local treasurer must decide within 60 days from the filing of protest 4. If the treasurer finds the protest meritorious, he issues a notice of cancellation of the assessment. If he finds it otherwise, he issues a denial with notice to the taxpayer 5. The taxpayer has 30 days from receipt of denial or lapse of the 60 day period to appeal to the regular courts What is the procedure for claiming a refund of, or credit for local taxes? Remedies of taxpayer after payment 1. The taxpayer must file a written claim with the local treasurer within 2 years from date of payment

40 | P a g e 2. If the claim is found meritorious, the taxpayer is granted a tax credit. No cash is refunded unless the taxpayer is terminating his operation 3. No case may be filed in court after the expiration of the 2 years from the date of payment or from the date the taxpayer is entitled thereto What are the remedies of LGs to ensure collection of real property taxes? 1. The basic real property tax and any other tax levied on real property constitutes a lien on the property subject to tax, superior to all liens and charges or encumbrances in favor of any person, irrespective of who the current owner or possessor of the property, enforceable by administrative or judicial action, and may only be extinguished upon payment of the tax and the related interests and expenses 2. To induce taxpayers to pay real property taxes, LG may grant a discount not exceeding 20% of the annual tax due. 3. When the tax becomes delinquent, the local treasurer immediately causes a notice of delinquency to be posted at the main hall and in a publicly accessible and conspicuous place in each barangay of the LGU concerned. The notice shall also be published once a week for 2 consecutive weeks in a newspaper of general circulation in the province, city or municipality 4. Non-payment subjects the taxpayer to interest at the rate of 2 % per month until paid but in no case shall the total exceed 36 months 5. To enforce its lien, the LG may distraint personal property or levy on the property 6. Levy is effected by selling the delinquent real property at public auction. The title to the property will be vested in the purchaser, subject however to the right of the delinquent owners right of redemption within one year from the date of sale. What are the remedies of the taxpayer against collection of RPT? 1. The taxpayer may pay under protest in writing filed within 30 days to the local treasurer who must decide the protest within 60 days from receipt 2. If protest is denied, the 60 day period lapses without a decision, the taxpayer may appeal to the regular courts a. Periods of assessment and collection of local taxes, fees or charges b. Protest of assessment c. Claim for refund of tax credit for erroneously or illegally collected tax, fee or charge 9. Civil remedies by the LGU for collection of revenues a. Local governments lien for delinquent taxes, fees or charges b. Civil remedies, in general 1) Administrative action 2) Judicial action c. Procedure for administrative action 1) Distraint of personal property 2) Levy of real property, procedure 3) Further distraint or levy 4) Exemption of personal property from distraint or levy 5) Penalty on local treasurer for failure to issue and execute warrant of distraint or levy d. Procedure for judicial action

41 | P a g e Either of a) the administrative action through distraint of personal property and levy upon real property and B) judicial action may be pursued concurrently or simultaneously at the discretion of the LGU. Judicial civil action is in the form of a claim for a sum of money before the regular court. No provision for criminal action. Remedies of the taxpayer under the Local Tax Code vs a tax ordinance 1. before the effectivity of ordinance: attend the public hearing and oppose 2. after effectivity a. within 30 days: appeal to Sec of Justice b. Sec of Justice must decide within 60 days c. Appeal to appropriate court: regular or CTA B. Real Property Taxation Fundamental principles 1. Real property shall be appraised at its current and fair market value 2. Real property shall be classified for assessment purposes on the bases of its actual use 3. Real property shall be assessed on the basis of a uniform classification within each government unit 4. The appraisal, assessment, levy and collection of real property tax shall not be let to/delegated any private person; and 5. The appraisal and assessment shall be equitable What are the steps in determining the amount of real property tax due? 1. Step 1: appraisal: determination of the current and fair market value of the real property where it is located 2. Step 2:assessment: determination of the tax base in accordance with the classification of the property and imposition of the appropriate assessment 3. Step 3:Imposition of the tax and collection How is current and fair market value of the real property determined? The owner makes a sworn statement and files it with the assessor within 60 days from acquisition and once every 3 years from January to june 30 starting 1992 The local assessor shall make himself make an appraisal according to an assessment roll which contains a Schedule of Fair Market Values of all real property within his jurisdiction (not the same as zonal value- arrived at by the Commissioner himself- for natl taxation; but most of the time they are the same) How is the appraisal made sure to be current and fair market value? 1. All declarations are required to be kept in a uniform classification system known as the Real Property Identification System 2. All transferors of real property are required to notify the local assessor of the mode of transfer within 60 days from disposition 3. The Register of Deeds is required to give the local assessor an abstract or digest of his registry within 6 months from effectivity of RPC and yearly thereafter What is meant by assessment level?

42 | P a g e Means that percentage of the current and FMV of real property that is made the tax base (a percentage of the CFMV) of the real property tax Real property shall be classified, valued and assessed on the basis of actual use wherever located, whoever owns it, and whoever uses it
CLASS Residential and Timberland Agricultural Commercial Industrial Mineral ASSESSMENT LEVEL 20% 40% 50% 50% 50%

Other than land, what other properties are subject to the real property tax? 1. Building and other structures 2. Machineries What are included in the special classes of properties and assessment levels ACTUAL USE Assessment Levels Agricultural 15% Scientific 15% Hospital 15% Local water districts 10% OGCCs, engaged in water or power 10% When does an assessment take effect? all assessments and reassessments made after the first day of January shall take effect on the first day of Jan of the succeeding year. Remedy who is not satisfied with assessment 1. Appeal within 60 days from receipt of written notice of assessment to the Local Board of Assessment appeals. 2. From adverse decision of the LBAA appeal may within 30 days from receipt be made to the Central Board of Assessment Appeals, whose decision is final and executor What local government may impose the real property tax? FMV X Assessment level X 1%/2% Province 1% of assessed value of the property City - 2% Municipality within Metropolitan Manila 2% What real properties are exempt from the real tax? 1. Owned by RP and its political subdivisions, except when the beneficial use is granted to a taxable person 2. Charitable institutionsADE used for religious 3. All machineries and equipment that are directly and exclusively used by local water districts and OGCCs engaged in the supply and distribution of water and/or generation and transmission of electric power 4. All real property owned by duly registered cooperatives 5. Machinery and equipment used for pollution control and environmental protection What are special levies? Taxes imposed on real property in addition to real property tax:

43 | P a g e 1. Special education fund tax 1% 2. Taxes on idle lands not more than 5% 3. Special assessments (on lands benefited by public works funded by the LG) not to exceed 60% of the cost of project

How and when is real property tax collected? The real property tax for any year shall accrue on the first day of January and from the date shall constitute a lien(statutory claim) on the property until paid; accrual an obligation becomes an actual obligation The real property tax, which is collected by the local treasurer, may be paid in 4 equal installments, on march 31, june 30, sept 30 and December 31. COURT OF TAX APPEALS a specialized court, with the same level as CA, with various jurisdiction over all matters involving taxes both civil and criminal; with a specialized and limited jurisdiction; What is the composition and structure of the CTA? Presiding Justice and 8 Associate Justices, who may meet en banc or in 3 divisions of 3 justices each. When sitting en banc, 5 constitute a quorum. Affirmative vote of 5 is needed to reverse a division. Majority of all present sufficient for all other cases The quorum of a division is 2. A decision must be voted for affirmatively by 2. The losing party in a division must appeal en banc and then by certiorari to the SC under Rule 45. Over what areas of tax law does the Court of Tax Appeals have jurisdiction? Exclusive appellate jurisdiction over cases from BIR, RTC, BoC, CBAA (Central Board of Assessment Appeals), Sec of Finance, Sec. of Trade and Industry Jurisdiction over criminal cases Jurisdiction over tax collection case What is the exclusive appellate jurisdiction of the CTA over tax agencies? 1. The CTA has the exclusive appellate jurisdiction to review by appeal: a. Decisions of the CIR involving disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties in relation thereto, or other matters arising under the NIRC, or other laws administered by the BIR b. Inactions by the CIR in cases involving disputed assessments, refunds of internal revenue taxes, fees or other matters arising under the NIRC, or other laws administered by the BIR, where the NIRC provides a specific period for action in which case the inaction shall be deemed a denial c. Decisions, orders or resolutions of the RTC in local taxes originally decided or resolved by them in the exercise of their jurisdiction d. Decisions of the Commissioner of Customs in cases involving liability for customs duties, fees or other money charges, seizure, detention or release of property affected, fines, forfeitures or other penalties in relation thereto, or other matters arising under the customs law or other laws administered by the Bureau of customs

44 | P a g e e. Decisions of the CBAA in the exercise of its appellate jurisdiction over cases involving the assessment and taxation of real property originally decided by the provincial or city board assessment appeals f. Decisions of the Secretary of Finance on customs cases elevated to him automatically for review from decisions of the Commissioner of Customs adverse to the government under Sec 2315 of the TCC g. Decisions of the Sec of Trade and Industry, in case of nonagricultural product, commodity or article, and the Sec of Agriculture in the case of agricultural product, commodity or article, involving dumping and countervailing duties under sec 301 and 302 respectively, of the TCC and the safeguard measures under RA No. 8800 where either party may appeal the decision to impose or not to impose said duties Jurisdiction over cases involving criminal offenses as herein provided: 1. Exclusive original jurisdiction over all criminal offenses arising from violations of the NIRC or TCC and other laws administered by the BIR or the BoC: where the principal amount of taxes and fees, exclusive of charges and penalties, claimed is less than 1M or more; if less to regular courts first, then appeal is to CTA. 2. Exclusive appellate jurisdiction in criminal offenses: a. Over appeals from the judgments, resolutions or orders of the RTCs in tax cases originally decided by them, in their respected territorial jurisdiction. b. Over petitions for review of the judgments, resolutions or orders of the RTC in the exercise of their appellate jurisdiction over tax cases originally decided by the MeTC, MTC and MCTC in their respective jurisdiction. Jurisdiction over tax collection cases as herein provided: 1. Exclusive original jurisdiction in tax collection cases involving final and executory assessments for taxes, fees, charges and penalties: where the principal amount of taxes and fees, exclusive of charges and penalties, claimed is 1M or more; 2. Exclusive appellate jurisdiction in tax collection cases: a. Over appeals from the judgments, resolutions or orders of the RTCs in tax collection cases originally decided by them, in their respective territorial jurisdiction. b. Over petitions for review of the judgments, resolutions or orders of the RTCs in the Exercise of their appellate jurisdiction over tax collection cases originally decided by the MeTC, MTC and MCTC, in their respective jurisdiction. As full pledged court, what are the CTAs powers and authorities? The CTA shall have the power to: 1. Receive evidence 2. Summon witnesses and require the production of papers or documents by subpoena duces tecum 3. Administer oaths 4. Punish for contempt Who may appeal to the CTA? Any party adversely affected by a decision, ruling or inaction of the CIR, the Commissioner of Customs, the Secretary of Finance, the Secretary of Trade and Industry or the Secretary of Agriculture or the Central Board of Assessment Appeals or the Regional Trial Courts may file an appeal with the CTA within thirty (30) days after the receipt of such decision or ruling or after the expiration of the period fixed by law for action

45 | P a g e How appeal is made to the CTA? Appeal shall be made by filing a petition for review under a procedure analogous to that provided for a procedure analogous to that provided for under Rule 42 of the 1997 Rules of Civil Procedure with the CTA within thirty (30) days from the receipt of the decision or ruling or in the case of inaction as herein provided, from the expiration of the period fixed by law to act thereon. A Division shall hear the appeal. For decisions of the RTC and CBAA in the exercise of its appellate jurisdiction, appeals is by filing a petition for review, which shall be heard by the CTA en banc. All other cases involving rulings, orders or decisions filed with the CTA shall be raffled to its Divisions. A party adversely affected by a ruling, order or decision of a Division of the CTA may file a motion for reconsideration of new trial before the same Division within fifteen (15) days from receipt. With respect to criminal cases, the general rule applicable in regular Courts on matters of prosecution and appeal shall likewise apply.

Will an appeal suspend the collection of the tax? Generally, mere appeal to the CTA will not suspend the payment, levy, distraint, and/or sale of any property of the taxpayer for the satisfaction of his tax Exception: when in the opinion of the CTA may jeopardize the interest of the Government and/or the taxpayer; the CTA may suspend such collection and require the taxpayer either to deposit the amount claimed or to file a surety bond for not more than double the amount What rules apply to decisions and resolutions of the CTA? 1. All cases or matters must be decided or resolved within 12 mos. From submission 2. Decisions shall be in writing, stating clearly and distinctly the facts and the law on which they are based, and signed by the Justices concurring therein 3. Decisions may be published in the Official Gazette in the form and manner suited for public information and use Exclusivity of recourse to CTA No civil proceedings involving matters arising under the NIRC, TCC of LGC shall be maintained, except as provided in RA1125 as amended and disposed of in accordance with that law, as amended A party adversely affected by a resolution of the division of the CTA on motion for reconsideration or new trial, amy file petition for review with the CTA en banc Collection as part of execution Upon issuance of any ruling, order or decision of the CTA favorable to the national government, the CTA shall issue an order authorizing the BIR, through the Commissioner to seize and distraint any goods, chattels, effects and the personal property, including stocks and other securities, debits, credits, bank accounts and interests in and rights in personal property and/or levy the real property in sufficient quantity to pay for the tax.

Nature of real property tax Imposition of real property tax

46 | P a g e a. Power to levy real property tax b. Exemption from real property tax 4. Appraisal and assessment of real property tax a. Rule on appraisal of real property at fair market value b. Declaration of real property c. Listing of real property in assessment rolls d. Preparation of schedules of fair market value 1) Authority of assessor to take evidence 2) Amendment of schedule of fair market value e. Classes of real property f.Actual use of property as basis of assessment g. Assessment of real property 1) Assessment levels 2) General revisions of assessments and propertynclassification 3) Date of effectivity of assessment or reassessment 4) Assessment of property subject to back taxes 5) Notification of new or revised assessment h. Appraisal and assessment of machinery 5. Collection of real property tax a. Date of accrual of real property tax b. Collection of tax 1) Collecting authority 2) Duty of assessor to furnish local treasurer with assessment rolls 3) Notice of time for collection of tax c. Periods within which to collect real property tax d. Special rules on payment 1) Payment of real property tax in installments 2) Interests on unpaid real property tax 3) Condonation of real property tax e. Remedies of LGUs for collection of real property tax 1) Issuance of notice of delinquency for real property tax payment 2) Local governments lien 3) Remedies in general 4) Resale of real estate taken for taxes, fees or charges 5) Further levy until full payment of amount due 6. Refund or credit of real property tax a. Payment under protest b. Repayment of excessive collections 7. Taxpayers remedies a. Contesting an assessment of value of real property 1) Appeal to the Local Board of Assessment Appeals (LBAA) 2) Appeal to the Central Board of Assessment Appeals (CBAA) 3) Effect of payment of tax b. Payment of real property under protest 1) File protest with local treasurer 2) Appeal to the LBSS 3) Appeal to the CBAA 4) Appeal to the CTA 5) Appeal to the SC Judicial remedies under the RPTC

47 | P a g e The LGU may enforce the collection of the basic real property tax or any other tax levied under the RPTC by civil action before the regular courts. No provision for criminal action. IV. Tariff and Customs Code of 1978, as amended (TCC) A. Tariff and duties, defined B. General rule: All imported articles are subject to duty. Importation by the government taxable. C. Purpose for imposition D. Flexible tariff clause E. Requirements of importation 1. Beginning and ending of importation 2. Obligations of importer a. Cargo manifest b. Import entry c. Declaration of correct weight or value d. Liability for payment of duties e. Liquidation of duties f. Keeping of records F. Importation in violation of TCC 1. Smuggling 2. Other fraudulent practices G. Classification of goods 1. Taxable importation 2. Prohibited importation 3. Conditionally-free importation H. Classification of duties 1. Ordinary/Regular duties a. Ad valorem; Methods of valuation 1) Transaction value 2) Transaction value of identical goods 3) Transaction value of similar goods 4) Deductive value 5) Computed value 6) Fallback value b. Specific 2. Special duties a. Dumping duties b. Countervailing duties c. Marking duties d. Retaliatory/Discriminatory duties e. Safeguard I.Drawbacks J.Remedies What are the measures to ensure that the customs laws are duly complied with? 1. it is unlawful to obstruct a customhouse, warehouse, office, wharf, street or other premises under the control of the Bureau of Customs, and approaches thereto.

48 | P a g e 2. Bureau of Customs may conduct surveillance over the coast, from the time a vessel or aircraft enters RP jurisdiction until the goods have passed through the customhouse. 3. Customs authorities are authorized to effect searches, seizures and arrests in accordance with law 4. Customs authorities enter may, under a warrant duly issued by a judge, enter and search a dwelling 5. CA may board and search a vessel or aircraft or any articles or persons conveyed therein 6. CA may open any box or container wherever found where they have reasonable cause to suspect the presence therein of dutiable or prohibited article/s introduced into the Philippines contrary to law, and to stop, search, examine any person reasonably suspected of holding or conveying such article as aforesaid 7. Persons coming from abroad may be examined and searched by the customs authority Describe the seizure proceedings at the Bureau of Customs 1. The collector of customs, upon making a seizure, issues a warrant for the detention of the article. The importer can have it release upon filing a bond. NB. Prohibited articles cannot be released under bond 2. The collector must immediately make a report to the Commissioner of Customs and to the Auditor General 3. The collector also gives a written notice of the seizure to the owner who is given an opportunity to be heard on the violation that led to the seizure. If the owner is unknown, notice is posted for 15 days in the public corridor of the customhouse. The Commissioner in his discretion may publish the seizure in a newspaper of general circulation or any other means. 4. The collector then prepares a list and description of the property seized and causes them to be appraised and classified at their whole sale values in the local market by at least two appraising officials or competent persons 5. If within 15 days the owner does not appear or the owner is not found, the collector shall declare the seized goods as forfeited in favor of the govt to be sold at public auction. If the owner appears, he may pay fine or if already forfeited, the appraised value of the goods. What is the procedure in protests cases? 1. The party adversely affected by a ruling or decision of the Collector on any liability for duties, fees or other money charges, except the fixing of fines in seizure cases may protest such ruling or decision by a) paying the amount and b) protesting the liability in writing within 30 days. 2. The collector must re-examine the case and issue an appropriate order What is the remedy against a decision or action of the Collector? 1. The person aggrieved may, within fifteen days after notification in writing by the Collector of his action or decision, give written notice to the Collector of his desire to have the matter reviewed by the Commissioner. 2. Thereupon the Collector shall forthwith transmit all the records of the proceedings to the Commissioner 3. The Commissioner shall approve, modify or reverse the action or decision of the Collector and take such steps and make such orders as may be necessary to give effect to his decision. What is the scope of the authority of the Sec of Finance over the Commissioner? If the Sec of Finance is of the opinion that the decision of the Commissioner is erroneous and unfavorable to the Government, he may require the Commissioner to order a reliquidation;

49 | P a g e

Except for the above, the supervisory authority of the Sec of Finance over the Bureau of Customs shall not extend to the administrative review of the ruling of the Commissioner in matters appealed to the Court of Tax Appeals. 1. Government a. Administrative/Extrajudicial 1) Search, seizure, forfeiture, arrest b. Judicial The party aggrieved by the ruling of the Commissioner of Customs in any matter brought before him a) upon protest or b) by his action in any case of seizure may appeal to the CTA within 30 days from notice of decision or action Unless such an appeal is made, the action or ruling of the CoC shall be final and conclusive. 1) Rules on appeal including jurisdiction 2. Taxpayer a. Protest b. Abandonment c. Abatement and refund V. Judicial Remedies; Republic Act 1125 The Act that Created the Court of Tax Appeals (CTA), as amended, and the Revised Rules of the Court of Tax Appeals A. Jurisdiction of the Court of Tax Appeals 1. Exclusive appellate jurisdiction over civil tax cases a. Cases within the jurisdiction of the Court en banc b. Cases within the jurisdiction of the Court in divisions 2. Criminal cases a. Exclusive original jurisdiction b. Exclusive appellate jurisdiction in criminal cases B. Judicial Procedures 1. Judicial action for collection of taxes a. Internal revenue taxes b. Local taxes 1) Prescriptive period 2. Civil cases a. Who may appeal, mode of appeal, effect of appeal 1) Suspension of collection of tax a) Injunction not available to restrain collection 2) Taking of evidence 3) Motion for reconsideration or New trial b. Appeal to the CTA, en banc, a. Petition for review on certiorari to the Supreme Court 3. Criminal cases a. Institution and prosecution of criminal actions 27 1) Institution on civil action in criminal action b. Appeal and period to appeal

50 | P a g e 1) Solicitor General as counsel for the People and government officials sued in their official capacity c. Petition for review on certiorari to the Supreme Court C. Taxpayers suit impugning the validity of tax measures or acts of taxing authorities a. Taxpayers suit, defined b. Distinguished from citizens suit c. Requisites for challenging the constitutionality of a tax measure or act of taxing authority 1) Concept of locus standi as applied in taxation 2) Doctrine of transcendental importance 3) Ripeness for judicial determination